Funding Rate Arbitrage Strategy Report

An analysis of the arbitrage opportunity between the spot margin trading interest rate and perpetual swap trading funding rate. A recent 7-day trading period showed a yield of 1.66% ROI.

OKEx
OKEx
Jul 24 · 3 min read

Author: Thomas Tse, Head Quantitative Strategist of OKEx

With the offering of both spot, margin, and derivatives trading at one spot, OKEx provides users a world-class marketplace which opens the doors to a lot of arbitrage opportunities, saving you the hassle of withdrawing funds from a derivatives exchange to another spot trading platform, also the extra time and costs from blockchain transactions.

Premise

To execute this strategy, we assume the following:

  1. Margin trading interest rate settle with Loyalty Points (70% discount on the secondary market)
  2. Tier VIP3 in fee schedule
    a. Spot trading taker fee = 0.07%
    b. Perpetual swap trading taker fee = 0.05%
  3. You have USDT in your OKEX wallet.
  4. There are available coins to borrow at OKEX margin trading wallet.

Analysis

Essentially, borrow $1000 of TRX with $1000 USDT as margin. Sell $666 of TRX for USDT. Use $333 of TRX as swap margin, buy 66 TRX contracts. Pay transaction fees, spot lending rate and receive swap funding rate.

Starting with a capital of 1,000 USDT on July 15, 2019, the 7-day yield was around 1.66%.

  • The below graphs show that the spot margin daily interest rate was 0.1% from July 15 to 21 and also shows the swap funding rates history.
Figure 1. Margin Trading Daily Interest of TRX
Figure 2. Funding Rates History of Perpetual Swap Trading
  • The Trades

Note: ­Borrow 1,000USDT-equivalent of TRX. Short 2/3 of it at spot margin trading (666.67 USDT). Then, transfer the remaining 1/3 to perpetual swap account, open 66 swaps which is equal to 660USD. It is almost a delta-neutral strategy.

  • The flow of coins shows a yield of 575TRX which was 1.66% return at the time.

Risk Warning

  1. Funding rates volatility
    For example, if the funding rate at 12:00 July 21 changes from negative to positive, we will have to decide whether to close the position by estimating the next funding rate and the closing fee.
  2. USDT price volatility
    You are implied long USDT and short USD.
  3. Forced liquidation risks
    Forced liquidation occurs if the price of perpetual swap drops ~30% and the spot price increased by 217%.
  4. Clawback risks
    Although present, there has been no clawback since perpetual swap trading was launched.

Improvements

  1. Do not hold any positions. Instead, borrow TRX and open position before swap settlement. Then, close the position and repay TRX as soon as possible after receiving funding amount from settlement.
  2. Increase both the short order size at margin trading and the leverage level at perpetual swap trading, in order to increase the overall effective leverage.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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The Most Trusted Digital Asset Exchange

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