On Thursday, I spent most of the day with a friend/business colleague discussing trading opportunities. I showed him the following chart which displays the SPY-IVV spread. Both ETFs track the S&P 500 index. The spread is highly co-integrated and stable. On average these ETFs don't deviate more than $0.50 from each other. (I want to thank Aris David for his research on this spread).
My friend took the chart, looked at it for a few seconds, and then told me he made $4,000,000 trading similar spreads for his personal account in 2008. I was stunned.
I asked him how he made all this money trading a few spreads. He answered: they wanted liquidity and I provided it to them 24 hours a day during that period.
When securities that more or less track the same thing deviate in price by this much, you are dealing with a liquidity gap. And there is money to be made by traders willing to provide that liquidity.
Click image to enlarge.
Michael Bigger. Follow me on Twitter and StockTwits.