News 

Pairs Trading Available to Retail Traders Accessing Market-Neutral Trading Strategies

HomeTrader Media Release, 14 December 2007

Amidst a volatile share market, more retail traders are embracing a trading strategy traditionally reserved for institutions known as ‘pairs trading’ to better manage their risk.

Pairs trading was developed nearly 30 years ago and has been used by the world's largest financial institutions and hedge funds to make very good returns whilst reducing market risk. Pairs trading involves simultaneously taking a long and a short position on two different shares.

For the first time in Australia a comprehensive pairs trading course designed specifically for teaching retail traders how to successfully pairs trade has been developed.

A recent survey of share traders showed the majority are looking for market-neutral strategies to provide protection during major market corrections like those experienced in August and November.

HomeTrader Executive Director, Jason Davis said, “After two years of research and development this innovative share trading solution is now ready for retail traders.  Traditionally, pairs trading has been reserved for institutions but now it’s time for retail traders to make money from this strategy.”

“The first series of training courses has just been completed, with over 400 traders ready to give pairs trading a go for the very first time.

“The survey found over half the respondents indicated that the recent market volatility had an impact on their decision to attend the pairs trading course.  In addition, only 44% of respondents had heard of pairs trading before the HomeTrader course was launched,” said Davis.

Unlike 'normal' trading where profit or loss is determined by the price movement of just one share, a pairs trader makes and loses money according to the relative performance of the two positions.  The shares must be in the same market sector.

A pairs trader aims to be market-neutral, which means their long and short exposures are equal.  If an external economic factor affects the share price of both companies, the trader will make and lose the same amount on each leg of the trade, provided the pricing equilibrium between the two shares stays constant.

 “Whilst pairs trading is a smart trading strategy it is important to remember that every trader is still exposed to the risk of company specific events.  Despite these risks, the back testing results conducted during HomeTrader’s R&D process clearly demonstrated that pairs trading is without doubt an important trading strategy for traders,” said Davis.