F19 EFP goes Inverted

F19 EFP (Exchange Future for Physical) goes Inverted — for a brief moment, we saw the F19 Futures on CME ($3,590 bid) trade OVER spot prices on Coinbase ($3,582.10 offer). Since these futures expire on Friday 1/25, in theory, you should be able to buy SPOT BTC, and sell the January Futures simultaneously as a “pseudo-ARBITRAGE” (for a 3-day holding period). How and where these futures settle is the key to this trade:

https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin

CME Bitcoin Futures Daily Settlement Procedure

Normal Daily Settlement Procedure

CME Group staff determines the daily settlements for Bitcoin futures based on trading activity on CME Globex between 14:59:00 and 15:00:00 Central Time, the settlement period.

Tier 1: Trades on CME Globex

All contract months settle to the volume-weighted average price (VWAP) of outright trades between 14:59:00 and 15:00:00 Central Time, the settlement period, rounded to the nearest tradable tick. If the VWAP is equidistant between two ticks it will be rounded towards the prior day settlement price.

Tier 2: CME Globex Market Data

In the absence of trades during the settlement period, the contract month settles to the midpoint of the Bid/Ask between 14:59:00 and 15:00:00 Central Time, the settlement period.

Tier 3: Absence of Two Sided Markets

If there are no two-sided markets available during the settlement period in the Lead* month, then the settlement price will be the last trade price (or prior settle in the absence of a last trade price) adjusted to the Bid/Ask if one side is present. Deferred months will settle to the net change of the previous month, adjusted to the Bid/Ask if one side is present.

*The Lead month is the contract expected to be the most active.

Final Settlement Procedure

Delivery is by cash settlement by reference to the Final Settlement Price, equal to the CME CF Bitcoin Reference Rate (BRR) on the Last Day of Trading.

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To exit this trade properly and capture this ~$8 ARB in this example, on Friday 1/25, when the CME January Futures expire, you would have to liquidate the Physical BTC Coin that was purchased. You would sell the coin on a TWAP from 14:59:00 and 15:00:00 Central Time in order to closely MATCH the “CME CF Bitcoin Reference Rate (BRR)”. Exiting this trade is where the risk lies. If the slippage is too great, then you can lose some or all of that ~$8 that was gained entering into this position.

If you have the ability to build or program an “auto-spreading” order-type, then you should be hunting for this opportunity over the remainder of this week to make some “free” money.

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