Reasons for proprietary traders and speculators prefer arbitrage 

strategy include:

1. 1.The price risk of directional trades is generally larger than 

arbitrage strategy, as up/down-side risk of uncovered position is 

unlimited;

2. Other than fundamental factors of oil supply and demand, 

there are other factors that will impact the result of a directional 

trade, including the strength of the US dollar, macro-economic 

events, investors’ risk taking limits, and volatility passed through 

from other financial markets (such as stock markets). By contrast, 

arbitrage strategies involving oil contracts may be relatively 

more impacted by the relationship of demand and supply as 

simultaneous long and short positions oset many other risk 

factors.

3. Arbitrage trading typically reduces the capital requirement 

for margining purposes compared to directional trades enhancing 

client’s capital eciency.

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