Why does index arbitrage strategy Leg1 lose money?

Ok, this clearly was too concise, let me try again.   As input we have the following "index arb" strategy (all numbers approximate):   Leg1 is 10x smaller than Leg2. Market in which Leg1 is trading is 100x smaller than market for Leg2. Leg1 is consistently losing money, Leg2 is making astronomical amounts of money.   What is going on here? Why is Leg1 losing money? What's the point of Leg1, it barely hedges any risk and loses a lot of money, why not trade just Leg2?   Is there anything counterintuitive and unexpected (no) and should we be sceptical (yes).   Let's for simplicity assume it's only one camel vs retail crowd, no other competitors  If Leg1 and Leg2 open with a gap between them you can try buying Leg1 and selling Leg2. They will of course converge to the same point, but *which* point? Almost whichever you want, if you have enough capital! The easiest way to get it to where you want is to trade a lot (vs market volume) in the leg that is less liquid. By the time you closed the arb, from the perspective of an external observer everything looks "normal" - arb is closed, market is efficient, thank you, kindly camel. In reality of course the point the market converged to is not equilibrium of some sort, you massively shifted illiquid Leg1( by tens of basis points) through market impact of your trading. Note that it does not mean that Leg1 price went up Vs open, only that it went up Vs where it would have been without you. During unwind of the Leg1 later in the day you revert those tens of basis point of market impact, monetizing it on Leg2.   Of course Leg1 would lose money consistently, try buying something at the speed of 30% of the market volume and then selling it at the same speed! Leg2 is making money not because you have perfect foresight of where the market is going but simply because you cause the move of the market by impact of unwinding Leg1.    Another useful thought experiment: how to tell if your strategy is likely legit Vs something that will result in SEBI sending you a 100 page pdf: imagine reducing all sizes in your strategy by a factor of a 100. If it works better than before (per unit of risk/in terms of margins) then it looks legit. If it stops working altogether after scaling down then question your life choices. Any "normal" strategy works worse as it scales up, due to market impact, unless your strategy IS market impact.   I can't send an email to 3000 employees of JS but come on, folks, you are all very smart and many of you are smarter than me. Be honest with yourself.