Arbitrage
Category
Trading-Stile & Zeithorizonte
Sub-category
Diskretionäre Methodologien
Curated by
Last reviewed
Arbitrage is the simultaneous buying and selling of the same asset on different markets to capture price differences with low risk. If an asset quotes at $60,000 on exchange A and $60,180 on exchange B, the gross difference is $180. After fees, transfer time and slippage little often remains – arbitrage today is largely the business of automated systems.
Context & Mechanics
Definition and basic principle
Arbitrage exploits violations of the “law of one price”: the same asset should cost the same everywhere. If it does not, the arbitrageur buys on the cheaper and simultaneously sells on the more expensive market – price direction is irrelevant, the profit sits in the difference. This is exactly how the gap disappears: arbitrage demand lifts the low price and presses the high one until both meet. Arbitrageurs are thus – alongside market makers – a central mechanism for efficient, consistent prices.
Forms of arbitrage
Spatial arbitrage: the same asset on two venues – classic in cryptocurrencies with fragmented liquidity. Triangular arbitrage: three currency pairs whose cross rates do not match (EUR/USD × USD/JPY ≠ EUR/JPY). Cash-and-carry: hedging the difference between spot and futures price; in crypto related to collecting the funding rate. Statistical arbitrage: trades historically stable price relationships (pairs trading) – strictly speaking not true arbitrage because the relationship can break.
Why “risk-free” does not hold in practice
The textbook definition calls arbitrage risk-free – in reality four factors eat the margin: fees on both sides, the bid-ask spread on entry and exit, slippage in execution and execution risk when one leg of the transaction fills late or not at all (in crypto additionally transfer time between exchanges). Since the gaps usually exist for fractions of a second and sit in the per-mille range, highly automated systems with co-location dominate this field – for manual retail traders pure arbitrage strategies have historically rarely been profitable.
Why it matters for traders
Even those who do not trade arbitrage benefit from understanding it: it explains why prices run synchronously across markets, why futures and spot are coupled and where seemingly “free” differences in truth hide costs and risks. In the GlanWick simulator it can be calculated by way of example how fees and slippage consume a gross difference – GlanWick is a training and simulation tool and not a prop firm itself.
Execution Example
A cryptocurrency quotes at $60,000 on exchange A and $60,180 on exchange B. A trader with balances on both exchanges checks whether spatial arbitrage of 1 unit is worthwhile. Both exchanges charge a 0.1% taker fee.
- Gross difference: 60,180 − 60,000 = $180 (0.3%).
- Fees: buy 60,000 × 0.1% = $60; sell 60,180 × 0.1% = $60.18 → together $120.18.
- Net before execution risk: 180 − 120.18 = $59.82 (≈0.1%) – assuming both legs fill exactly at the displayed prices.
- Reality check: just 0.05% slippage per side (≈$60) turns the trade into a zero-sum game; if the transfer between exchanges takes minutes, the trader additionally carries full price risk. The gap is built for automated systems, not manual execution.
Execution Risk & Errors
Viewing gross price differences as profit without deducting fees, spread and slippage
Underestimating transfer times between exchanges and carrying full price risk in the meantime
Considering statistical arbitrage risk-free although price relationships can break
Trying to compete against highly automated systems with manual execution
Ignoring execution risk when only one leg of the transaction fills
Frequently Asked
Is arbitrage really risk-free?
Only in textbooks. In reality there are fees, spread and slippage costs plus execution risk when one leg fills late or not at all. In crypto, transfer time between exchanges adds to this.
Why do arbitrage opportunities disappear so quickly?
Because arbitrage itself aligns the prices: buying lifts the low price, selling presses the high one. Automated systems close gaps in fractions of a second.
What is triangular arbitrage?
Exploiting inconsistent cross rates between three currency pairs – for instance when EUR/USD × USD/JPY does not match the EUR/JPY rate. Three simultaneous trades capture the difference.
Is arbitrage worthwhile for retail traders?
Pure price arbitrage historically rarely: margins sit in the per-mille range and require speed and fee structures reserved for institutional participants. The concept's value lies in market understanding.