Triangular Arbitrage: Definition and Example

triangular arbitrage

Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency. We investigate triangular arbitrage within the spot foreign exchange market using high-frequency executable prices.

We will access market data and execute on trades using Alpaca API. To use Triangular Arbitrage, we must get the latest prices for each of these currency pairs. We then find the conversion rates, buy the cheaper currency, convert it into the expensive currency, and then finally sell the expensive currency. We will do this but with ETH/USD, the new ETH/BTC coin pair, and BTC/USD. Our specific strategy will be implemented just using Alpaca’s services – we won’t have to interact cross exchanges.

Compositional analysis of exchange rates

The trader exchanges one asset for a second, the second for a third, and the third for the first to earn from price differences. This type of arbitrage can result in a “riskless” profit if quoted currency exchange rates do not equal the market’s cross-exchange rate. In other words, if two currencies also trade against some third currency, then the exchange rates of all three should be synchronized. Cross rates are the exchange rates of 1 currency with other currencies, and those currencies with each other. Cross rates are equalized among all currencies through a process called triangular arbitrage.

LOS 8 (b) Identify a triangular arbitrage opportunity and calculate the profit, given the bid-offer quotations for three currencies. JavaScript Bot that does decentralized cryptocurrency exchange triangular arbitrage is a tool that allows users to take advantage of price differences between different cryptocurrency exchanges. If a market is not liquid enough or lacks traders, you may be unable to follow through with the trades needed to complete the triangular arbitrage.

Step 1: Get all the valid crypto combinations

Since triangular arbitrage involves multiple trades and is time-sensitive, the price differences might have changed by the time a trader tries to manually execute the last of the three trades in a triangular arbitrage. From these transactions, you would receive a loss of $344,214.06 (assuming no transaction costs or taxes), so there is no triangular arbitrage opportunity. If the result had been positive, there would have been an arbitrage opportunity. Automated trading platforms have streamlined the way trades are executed, as an algorithm is created in which a trade is automatically conducted once specific criteria are met. Automated trading platforms allow a trader to set rules for entering and exiting a trade, and the computer will automatically conduct the trade according to the rules. While automated trading has many benefits, such as the ability to test a set of rules on historical data before risking capital, engaging in triangular arbitrage is only feasible using an automated trading platform.

triangular arbitrage is a technique that tries to exploit the price discrepancy across three different assets at the same time. For example, we can exchange BTC for USDT, BTC for ETH and ETH back to USDT. If the net worth in doing these three trades simultaneously is profitable then the 3 trades are executed simultaneously. Cryptocurrency is highly speculative in nature, involves a high degree of risks, such as volatile market price swings, market manipulation, flash crashes, and cybersecurity risks.

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