In the financial markets, where there are tons of ways and strategies to make profitable trades or finding ways to generate juicy profits from any asset pair, arbitrage is standing on one of those major categories. The whole idea contains, the scope of prices of similar assets differential in different brokers or institutions.
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What is Arbitrage?
The arbitrage term calls the attempt to buy an asset at a particular price with the expectation of selling it at a relatively higher price immediately in a different market. The arbitrage opportunity created when a regulated market opens after an official closure or by some fundamental event influences the price which produces price discrepancies. Meanwhile, the opportunity grabbers called arbitrageurs to buy the asset from a lower price market and sell it in the higher price market.
To understand it, you can assume that you bought an asset for example US dollar from the first bank at the price of 6.58 Chinese Yuan, and you know that at the second bank the price of US dollar is 6.59, for the expectation making from arbitrage the arbitrageurs have the similar intention to sell the US dollar at the higher price immediately until the other arbitrageurs vanish the scope of trade. Meanwhile that trade the arbitrageur made 0.01 Yuan profit on his buy trade of 1 US dollar.
Ways or Strategies in Arbitrage Trading
The markets have their own nature-based on their participants, to understand it, it is important to know the fundamentals aspects of each market to make the appropriate approach towards its arbitrage opportunities or scope of findings.
To find the opportunity of arbitrage in any market it is required to have enough exposure to buy or sell the asset at sufficient time to avail the opportunity as it has to be longer profitable until we execute our trades. Any market has almost similar patterns of price movements when the information reaches the masses. The arbitrage trading required your quick intentional approach towards price margins to avail the opportunity accordingly.
When similar types of expectations increase in the market, the scope of profit margin or arbitrage opportunity vanishes gradually or it becomes negligible profitable. So it is highly attention taking or staying informed about your interesting assets to made your arbitrage trades accordingly when the respective option is available.
Arbitrage in Forex Market
The forex market is believed to be well established to avail such opportunities with having a great exposure of capital or relative resources. This market is mainly run by central or commercial banks that’s why having a good amount of capital along with suitable transaction executing systems to perform such trades for different strategies such as currency pairs discrepancies, differential of currency interest arbitrage, or triangular arbitrage strategies are commonly talked in the market.
Arbitrage in the Stock Market
Due to the stock exchange’s liquidity inefficiencies, similar to the other market economic principles applies here and creates arbitrage opportunities for the spectators. The brokers allow the participants to buy or sell the stocks at given prices which include their price discrepancies indirectly or directly create supply-demand arbitrage opportunities.
Arbitrage in Commodity Market
The commodity market is mainly traded as a futures contract, that’s why the participants who want to arbitrage in that market, they need to trade between spot and futures contract prices discrepancies. The commodity trading is already uncommon in retail investors or traders that’s why the brokers are less part taking in providing services regarding commodity spot and futures contracts in the same accounts.
However, commodity arbitrage is still considered as profitable between spot and futures contract relation but it’s inconvenient to avail sufficient scope of arbitrage opportunities.
Arbitrage in Crypto Market
The crypto market is a relatively new market and it is the currently most controversial in terms of price volatility and common man exposure towards liquidity spot assets backed by real companies or technological platforms. In terms of centralizing exchanges currently, according to coinmarketcap, there are roughly 350+ active spot exchanges and roughly 40+ active trading volume decentralize exchanges in the market.
Although the market has still a lot’s scope to grow and establish and adopt by masses to invest and play in the market. The more market actively traded and become distributed produce more arbitrage opportunities for arbitrageurs. During the high volatility, the prices become too high on one exchange and too low on the second, due to the fewer arbitrageurs or blockchain network transaction confirmation congestion which impacts liquidity and impact the arbitrageur’s trade execution.
The more decentralization and blockchain solutions develop and established for implementations of financial strategies executions which leads to more profitability scope of breathing room available for the market participants.
Is It Arbitrage Trading Riskless?
Although arbitrage is very much considered theoretically as risk-free trading, it is taken as very much wrong because, in reality, nothing is 100% risk-free. Price action trading based on technical analysis or leverage trading has its own drawbacks so arbitrage can be considered as less risker if done by professional rules. However significant price volatility or confused uncertain markets turn out to be huge losses.