I am writing a thesis and found your community as an excellent resource to further my knowledged around the topic I choose. Currently I am trying to grasp the idea of three way arbitrage with market neutrality in the forex market.
Let me give context to my question. Let’s say my currency is the EUR. I would like to find arbitrage oppurtinities in two different FOREX brokers. So, I am checking the EURUSD price on both brokers and I see that on broker A the price is higher than on broker B. So what I do now is I go long on broker B as I assume the market is underpriced there, and I short sell on broker A to achieve market neutrality as I don’t own the assets that way. I wait til the market normalises on both brokers and I close my positions.
Is there a way to achieve this in a three way arbitrage situation? As in a three way arbitrage oppuounity you have to EXCHANGE an essate to the second asset to exchange that to the third asset. Please can you tell me a way to achieve market neutrality in a three way arbitrage situation?
Sadly it simply won’t work that way - 2 bets = 2 sets of spreads, which will kill any possible advantage stone dead - do you know the difference between “Bid” and “Ask” ? There is No “Price” - You buy at one price (the Ask) and selln at anther (the Bid) - they are usually 1-2 pips apart (Do you know what a pip is ?) - The price you see on “yahoo” or “bloomberg” or “IG Index” is just somewhere between the two (Usually) ! You cannot buy or sell at that price ( unless you are hugely capitalised and have DMA ! - which you don’t and cannot afford ! )
Plus you’d have to take both bets simoultaneously which would mean 2 computers.
Plus the amounts of money you could gamble as retail is so tiny that it simply would not be worth the effort - even if such a situation could possibly be found occasionally !
thanks for the input!
i am not going to do this whole thing in practice just in theory
i fully understand your points, all this should be hypothetical if there is any way to achieve this market neutrality with a 3 way arb oppurtunity.
So if you’re going to do it “In theory” - but know full well that you would crash and burn attempting to do something completely impossible in practice - Just Lie - you’ll either get caught or you won’t !
I’m not sure what you mean by “market neutrality”. The purpose of arbitrage is to profit from a momentary price dis-equilibrium.
Regarding the general idea of arbitrage in the currency market –
Arbitrage, including triangular arbitrage (what you are calling three-way arbitrage), is possible. And it occurs often, but only in the world of high-frequency trading.
Except in the rarest of circumstances, currency arbitrage requires faster electronic connections than any retail trader will ever have.
So, for us (mere mortals) in the retail forex world, arbitrage is purely theoretical, without any practical application.
Here’s a POST that might shed some light on currency arbitrage in general, and (in the last two paragraphs) answer your questions about triangular arbitrage in particular.
And this quote from another post also addresses the topic of triangular arbitrage:
