Cross-border arbitrage strategies
This time we continue our series of articles with the topic of cross-border arbitrage and the related strategies, so heavily required for successful trading.
Decentralization led to the existence of a large amount of cryptocurrency exchanges. The same assets are being traded on these exchanges. The cryptocurrency prices, however, differ between them. The reasons for that are:
1. Time factor. For example, the users of one exchange can find out earlier about released positive news and start purchasing coins faster than the users of other exchanges. In this moment the difference in the price of a coin can reach considerable values.
2. Liquidity. At the exchanges with a relatively small trade volume the cryptocurrency price can be influenced even by one large deal. If one trader decides to buy a significant amount of coins, and the exchange can’t offer a matching amount of offers — the trader will collect the full hand and will be making deals on less profitable conditions — cheaper than the current level.
3. Exchange trade rules. Let’s say that on one of the exchanges the price of bitcoin is sometimes lower than the market one. It’s linked to the platform offering good conditions for cryptocurrency pay-out into fiduciary currencies and low commissions. Consequently, traders are eager to sell their cryptocurrency cheaper.
4. Technical maintenance or network errors can impact the work of the exchange. This, in turn, can influence the coin price change.
Let’s look into an example of a cross-border arbitrage strategy.
At exchange A and at exchange B the cryptocurrency pair BTC/USD is traded. In different periods of time the bitcoin price at the exchanges varies. At one point it can be higher at exchange A than at exchange B, in the other moment — the situation can change, and bitcoin can cost more at exchange B than at exchange A.
An open arbitrage position is market neutral, which means that it doesn’t depend on the direction of cryptocurrency price movement. Because of that arbitrage strategies are considered to be low risk.
From the received profit one should take out the charges, including the exchange commissions as well as the funding fee. The size of these charges depends on various reasons and can make up from 20% to 80% of the received profit.
When working with this strategy on nonliquid currencies or when trading relatively large volumes — it is important to consider the liquidity of the traded instrument. One needs to use the set position algorithm.
It is also crucial to consider the expenses for providing the credit “shoulders” (leverages) on various trading platforms. There is a risk of certain situations arising — when the cost of funding can lead to direct losses.
There are versions of cross-border arbitrage strategies, when the marginal crediting is not used. In this case the currency bought at exchange A is transferred to exchange B and sold. This strategy possesses a risk of transferring the funds, specifically with the transfer delay. Arbitrage strategies are used by plenty of players. This means that with significant delays, when transferring the currency from one exchange to another, the arbitrageur loses the potential profit since the cross-exchange spread quickly diminishes.
All in all, cross-border arbitrage strategies offer much flexibility and not at the cost of high risks. This makes them highly sought after at the market.
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