Triangular arbitrage

Triangular arbitrage (also referred to as cross-currency arbitrage or three-point arbitrage) is the act of exploiting an arbitrage opportunity resulting from a pricing discrepancy among three different currencies in the foreign exchange market.

Triangular arbitrage is the result of a discrepancy between three foreign currencies that occurs when the currency’s exchange rates do not exactly match up.

These price discrepancies arise within a trading platform, for example, when there are differences between some cryptocurrency quotes. Thus, some inefficiency of quotation appears, which we can use in our interests for profit.

Let’s look into an example of a Triangular arbitrage strategy:

• First step — We buy currency B for currency A
• Second — Buy currency C for currency B
• Third — Sell currency C for currency A
• In conclusion, we make a profit in currency A.

Let’s look into an example of a triangular arbitrage strategy.

1. At the time of writing this article, the BTC / USD rate is $6745.1

We buy 1 BTC at the current rate, selling 6745.1 USD

2. At the time of writing this article, the XRP / BTC rate is 0.00011521

Next step we buy 8679 XRP at the current rate, selling 1 BTC

3. At the time of writing this article, the XRP / USD rate is 0.7793

Last, we sell ​​8679 XRP, so we end up with 6763,45 USD

Thus, our profit is 18.44 USD.

When using a trading strategy based on triangular arbitrage, it is crucial to take the commissions of the exchange, as well as the spreads of the instruments traded on the exchange into account. In addition to that, it is essential to choose the most dynamic instruments as traded pairs.

The disadvantage of this strategy is the unpredictable risk of rapid change in quotations. Therefore, the important factor in this strategy is the speed of the calculations.

Additionally, in order for the triangle arbitrage strategy to be successful, it is necessary to have a high speed of receiving exchange data, as well as a high rate of sending and execution of orders.

For greater efficiency, full automation of the search and execution of applications is needed. Obviously, such problems can be solved by implementing these strategies in the form of trading robots. The chain of the triangle arbitrage operations may not be limited to three currencies, but be longer and consist of several crypto-currencies.

The main advantages of such arbitration:

1. The possibility of earning in an unstable market.

2. A relatively low level of risk (subject to constant monitoring of the market and sufficient speed of execution).

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