What is Triangular arbitrage

As such, traders need to be able to identify and act on these opportunities quickly to make a profit. Another strategy used by forex arbitrage traders is statistical arbitrage. Statistical arbitrage involves using mathematical and statistical models to identify trading opportunities.

You must be aware of the risks and be willing to accept them in order to invest in these markets. The information contained in this article is for educational purposes only and is not to be a recommendation for any specific investment. Trading any market carries a high level of risk, and may not be suitable for all investors. If then the currency pair EUR/GBP is bought, the currency pair EUR/USD is sold, and finally, the USD/GBP currency pair is also sold, this would result in a zero-risk profit. Finally, the trader can sell these euros to Citibank for $1,014,533 (€1,121,651 x $0.9045). Such platforms make it easier for forex traders to set rules for entering and exiting trades.

Automated Trading Platforms and Triangular Arbitrage

Assuming that agents exchange EUR/JPY, EUR/USD and USD/JPY, the arbitrager monitors the triangular arbitrage processes presented in Eqs (4a) and (4b). As soon as one of these processes exceeds the unit, the arbitrager submits market orders to exploit the current opportunity (predatory market orders henceforth). Contrary to limit orders, market orders trigger an immediate transaction between the arbitrager and the market maker providing the best quote on the opposite side of the LOB.

Here is an overview of the different steps to implement a triangular arbitrage trading algorithm. We shall be looking into each of these steps in detail in the next sections. There are different approaches of buying/selling the 3 assets to achieve triangular arbitrage.

Triangular Arbitrage (Forex)

Then, the computer will automatically make trades according to the orders in the algorithm. Where bx/y(t) and ax/y(t) are the best bid and ask quotes available at time t in the x/y market respectively. Section 2 outlines the basic concepts, discusses the employed dataset and provides a detailed description of the proposed model. Section 3 examines the behavior of triangular arbitrage the model in order to collect insights on the microscopic origins of cross-currency interdependencies. Section 4 concludes and provides an outlook on the research paths that could be developed from the outcomes of this study. Technical details, further empirical analyses and an extended version of the model are presented in the supporting information sections.