Cross-Exchange Cryptocurrency Lead-Lag Arbitrage
Summary
This document explains cross-exchange arbitrage that seeks to profit when the same cryptocurrency has different prices on two exchanges. The basic method compares one venue’s ask with another’s bid, buys on the cheaper venue, and sells on the dearer one. It also describes closing the paired position as the spread narrows, while accounting for fees, slippage, price impact, and execution delays.
The article discusses practical challenges: scarce spreads, missed fills, one-sided execution, and funds accumulating on one exchange. Suggested responses include monitoring more markets, using maker orders, improving data and network latency, setting stops for unhedged exposure, and transferring funds. Demonstration code illustrates threshold checks and paired orders, but the document explicitly says it is not live-trading code and omits operational complications. Its claim of low-risk arbitrage is limited by execution uncertainty, liquidity, and the possibility that spreads widen instead of reverting.
Key ideas
- Compare executable bid and ask prices across exchanges to identify a potential spread.
- Subtract fees and slippage from the apparent spread before treating it as an opportunity.
- Paired execution can fail on one venue, leaving the trader exposed to market moves.
- Liquidity, latency, capital distribution, and withdrawal time can constrain the strategy.
- The included example is illustrative and omits important live-trading complications.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.