Cross-Market Relative-Value Trades with Transferable Funding
Summary
The document explains how price differences across separate markets can support paired relative-value positions when only one currency can move between venues. It converts quoted exchange rates into the cost of each traded currency in terms of the transferable funding currency. That comparison reveals which market is relatively cheap for each asset and which is relatively expensive.
The example suggests buying one currency in the venue where it costs less and selling it where it costs more. Transferring the funding currency can finance positions across markets, potentially arranging the trades with no initial net funding requirement. The response classifies this as statistical arbitrage or pairs trading, rather than risk-free arbitrage. Its illustration assumes no bid-ask spread and omits fees, execution risk, price movement, and transfer delays, so the quoted differences alone do not establish a realizable profit.
Key ideas
- Convert each venue’s quoted rates into prices expressed in the transferable funding currency.
- Buy an asset where its funding-currency price is lower and sell it where the price is higher.
- Transferable funding can support positions across venues without requiring net initial funding.
- The response describes the setup as statistical arbitrage rather than pure arbitrage.
- Spreads, fees, execution, price changes, and transfer timing can undermine the apparent opportunity.
Tags
Full text
# Arbitrage between markets # Arbitrage between markets I'm trying to understand how arbitrage works, but I'm having some difficulties based on some restrictions: - I have markets A, B and C. - The currencies that are traded are X <-> Y, and X <-> Z. - The only thing that can be transferred between markets A, B and C is currency X. - The time it takes to transfer the funds (in currency X) between any market is about 2-10 minutes. - The opportunity for arbitrage last for about 1 hour. The exchange rates on market A - 1 X exchanges for 3.22 Y - 1 X exchanges for 5.11 Z The exchange rates on market B - 1 X exchanges for 3.25 Y - 1 X exchanges for 5.07 Z The exchange rate on market C - Does not exchange X <-> Y - 1 X exchanges for 4.98 Z Suppose that exchange A is the exchange with the highest volume and presumably the most accurate exchange rate. How can one take advantage of the arbitrage opportunities if the only thing that can be transferred between exchanges is currency X and it takes 2-10 minutes? ## Answer by Tal Fishman (score 1, accepted) https://quant.stackexchange.com/a/3352 This is actually a stylized example of the classic dual-listed companies "arbitrage", the most famous example of which is Royal Dutch Shell. It is not a pure arbitrage, but rather is a case of "statistical arbitrage", specifically pairs trading. First, express the prices of Y and Z in terms of X, and let's rename X "\$" for convenience's sake. Then Y costs about \$0.311 in market A and \$0.308 in market B. Assuming no bid/ask spread, therefore you should buy Y in B and sell it in A. Z costs \$0.196, \$0.197, \$0.201 in A, B, and C, respectively, so buy Z in A and sell it in C. Since money (X) is transferable between markets, you can use one market as a funding source for another, so that all arbitrages can be set up to have zero cost at inception.
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