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John Shandy` (talk | contribs) →Evidence for triangular arbitrage: Cleanup, paraphrasing plagiarized content left by past editors. |
John Shandy` (talk | contribs) New section: Profitability (decided that splitting this from Evidence was actually more appropriate) |
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Researchers have shown a decrease in the incidence of triangular arbitrage opportunities from 2003 to 2005 for the Japanese yen and Swiss franc and have attributed the decrease to broader adoption of electronic trading platforms and trading algorithms during the same period. Such electronic systems have enabled traders to trade rapidly and react hastily to changes in price. The speed gained from these technologies improved trading efficiency and the correction of mispricings, allowing for less incidence of triangular arbitrage opportunities.<ref name="Fenn et al. 2009" />
==Profitability==
Mere existence of triangular arbitrage opportunities does not necessarily imply that a trading strategy seeking to exploit currency mispricings is necessarily profitable. Electronic trading systems allow the three constituent trades in a triangular arbitrage transaction to be submitted very rapidly. However, there exists a delay between the identification of such an opportunity, the initiation of trades, and the arrival of trades to the party quoting the mispricing. Even though such delays are only milliseconds in duration, they are deemed significant. For example, if a trader places each trade as a [[limit order]] to be filled only at the arbitrage price and a price moves due to market activity or new price is quoted by the third party, then the triangular transaction will not be completed. In such a case, the arbitrageur will face a cost to close out the position that is equal to the change in price that eliminated the arbitrage condition.<ref name="Fenn et al. 2009" />
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