Triangular Arbitrage

S

stephencrowley

I've found a couple of papers which are interesting. Does anyone actually use these arbitrage strategies? If so, are they effective, does commissions eat up the profits? Seems like a very simple to code black-box strategy.

Triangular arbitrage as an interaction among foreign exchange rates
We first show that there are in fact triangular arbitrage opportunities in the spot foreign exchange markets, analyzing the time dependence of the yen-dollar rate, the dollar-euro rate and the yen-euro rate. Next, we propose a model of foreign exchange rates with an interaction. The model includes effects of triangular arbitrage transactions as an interaction among three rates. The model explains the actual data of the multiple foreign exchange rates well.

Time-scale dependence of correlations among foreign currencies

For the purpose of elucidating the correlation among currencies, we analyze daily and high-resolution data of foreign exchange rates. There is strong correlation for pairs of currencies of geographically near countries. We show that there is a time delay of order less than a minute between two currency markets having a strong cross-correlation. The cross-correlation between exchange rates is lower in shorter time scale in any case. As a corollary we notice a kind of contradiction that the direct Yen-Dollar rate significantly differs from the indirect Yen-Dollar rate through Euro in short time scales. This result shows the existence of arbitrage opportunity among currency exchange markets.
 
I thought by definition these papers were taking into account the spreads.. I think the trick is to find a broker than can close out a trade like this.

USD->JPY
JPY->EUR
EUR->USD

Should be 3 trades, and the last trade should close out the first, but I think most brokers treat it as 3 open trades.


Quote from ssternlight:

From what little I have heard on this subject the spreads eat the arb possibility...(not a definitive answer fwiw)
More...
 
I checked it out.

it sounds pretty complex.

I understand the concept of opening or closing a trade, and to direction either buy or sell.

but the tons of analytical garb of why hypothetically it should work I'm not interested in.

either it works or doesn't.

if it doesn't I could probably make it work by modifying it.

is there an over-simplified and easy-to-understand explanation/version of this 3-way arb?

sKaLpZ
 
That's a bunch of PhD economist going through intellectual masturbation by describing a simple fact in a complex way, and then believe they discovered something!!! :D

stupid geeks.....
 
Here's what i tried. I give my idea for free! I just hope that you're honorable enough to share your secret in return if you find how to make money with it.

I know the spread eats everything, and you can't swap so arbitrage is impossible anyway with the stupid internet bucketshops.

But, if you take 3 big position, like EUR/USD, USD/JPY, EUR/JPY to be perfectly edged and lose no money because of exposure.

You see your P/L moves sometime, cause it's true the exchange rates don't move at the same time. During that time, you sort of "cash-in" by selling part of a position and adding to 2 others, or buying one and selling 2 or whatever. You do this in a way so that your exposure stays 0.

Can you make money that way?? I did but it gets complicated real fast and i don't know how i did it! Was it simple exposure to a good pair? The fact that my account is in CAD so if CAD fluctuate my P/L in USD will vary?
 
I could be wrong, but this is one of the oldest types of textbook arb examples used (aside from the buy gold in NY, simultaneously sell it in London, or whatever). As such, I would be surprised if opportunities still existed. Who knows though...
 
Well, I know of one top-tier firm that automated and executed triangular currency arb, on all 6 of the majors and their crosses. We're talking a long time ago, back in 1990-92. Which almost certainly means that there must have been other well-capitalized players, engaged in that strategy around that time.

Today? No idea, but, seconding MYDemaray, somehow I seriously doubt it.
 
There is always opportunities, that's how the market mechanic works. Take a look, pairs don't move togeter and you always have a 2-3 sec lap to capture a pip of arbitrage. But there are thousands of automated arbitrage systems running in large banks. That's what makes the markets move togeter.
 
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