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Forex arbitrage is the practice of buying and selling different currency pairs simultaneously in different markets to take advantage of price discrepancies. This strategy works on the principle that the same currency pair can have different prices in different markets due to differences in supply and demand, transaction costs, and market inefficiencies. This creates an opportunity for traders to buy the currency pair at a lower price in one market and sell it at a higher price in another market, pocketing the difference as profit. To meet the goals of this study, a model (Arbitrager Model henceforth) of three co-existing inter-dealer FX markets is introduced. In the Arbitrager Model, each market hosts a fixed number of agents who interact by exchanging a given FX rate. Trading is organized in simplified LOBs where prices move in a continuous grid.

Agents provide liquidity to the market by adjusting limit orders through which they quote a bid and an ask price, thus acting as market makers. To set these prices, market makers adopt simple trend-based strategies. Furthermore, market makers cannot interact across markets, that is, they can only trade in the market they have been assigned to. Finally, echoing [37], the ecology hosts a special agent (i.e., the arbitrager) that is allowed to submit market orders in any market to exploit triangular arbitrage opportunities, see Fig 4. Forex arbitrage is a trading strategy that involves taking advantage of the price discrepancies between different currency pairs.

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A very common scheme is the price-time priority rule which uses the submission time to set the priority among limit orders occupying the same price level, i.e., the order that entered the LOB earlier is executed first [54]. Given the need for quick quotes and trade orders, a strategy like this can really only be implemented with API trading services – where Alpaca excels. The development of technology and the emergence of new financial markets could influence the application of triangular arbitrage. Triangular arbitration could evolve into a more sophisticated form, leading to greater efficiency and precision in the execution of such trades. Triangular arbitrage brings a higher risk for slippage as it involves frequent trading when the opportunity arises.

• To meet the goals of this study, a model (Arbitrager Model henceforth) of three co-existing inter-dealer FX markets is introduced.
• Triangular arbitration could evolve into a more sophisticated form, leading to greater efficiency and precision in the execution of such trades.
• Forex markets are extremely competitive with a large number of players, such as individual and institutional traders.
• We can either hard-code to a limited set of combinations or allow the code to consider all the possible combinations available in the exchange.
• The relationship between triangular arbitrage [50–53] and cross-currency correlations remains unclear.

Cryptocurrency is not regulated or is lightly regulated in most countries. Cryptocurrency trading can lead to large, immediate and permanent loss of financial value. You should have appropriate knowledge and experience before engaging in cryptocurrency trading. This is largely because one cannot generally take traditional investing concepts and apply them successfully. There are a large number of unclear factors that can influence a cryptocurrency’s price. Arbitrage methods, including Triangular Arbitrage, are relatively risk-free and attempt to ensure a profit regardless of many market conditions, and generally don’t need to be monitored as often as other riskier strategies.

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Some international banks serve as market makers between currencies by narrowing their bid–ask spread more than the bid-ask spread of the implicit cross exchange rate. However, the bid and ask prices of the implicit cross exchange rate naturally discipline market makers. First, we 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. Second, we propose a model of foreign exchange rates with an interaction.

The price discrepancies generally arise from situations when one market is overvalued while another is undervalued. Arbitrage is a trading approach that turns market inefficiencies into financial opportunities. Triangular arbitrage is a risk-free benefit when the quoted exchange rates are not the same as the market cross rates. Hence, the exchange rate may be overvalued in one market and undervalued in another. In this regard, foreign exchange market participants, such as international banks, exploit such inefficiencies to profit. The model introduced in the present study could be subject of meaningful extensions and enhancements aimed to turn this framework into a valuable tool that could be used by exchanges, regulators and market designers.