Arbitrage Strategies

Arbitrage strategies seek to profit from price differences for similar or related instruments. In theory, arbitrage is low risk, but in practice it requires careful execution, funding, and risk control.

Common Types

Spatial arbitrage exploits price differences across venues. Temporal arbitrage trades mispricings across maturities such as futures curves. Statistical arbitrage uses mean reversion relationships between baskets or factors. Event arbitrage trades around corporate actions such as mergers.

Execution Considerations

Arbitrage trades often require simultaneous execution of multiple legs. Delays or partial fills create exposure. Low latency routing, reliable connectivity, and precise order management are critical.

Capital and Funding

Many arbitrage strategies rely on leverage and shorting. Funding costs, margin requirements, and borrow availability can determine whether a trade is viable. These constraints must be modeled in both research and live trading.

Risks

Relationships can break during regime shifts, causing spreads to widen. Liquidity shocks can make exit difficult. Operational failures are especially dangerous because arbitrage positions are often highly leveraged.

Conclusion

Arbitrage can be attractive but is operationally demanding. Success depends on execution quality, risk discipline, and accurate cost modeling.