What is Arbitrage in Forex?

What is Arbitrage?

Arbitrage exploits temporary price discrepancies between markets or instruments to lock in low-risk profit. True risk-free opportunities are rare in modern forex, but short-lived gaps can appear when volatility spikes or quotes update at different speeds.

Types of Forex Arbitrage

• Triangular arbitrage: Profit from mispricing among three related pairs (e.g., EUR/USD, USD/JPY, EUR/JPY).
• Statistical arbitrage: Trade baskets when correlations diverge from historical norms.
• Broker latency arbitrage: Use faster data to trade against brokers with slower feeds (often prohibited).
• Carry arbitrage: Hedge interest-rate differentials via derivatives to capture yield.

Risks to Consider

• Transaction costs: Commissions and spreads may exceed the theoretical gain.
• Technology failures: Connectivity issues introduce unwanted directional exposure.
• Regulatory limits: Some brokers and jurisdictions restrict aggressive latency strategies.
• Market adaptation: Arbitrage edges decay quickly as participants update pricing models.