The Mirage of Triangular Arbitrage in the Spot Foreign Exchange Market

Abstract

We investigate triangular arbitrage within the spot foreign exchange market using high-frequency executable prices. We show that triangular arbitrage opportunities do exist, but that most have short durations and small magnitudes. We find intra-day variations in the number and length of arbitrage opportunities, with larger numbers of opportunities with shorter mean durations occurring during more liquid hours. We demonstrate further that the number of arbitrage opportunities has decreased in recent years, implying a corresponding increase in pricing efficiency. Using trading simulations, we show that a trader would need to beat other market participants to an unfeasibly large proportion of arbitrage prices to profit from triangular arbitrage over a prolonged period of time. Our results suggest that the foreign exchange market is internally self-consistent and provide a limited verification of market efficiency.

References in corpus (1)

• Triangular arbitrage as an interaction among foreign exchange rates

Cited by in corpus (3)

• Multiscale characteristics of the emerging global cryptocurrency market
• Detecting correlations and triangular arbitrage opportunities in the Forex by means of multifractal detrended cross-correlations analysis
• The microscopic relationships between triangular arbitrage and cross-currency correlations in a simple agent based model of foreign exchange markets