As well known by all, arbitrage trading is a form of trading system that takes advantage of price differences in places of different geographical regions. This is whereby arbitrage traders buy currency from cheap places and sell them at a profit in another place before the prices level up. But what exactly do they target in order to make the profits they want?
What Are Price Discrepancies?
Arbs take advantage of arbitrage price discrepancies which is the difference in price of a commodity between two different places. These prices differ from time to time and this is what arbitrageurs use to gain risk free profits. Even though the difference in prices are not in dollars but in a few pennies, it is very logical to say that with higher trading amount and more trade, you can make a lot of money in a single day.
Causes price discrepancies in arbitrage trading systems.
1. Differences in Withdrawal and Deposit Times of Currencies
Some exchanges only take a few hours while some take up to a number of days to complete the transactions. This may affect the change in rates in different currencies which causes price discrepancies giving an opportunity for arbitrage trading.
2. Influence from Foreign Currency Rates
For instance, the bitcoin price is stable in the US and also in Korea. However, the USD gains more than the KRW. Therefore, in arbitrage, you can consider buying bitcoins in KRW and selling them in USD. This will guarantee profits which is the main aim of arbitrage.
3. Trade May be Large on One Exchange and Not on Another
When one exchange has more trade, it automatically leads to a reduction in the other. This price discrepancy may be an opportunity for arbitrage as it does not affect some other parts of the world.
4. Other Factors
There are other factors that lead to price discrepancies like market demand per country, difference in people’s view on the exchanges, exchanges to different clients and varying liquidity across the exchanges. This creates a loophole for the arbitrage trading system.
Who Does the Price Discrepancies Affect and How?
Price discrepancies may seem of no effect to some people. However, it has a great impact on some people, especially arbitrageurs. For them, these are great opportunities to make money in a short time. They utilize the opportunities whereby for instance a currency exchange at 100.5 and exchanges at 99.2 there is a difference of 1.3 which is very big to an arbitrageur. Let’s assume you perform the trade using a million. In the end, you will have more than 13000 for just one trade. What if you do it 20 times a day? You can see how much money you can make. That is how much impact it makes to an arbitrageur.
Arbitrage price discrepancies can have a great impact in terms of profits and luckily, they are available abundantly every single day of the year. If you check these opportunities, you can make a lot of money within a short time. However, you should keep in mind that you are not the only person seeing the price discrepancy. Therefore, you should be as fast as possible before the prices level up in order to have maximum profits. This problem has been catered whereby there are systems that have been developed to detect price discrepancies and give alerts frequently.