Arbitrage – let’s earn from others’ mistakes

Arbitrage in financial markets means taking advantage of situations when the same asset is priced differently at different trading venues. Such a situation is usually called mispricing (there are other meanings of this term, and we will get back to it in the very next section about statistical arbitrage). Due to the colossal fragmentation of the FX market (see Chapter 3, FX Market Overview from a Developer’s Standpoint) mispricing there is not infrequent, so an arbitrage strategy looks pretty straightforward: as soon as we see that, say, EURUSD is priced at 1.00012 at LMAX and 1.00013 at IS Prime, then we simultaneously buy at LMAX and sell at IS Prime, pocketing one-tenth of a pip.

I think you can clearly see some problems with arbitrage, which directly follow from its description.

First, the potential profit from a single trade is ridiculously small, so you have to make lots of trades in order to be consistently...