How Do Market Makers Profit from Arbitrage Opportunities Created by Basis Differences?
Market makers engage in basis trading to profit from temporary misalignments between the futures price and the spot price. They typically execute a simultaneous long position in the undervalued leg and a short position in the overvalued leg.
This locks in a risk-free profit that materializes when the prices converge at expiration.
Glossar
Short Position
Definition ⎊ A short position represents the sale of a financial instrument, such as a cryptocurrency, stock, or derivative contract, that the seller does not own, with the expectation that its price will decrease.
Leverage Impact
Amplification ⎊ ⎊ Leverage impact within cryptocurrency, options, and derivatives fundamentally alters risk-return profiles by magnifying both potential gains and losses relative to the underlying asset’s movement.
Basis Trading
Arbitrage ⎊ Basis trading, within cryptocurrency and derivatives markets, exploits temporary mispricings between the spot and futures contracts of an underlying asset, aiming for risk-free profit.
Market Makers Profit
Arbitrage ⎊ Market Makers Profit is derived primarily from capturing the bid-ask spread and managing inventory risk associated with providing continuous liquidity across trading venues.
Transaction Costs
Expense ⎊ Transaction costs represent the total expenses incurred when executing a trade or interacting with a financial protocol on a blockchain.
Arbitrage Opportunities
Exploitation ⎊ Arbitrage Opportunities in crypto derivatives arise from temporary price dislocations between related instruments across different venues or between the derivative and its underlying spot asset, demanding rapid, automated execution to capture the spread.