How Do Transaction Costs Affect the Profitability of Arbitrage?

Transaction costs, which include trading fees, withdrawal fees, and potential funding payments, directly reduce the profitability of an arbitrage trade. For basis arbitrage, the trading fees on both the spot and futures legs must be considered.

If the expected profit from the funding rate or the basis convergence is less than the total transaction costs, the trade is no longer viable. Low-latency execution is also crucial to minimize price movement risk.