How Does the Depth of the Order Book Impact Triangular Arbitrage Strategy?
Order book depth is crucial because the arbitrageur needs to execute all three trades without causing significant slippage. A shallow order book means the arbitrageur's trades will move the price quickly, reducing or eliminating the profit.
Deep order books allow for larger trade sizes. Arbitrageurs must size their trades carefully to stay within the most liquid layers of the order book to minimize slippage.
Glossar
Order Book
Depth ⎊ An order book represents a listing of buy and sell orders for a specific cryptocurrency, option contract, or derivative, displaying price and quantity at various levels.
Shallow Order Book
Depth ⎊ In cryptocurrency and derivatives markets, a shallow order book signifies a market characterized by limited liquidity, presenting heightened price volatility and increased execution risk.
Order Book Impact
Execution ⎊ : Order Book Impact quantifies the immediate price movement resulting from the execution of a trade against the available depth of bids and offers.
Triangular Arbitrage
Arbitrage ⎊ Triangular arbitrage, within the context of cryptocurrency derivatives and financial markets, exploits temporary price discrepancies across three distinct markets or exchanges for the same underlying asset or related instruments.