What Are the Risks Associated with Cross-Exchange Arbitrage?
The primary risks associated with cross-exchange arbitrage are execution risk, transfer delays, and exchange-specific risks. Execution risk occurs when the price changes before the trade can be completed, eliminating the arbitrage opportunity.
Transfer delays between exchanges can also be a significant issue, as the price difference may disappear before the funds arrive at the second exchange. Exchange-specific risks include the possibility of an exchange halting withdrawals, experiencing technical difficulties, or having insufficient liquidity to complete the trade.
Additionally, traders must account for withdrawal and trading fees on both exchanges, which can impact profitability.
Glossar
Insufficient Liquidity
Liquidation ⎊ Insufficient liquidity within cryptocurrency derivatives, particularly options, presents a heightened risk of forced liquidation, especially during periods of rapid price volatility or unexpected market shocks.
Execution Risk
Exposure ⎊ The inherent risk in cryptocurrency derivatives and options trading stems from the potential for adverse outcomes during the execution phase, particularly given the unique characteristics of these markets.
Trading Fees
Cost ⎊ Trading fees represent a quantifiable deduction from capital employed in executing strategies across cryptocurrency, options, and derivative markets, directly impacting net profitability and risk-adjusted returns.
Transfer Delays
Latency ⎊ Transfer delays within cryptocurrency, options, and derivatives markets represent the time elapsed between trade initiation and execution confirmation, critically impacting arbitrage opportunities and overall market efficiency.
Withdrawal Limits
Constraint ⎊ Withdrawal limits, across cryptocurrency exchanges, options platforms, and derivative markets, represent pre-defined boundaries on the amount of funds a user can withdraw within a specific timeframe.