Why Is a Highly Liquid Market Essential for Effective Arbitrage?
High liquidity is essential because it ensures that arbitrageurs can execute large-volume trades quickly and with minimal price impact (low slippage). Arbitrage opportunities are often fleeting, and a liquid market allows for immediate execution at the desired price.
Low liquidity, conversely, leads to higher slippage and transaction costs, making the arbitrage opportunity uneconomical or impossible to capture.
Glossar
Liquid Market
Depth ⎊ A liquid market, within cryptocurrency derivatives, signifies efficient price discovery and minimal transaction costs, crucial for effective risk transfer and hedging strategies.
Price Impact
Execution Cost ⎊ Price Impact quantifies the immediate change in an asset's market price caused solely by the execution of a single trade, reflecting the inverse of available liquidity at the point of execution.
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.