Triangular arbitration is a bit of currency slang that sounds good. It represents the idea of buying something and selling it instantly instantly at a profit. Instant, free money attracts almost everyone. The theory is sound, but it is very difficult to achieve in real life.
If you are not familiar with synthetic currency pairs, I recommend that you read my post on the subject as of December 2011. None of this explanation will make sense without understanding the synthetic pair concept.
Triangular arbitrage opportunities occur when a currency pair shows a price, while the same synthetic currency pair shows another price. If the sale price for the EURUSD is 1.2820 and the offer price of the currency pair is synthetic 1.2823, there is an opportunity for triangular arbitration.
The synthetic currency pair can affect any medium of exchange. Yen pairs are extremely liquid, so maybe you can use USDJPY EURJPY and to build synthetic EURUSD.
The great thing about the triangular arbitration trade is that there are multiple opportunities using the same instrument. Although the name pair does not change, which in this case is EURUSD, an operator could use any of the other 6 major currencies to make purchases for the best price in the trade. I made a list of the examples below, using the hypothesis that we are buying EURUSD.
Why triangular arbitration is so common
Almost all retail forex brokers dial until it spreads instead of charging direct commissions. The purpose is to camouflage the true cost of negotiation. Like most tricks, however, it creates an unwanted consequence. Artificial surcharges in propagation are the reason for many of the triangular arbitration opportunities.
The runner must decide on which side of the propagation he receives the marking. From time to time, the entire profit margin is subtracted from the offer or added to the order. More often than not, brokers cover their bets by adding portions of the review mark on both sides of supply and demand.
Profit margins are always higher at crossings. The extreme differences between the supply and demand to make the negotiation those crosses directly undesirable. It is a kind of paradox, but that becomes an undesirable positive trait in the context of triangular arbitration. The offer is lower than its real rate. Ordering is higher than your actual rate. When large commercial powers in reasonable differentials, it is common for the profit margin to create near arbitration opportunities permanent at crossings.
Trade only achieves a profit-realize power whenever the profit margin begins bias in the opposite direction. If a broker applies most of the profit margin in the questioning, triangular arbitration would not benefit until the agent changed the profit margin mostly or entirely to the offer. The flip flops usually take several hours to appear, which limits the number of daily opportunities.
Brokerage almost always sees arbitration operators as a toxic order flow. Arbitration only occurs when someone is asleep at the wheel; the earnings ultimately come out of someone’s pocket. Even in the case where brokerages offer an ECN or go through execution, they care much more about their relationships with banks than any individual client. Brokerages are essentially the wholesalers for the negotiating arms of the banks. If the banks cut them, then they have nothing to sell. Triangular arbitration in this situation earns its money from the banks. If a merchant earns too much money too quickly, the merchant will receive the ax at the request of the bank.
The operators at the FXCM operating table or other agents face no possibility of a continuous relationship. The benefits come directly from the pockets of the broker. If they have been in business for a long time, they will know what you are doing relatively quickly.
The division of operations across multiple brokers is the best opportunity for the strategy to succeed. Breaking orders creates more opportunities. More important, no entity knows its combined order flow. This makes it much harder for the loser to track what is bleeding dry.