Identifying Arbitrage Opportunities with Graphs

http://gist.neo4j.org/?7331087

by nicolewhite • 11 years ago

32 17 11 years ago

gist.neo4j.org

murbard22• 11 years ago

This doesn't take into account available volume. For that you need to solve a min-cost flow algorithm, using for instance the Ford–Fulkerson algorithm.

gavazzy• 11 years ago

Low volume is one of the reasons that arbitrage was so difficult with Bitcoin. While an individual could be somewhat profitable, it just couldn't provide adequate returns for a medium or large organization.

codesci• 11 years ago

Available volume? Forex is the most liquid market in the world.

murbard22• 11 years ago

1) There's still finite volume at a given price, and the arbitrages, when they do happen, typically involve small volumes.

2) There is more to arbitrage than Forex markets

foobar2020• 11 years ago

Yes. But if your arbitrage pattern is only 3 pips profitable, and you are exchanging millions at once, you might expect that the amount of available orders matching your path may actually matter.

TheAlchemist• 11 years ago

Besides the fact that you don't take into accunt the spread (the buy / sell prices, which are never equal), the big risk associated with this kind of 'arbitrage' is the fact that the transactions won't occur simultaneously. What happens if during the sequence of this 'arbitrage' prices move enough to offset the potential gain ?

nicolewhite• 11 years ago

Of course your points are valid. Perhaps I should have put this into context. The matrix given as the main example was assigned to me as a homework problem in an undergraduate optimization class. I decided to solve it using a graph and wanted to share.

j_lev2• 11 years ago

Doesn't take into account the fact that FX is "last look" for the provider of the liquidity and so any one of the transactions along the way could be rejected. In fact even if the trade wasn't rejected at the time of transaction, the liquidity provider could come back later and request a particular trade be reversed or manually adjusted as it was unprofitable for the liquidity provider.

Also doesn't take into account that in FX specifically, arbitraging is heavily frowned upon and if you are caught you are likely to have your account closed down.

The reasons for both of the above is that unlike for commodities/equity/futures/etc which are traded on a market, FX is more like a "gentleman's wild west" ie no defined market rules, but a lot of unofficial gentlemans agreements in place about what you can and can't do.

Various exchanges have tried to offer a standardised FX product and they all have the same issue - because a transaction on an exchange doesn't allow "last look" provision and the market makers have to honor the transaction, once an arbitrager infiltrates the market the market makers are basically at the mercy of the exchange (and all the latencies and rules within) and are forced to widen their spreads to the point that it no longer an attractive marketplace for all other market takers.

Having said that, arbitragers still do exist in FX. The most (in)famous one in Japan is a guy "Arb-san" who was making a motza in the countryside in Gifu. He had a great blog where he uploaded photos of his cars and piles of cash and trading rig, and commentary of how he was sticking it to the dumb banks. Unfortunately I can't find this blog anymore, but I did manage to find a profile of someone with the same name online that has some cars that I recognise from the that blog:

http://minkara.carview.co.jp/en/userid/1956440/car/

jklein11• 11 years ago

Can you explain the rational behind arbitrage being heavily frowned upon? Either arbitrage is effective, and prices are set efficiently without any intervention, or they aren't and the exchange makes collects their fees for the trades.

cbd1984• 11 years ago

Wow. You'd think the market regulators would have noticed such an obvious race condition and moved to fix it. Maybe atomic buy-sell transactions could be the future of finance.

genericacct• 11 years ago

You know it is a recent snippet because it mentions currencies that havent been in use for over a decade..

to3m• 11 years ago

Bringing it up to date must be one of those exercises for the reader.

dataker• 11 years ago

I'm assuming one would have to manage a hedge fund to actually be benefited?

Seems somewhat unfeasible for an individual investor.

ziles88• 11 years ago

Well, hedge-funds don't play arbitrage games anyways. This is for scalpers and mostly day-traders. Banks don't even really play arbitrage - not as a means to profit at least.

Only benefit to being a hedge-fund is you have lots of money to play with, which you'll need because the profits in arbitrage are very thin. You need likely 20K+, good spreads, fast execution, and an automated strategy to consider it worth your time.

syphon7• 11 years ago

Hedge funds make insane amounts of money using arbitrage strategies.

grandalf• 11 years ago

been using neo4j lately and loving it.

Identifying Arbitrage Opportunities with Graphs

Related Stories