HomeExperienceDetailed description of digital currency quantitative arbitrage
December 11, 2018
Detailed description of digital currency quantitative arbitrage
There are many global digital currency exchanges, and the same currency in market is not always effective in pricing due to many factors affecting. The same pair has spread among two or more exchanges. As long as there is a spread, there is arbitrage. Arbitrage through spreads is basically risk free in the digital currency market.
Suppose the EOS/USDT pair: the price in Huobi is 11, the price in Binance is 10, and the EOS has spread of 1 USDT between the two exchanges. Suppose you hold 1 EOS in Huobi, following the principle of selling high and buying low, sell 1 EOS in Huobi to get 11 USDT, spend 10 USDT to buy 1 EOS in Binance, then you net earned 1 USDT, and the amount of EOS remains unchanged. Although there is such a spread, manual arbitrage often has many uncertainties due to the time-consuming, poor accuracy and price changes of manual operations. Through the quantitative model to capture arbitrage opportunities and develop arbitrage trading strategies, and programmatic algorithms automatically release trading orders to the exchange, quickly and accurately capture opportunities, and efficiently earn income, which is the charm of quantitative arbitrage.
1. Cross-market two-side hedging arbitrage
The two-side arbitrage is also called direct arbitrage and bilateral arbitrage. It is through the discovery that the same transaction pair (like: EOS/USDT) has a spread in two different exchanges, and the behavior of high-selling and low-buying to take the spread profit.
The amount of hedged profit and loss is equal, and the same base currency is bought and sold in both markets to ensure that quote currency is transferred.
Suppose the Huobi EOS/USDT price is 8, and the Okex EOS/USDT price is 10. Follow the principle of buying low & selling high. Suppose that there are 100 USDTs held in Huobi and 10 EOSs in Okex, the arbitrage process:
1) Use 80 USDT to buy 10 EOS in Huobi, and then there are 10 EOS and 20 USDT in Huobi account.
2) Sell 10 EOS in Okex to get 100USDT, then there are 0 EOS and 100 USDT in Okex account.
After 1 round (1, 2 can be simultaneously carried out) hedging transactions (10 EOS for the amount of hedging), the user still has 10 EOSs, and the number of USDT becomes 120, and the net profit is 20 USDT.
When the high-priced market holds base currency or the low-priced market holds quote currency or fiat, it can carry out two-way cyclic hedge arbitrage.
When there is no base currency in the high-priced market or no quote currency in the low-priced market, arbitrage needs to put fiat in the low-price market.
When the arbitrage gain is greater than the arbitrage cost, and it’s stored in fiat account, you can perform cyclic arbitrage. (Moving bricks needs to pay attention to time risk)
2. Cross-market triangle hedge arbitrage
Triangular arbitrage, also known as indirect arbitrage or multilateral arbitrage, is to use three or more currency exchange rate spreads for trading in three or more trading markets at the same time. Triangular arbitrage is the arbitrage of cross-exchange rate pricing errors. If EOS/USDT=10, EOS/ETH=0.01, ETH/USDT=500, the fair price of ETH/USDT formed as 1000 by EOS/USDT and EOS/ETH cross-price, and the current price of ETH/USDT is 500. There is spread for arbitrage.
If EOS/ETH=0.5, EOS/USDT=10, USDT/ETH=0.01, the fair price of EOS/ETH formed by EOS/USDT, USDT/ETH is 400, and the current price of ETH/USDT is 500. Poor, follow the principle of buying low & selling high, can carry out arbitrage. as the picture shows:
Suppose you initially have 2 EOS, and you sell to get 1 ETH, then sell 1 ETH to get 100 USDT, and then sell 100 USDTs to get 10 EOS. After the triangle round, the number of EOS is changed from the initial 2 to 10.
3. triangle loop arbitrage in same exchange
Based on the principle of triangular arbitrage, use the spread of three pairs on the same exchange to trade, and there is no need to remove your currency. Calculated by 10,000 yuan, even if the arbitrage gain is only 0.1%, if one thousand times of arbitrages is executed in one day, the one-day income will become 21,700 annualized income, and no need to remove currency in account, never.