Triangle Arbitrage Forex Factory

Forex arbitrage question

Let's say there's a forex market trading 3 currencies, A,B and C. Now, in the AB and BC market, the bid/ask is .99 and 1.01, but the AC market is empty. It's possible as a market makearbitrageur to quote .97 and 1.03 on the AC market, because if somebody hits their order, they can use the other 2 markets to complete a triangular arbitrage.
Of course, there is some amount of risk involved because the liquidity in the other markets might disappear in between when they get hit and when they try to complete the triangle.
The arbitrageur's action can be characterized as providing a shortcut to trade AB-BC, for a fee; their counterparty could have done this themselves for lower cost.
Now, my question is, is it feasible for the exchange itself to automatically display these "synthetic" bids and asks on the order books, and complete the arbitrage itself as part of the matching engine?
It can quote better prices for a few reasons:
  1. It doesn't have to worry about turning a profit on the trade, since it's an action of the matching engine and not of a market participant.
  2. It doesn't have to pay transaction fees, for the same reason.
  3. More importantly, it's also riskless, because, as it is part of the matching system, the correct trades happen instantaneously, rather than by the arbitrageur's round trip latency.
Does anyone know if any forex markets do this in real life? Are there any reasons against it?
submitted by lurker111111 to finance [link] [comments]

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What is Triangular Arbitrage in Forex?🔺 - YouTube

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