I thought this article would be of interest to the traders here. I've included an excerpt but the full guide can be found here:
https://www.cryptoglobe.com/latest/2019/12/how-exactly-does-crypto-arbitrage-trading-work/
You may have heard of people mention arbitrage trading from time to time, but do you really understand how it works? Let’s dive into the different approaches to arbitrage, and how it works when trading crypto.
What Is Arbitrage
Arbitrage is defined as “the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.” In simpler terms, it means that a trader purchases some asset (for example BTC) then sells it for a higher price on a different exchange or trade pair. There are a few different ways to do this, each with their own upsides and downsides.
Why Are There Price Differences?
In order to profit off of arbitrage there needs to be a difference in price across exchanges or markets. For example, 1 BTC might be sold for $8,000 on one exchange and $8,100 on another. Why is there a price difference? This is because exchanges don’t have a set price for any asset, they maintain an order book which is a list of all of the prices that other people are willing to buy or sell that asset (because they have open buy or sell orders that are waiting to be filled). When you want to buy BTC on an exchange, you will buy it for the lowest price that someone is willing to sell it for, say $8,000. If there is nobody else looking to sell BTC for at a rate of $8,000, then the next lowest selling price will be used. That would depend on what other people have opened orders for, it might be $8,000.10, or $8005. Due to this mechanism, prices are always changing.
How Can I Find Price Differences?
Finding a big price differences, or “spread”, that you can take advantage of for profit can be hard. You need to be constantly watching real-time ticker (price) data across a number of exchanges, and doing the math to figure out how big the spread is. A spread of 0.10% probably won’t be profitable due to exchange trading fees, but a spread of 3% or so could be used to easily make a profit.
In reality, you’ll want to use some type of tool or custom spreadsheet to find spreads in real-time. These are often called a “crypto arbitrage scanner” or something similar. Profitable opportunities sometimes only exist for a short amount of time so having assistance in finding these spreads is crucial. There are a number of options to help with this, such as Coygo or ArbiTool. Below is an example of an arbitrage scanner.