Arbitrage: why price gaps close so fast
Arbitrage is buying an asset cheap in one place and selling it dearer in another to capture the spread. Low-risk in theory. In practice, one of the most competitive games in markets, and the edge can vanish before a trade fills.
The main flavours
- Cross-exchange. Same coin cheaper on exchange A than B, buy A, sell B.
- Triangular. Exploit a pricing inconsistency across three pairs on one venue (e.g. BTC→ETH→USDT→BTC).
- DEX / on-chain. Gaps between decentralized pools, often captured with flash loans in a single transaction.
Why the edge vanishes
Gaps exist for seconds because bots with co-located servers and low fees pounce instantly. By the time a human sees it, it's gone. What looks like a 1% gap is usually eaten by:
- Fees on both legs, plus withdrawal costs.
- Latency & slippage, the price moves while you execute.
- Transfer time, moving funds between venues isn't instant; the gap closes meanwhile.
Doing the arithmetic before you trade
A spread is not a profit. Subtract every cost below from the observed gap; whatever remains is your actual edge, and it is usually negative.
| Cost or constraint | Applies to | Typical order of magnitude |
|---|---|---|
| Taker fee, both legs | Cross-exchange, triangular | Charged twice; tier-dependent, falls with volume |
| Withdrawal and network fee | Moving funds between venues | Flat per transfer, dominates on small size |
| Slippage vs order-book depth | Every venue | Grows with your size; check depth, not last price |
| Transfer confirmation time | Cross-exchange | Minutes: the gap closes while you are in transit |
| Gas, plus failed-transaction cost | On-chain / DEX | You pay even when the transaction reverts |
| Priority fees and being front-run | On-chain / DEX | Searchers outbid you for the same opportunity |
| Capital pre-positioned on both venues | Cross-exchange | Idle inventory and counterparty risk on both sides |
Two structural points follow. First, avoiding transfer time means holding inventory on every venue, so you carry exchange risk permanently rather than momentarily. Second, a persistent spread is usually information, not opportunity: withdrawals halted, a thin book, a jurisdictional barrier, or a token that is not the same asset on both sides. If a gap survives long enough for you to notice it, ask what stops everyone else.
Cross-exchange arbitrage needs accounts on more than one venue: Binance and KuCoin often price the same coin a few basis points apart. For on-chain/DEX arbitrage, dYdX lets you trade perps straight from your wallet. Affiliate links, no extra cost to you.
Educational market information, not financial advice. Markets carry risk of loss, do your own research.