How to Arbitrage the Forex Market – Four Real Examples


What Is Arbitrage?

Arbitrage is a trading strategy that has made billions of dollars as well as being responsible for some of the biggest financial collapses of all time. What is this important technique and how does it work? That is what I will attempt to explain in this piece.

Figure 1: Spread gaps in broker quotes
Figure 1: Spread gaps in broker quotes

An Excel calculator is provided below so that you can try out the examples in this article.

Arbitrage and Value Trading Are Not the Same

Arbitrage is the technique of exploiting inefficiencies in asset pricing. When one market is undervalued and one overvalued, the arbitrageur creates a system of trades that will force a profit out of the anomaly.

In understanding this strategy, it is essential to differentiate between arbitrage and trading on valuation.

You will often hear people say that when a security is undervalued or overvalued an “arbitrageur” can buy it or sell it and hence hope to profit when the price comes back to fair value.

The keyword here is hope. This is not true arbitrage. Buying an undervalued asset or selling an overvalued one is value trading.

The true arbitrage trader does not take any market risk. He structures a set of trades that will guarantee a riskless profit, whatever the market does afterwards.

Arbitrage Example

Take this simple example. Suppose an identical security trades in two different places, London and Tokyo. For simplicity, let’s say it’s a stock, but it doesn’t really matter.

The table below shows a snapshot of the price quotes from the two sources. At each tick, we see a price quoted from each one.

Time London Price Tokyo Price Difference London Desk Tokyo Desk
08:05:00 54.32 54.32 0.00
08:05:01 54.31 54.31 0.00
08:05:02 55.20 55.10 0.10 Sell 10 @ 55.20 Buy 10 @ 55.10
08:05:03 55.80 55.70 0.10 - -
08:05:04 55.85 55.75 0.10 - -
08:05:05 54.32 54.32 0.00 Buy 10 @ 54.32 Sell 10 @ 54.32
08:05:06 54.33 54.33 0.00
08:05:07 53.76 53.76 0.00
08:05:08 53.89 53.89 0.00
08:05:09 53.56 53.56 0.00
08:05:10 53.00 53.00 0.00
Lock in 8.80 -7.80
Net risk free profit 1.00

At 8:05:02 the arbitrageur sees that there is a divergence between the two quotes. London is quoting a higher price, and Tokyo the lower price. The difference is 10 cents. At that time, the trader enters two orders, one to buy and one to sell. He sells the high quote and buys the low quote.

Because the arbitrageur has bought and sold the same amount of the same security, theoretically he does not have any market risk. He has locked-in a price discrepancy, which he hopes to unwind to realize a riskless profit.

Now he will wait for the prices to come back into sync and close the two trades. This happens at 8:05:05. He reverses out of the two positions and the final profit is $1 less his trading fees.

Not a huge profit, but it took just three seconds and did not involve any price risk.

Arbitrage is a bit like “picking pennies”. The opportunities are very small. This is why you have either to do it big or do it often.

Before the days of computerized markets and quoting, these kinds of arbitrage opportunities were very common. Most banks would have a few “arb traders” doing just this kind of thing.

Try the calculator
Calculator tool

Cross-broker Arbitrage

Arbitrage between broker-dealers is probably the easiest and most accessible form of arbitrage to retail FX traders.

To use this technique you need at least two separate broker accounts, and ideally, some software to monitor the quotes and alert you when there is a discrepancy between your price feeds. You can also use software to back-test your feeds for arbitrageable opportunities.

carry trade ebook
How to trade currencies for income: Complete guide

Carry trading has the potential to generate cash flow over the long term. This ebook explains step by step how to create your own carry trading strategy. It explains the basics to advanced concepts such as hedging and arbitrage.

The complete guide to a successful carry trade strategy.

A mainstream broker-dealer will always want to quote in step with the FX interbank market. In practice, this is not always going to happen. Variances can come about for a few reasons: Timing differences, software, positioning, as well as different quotes between price makers.

Remember, foreign exchange is a diverse, non-centralized market. There are always going to be differences between quotes depending on who is making that market.

Delayed quotes: When a broker’s quotes momentarily diverge from the broader market, a trader can arbitrage these events. This will allow a risk free profit. In truth, there are challenges. More on that later.

Let’s look at an example. The table below shows two broker feeds for EUR/USD.

Time Broker A Trade Broker B Trade
01:00:00 1.3035 / 037 1.3035 / 037
01:00:01 1.3036 / 038 Buy 1lot @ 1.3038 1.3048 / 052 Sell 1 lot @ 1.3048
01:00:02 1.3049 / 053 Sell 1 lot @ 1.3049 1.3049 / 053 Buy 1 lot @ 1.3053
01:00:03 Profit 11 pips -5 pips

Having both quotes available, the arbitrager sees at 01:00:01 that there is a discrepancy. He immediately buys the lower quote and sells the higher quote, in doing so locking in a profit.

When the quotes re-sync one second later, he closes out his trades, making a net profit of six pips after spreads.


When arbitraging, it is critical to account for the spread or other trading costs. That is, you need to be able to buy high and sell low. In the example above, if Broker A had quoted 1.3038/1.3048, widening the spread to 10 pips, this would have made the arbitrage unprofitable.

The outcome would have been:

Entry trade: Buy 1 lot from A @ 1.3048 / Sell 1 lot to B @ 1.3048
Exit trade: Sell 1 lot to A @ 1.3049 / Buy 1 lot from B @ 1.3053

Profit: -4 pips

In fact, this is what many brokers do. In fast moving markets, when quotes are not in perfect sync, spreads will blow wide open. Some brokers will even freeze trading, or trades will have to go through multiple requotes before execution takes place. By which time the market has moved the other way.

Figure 2
Spread range between two broker's quotes

Sometimes these are deliberate procedures to thwart arbitrage when quotes are off. The reason is simple. Brokers can run up massive losses if they are arbitraged in volume.

Arbitraging Currency Futures

Anywhere you have a financial asset derived from something else, you have the possibility of pricing discrepancies. This would allow arbitrage. The FX futures market is one such example.

Suppose we have the following quotes:

  • GBP/USD spot rate =1.45
  • 12-month GBP/USD futures contract trades at 1.44
  • 12-month interest on USD is 1.5%
  • 12-month interest on GBP is 3%

A financial future is a contract to convert an amount of currency at a time in the future, at an agreed rate. Suppose the contract size is 1,000 units. If you buy one GBP/USD contract today, in 12-months time, you will receive £1,000 and give $1,440 in return.

The arbitrageur thinks the price of the futures contract is too high. If he sells one contract, he will have to deliver GBP 1,000 in 12-months time, and in return will receive USD 1,440.

He does the following calculations:

To deliver £1,000, the arbitrageur needs to deposit £970.45 now for 12-months @ 3%.

He can borrow in US dollars the amount, $1407.15 at 1.5% interest.
He can convert this to £970.45 at the spot rate.
The cost of the deal is $1407.15 + $21.27, 12-months interest @ 1.5% ($1,428.41).

The above deal would create a synthetic futures contract that would convert £1,000 to $1428.41 in 12-months time. The cost today is USD 1,428.41.

From this, he knows that the 12-month futures price should really be 1.4284. The market quote is too high. He does the following trade:

Sell one futures contract @ 1.44.
Create the synthetic futures deal as above

At the end of 12-months, under the contract he delivers the £1,000 and receives $1,440. Using the money, he pays back his loan of $1407.15, plus $21.27 interest. He makes a riskless profit of:

USD 1,440 – USD 1,428.41 = USD 11.59

Notice that the arbitrageur did not take any market risk at all. There was no exchange rate risk, and there was no interest rate risk. The deal was independent of both and the trader knew the profit from the outset. The cashflows are shown in the diagram below (Figure 3).

Figure 3
Cash Flows in Typical Futures Arbitrage Deal

Value Trade Alternatives

Seeing the futures contract was overvalued, a value trader could simply have sold a contract hoping for it to converge to fair value. However, this would not be an arbitrage. Without hedging, the trader has exchange rate risk. And given the mispricing was tiny compared to the 12-month exchange rate volatility, the chance of being able to profit from it would be small.

As a hedge, the value trader could have bought one contract in the spot market. But this would be risky too because he would then be exposed to changes in interest rates because spot contracts are rolled-over nightly at the prevailing interest rates. So the likelihood of the non-arb trader being able to profit from this discrepancy would have been down to luck rather than anything else, whereas the arbitrageur was able to lock-in a guaranteed profit on opening the deal.

Cross-currency arbitrage

Trading text books always talk about cross-currency arbitrage, also called triangular arbitrage. Yet the chances of this type of opportunity coming up, much less being able to profit from it are remote.

With triangular arbitrage, the aim is to exploit discrepancies in the cross rates of different currency pairs.

For example, suppose we have:

Broker A
EUR/USD = 1.3000
GBP/USD = 1.6000

This means we should have the cross rate:
GBP/EUR = 1.6000 / 1.3000 = 1.2308

Suppose Broker B quotes GBP/EUR at 1.2288. From the above the arbitrageur does the following trade:

Buy 1.2288 EUR @ 1.300×1.2288 USD from Broker A
Buy 1 GBP @ 1.2288 EUR from Broker B
Sell 1 GBP @ 1.6 USD to Broker A
His profit is 1.6 USD – 1.3 x 1.2288 USD = .00256 USD

Of course, in reality the arbitrageur could have increased his deal sizes. If he trades standard lots, his profit would have been 100,000 x .00256 or $256.

The cashflows are shown in Figure 4.

In practice, most broker spreads would totally absorb any tiny anomalies in quotes. Secondly, the speed of execution on most platforms is too slow.

Figure 4
Cash Flows in Triangular Arbitrage Deal

Electronic Markets Reduce Price Anomalies

Arbitrage plays a crucial role in the efficiency of markets. The trades in themselves have the effect of converging prices. This makes “gaps” disappear so removing the opportunities of risk free profits.

Over the years, financial markets have becoming increasingly efficient because of computerization and connectivity. As a result, arbitrage opportunities have become fewer and harder to exploit.

At many banks, arbitrage trading is now entirely computer run. The software scours the markets continuously looking for pricing inefficiencies on which to trade. For the “ordinary trader”, this makes finding exploitable arbitrage even harder.

Nowadays, when they arise, arbitrage profit margins tend to be wafer thin. You need to use high volumes or lots of leverage, both of which increase the risk of something getting out of control. The collapse of hedge fund, LTCM is a classic example of where arbitrage and leverage can go horribly wrong.

Beware Brokers Who Ban Arbitraging

Some brokers forbid clients from arbitraging altogether, especially if it is against them. Always check their terms and conditions. Beware because some brokers will even back test your trades, to check if your profits have coincided with anomalies in their quotes.

Forbidding arbitraging is shortsighted in my opinion. Seeing a “no arbitrage” clause should raise red flags about the broker concerned. Arbitrage is one of the linchpins of a fair and open financial system.

Without the threat of arbitraging, broker-dealers have no reason to keep quotes fair. Arbitrageurs are the players who push markets to be more efficient. Without them, clients can become captive within a market rigged against them.

The following Excel workbook contains an arbitrage calculator for the examples above.

Download file
Please login

Challenges to the Arbitrage Trader

Arbitraging can be a profitable low risk strategy when correctly used. Before you rush out and start looking for arbitrage opportunities, there are a few important points to bear in mind.

  • Liquidity discount/premiums – When checking an arbitrage trade, make sure the price anomaly is not down to vastly different liquidity levels. Prices may discount in less liquid markets, but this is for a reason. You may not be able to unwind your trade at your desired exit point. In this case, the price difference is a liquidity discount, not an anomaly.
  • Execution speed challenge – arbitrage opportunities often require rapid execution. If your platform is slow or if you are slow entering the trades, it may hamper your strategy. Successful arb traders use software because there are a lot of repetitive checks and calculations.
  • Lending/borrowing costs – Advanced arbitrage strategies often require lending or borrowing at near risk free rates. But once fees are added, traders outside of banks cannot lend or borrow at anywhere near risk free rates. This invalidates many arbitrage opportunities.
  • Spreads and trade costs – Always factor in all trading costs from the start.
Join 11,000+ other traders and subscribe to Forexop's newsletter. It's free to join and you'll get updates directly to your inbox. Just add your email address below.
About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

    • I am in need of a working partner who can team up with me to work on arbitrage. I have my own company funds , but what i lack is a serious arb system. incase you have arbitrage system which works on real account. do contact me. at

    • Thanks steve, this article is pretty good, easier-to-understand than bbg training.

      Just as steve said, the approach needs a sold IT infrastructure. My IT+ trading experiences (band and fund) tell me that this strategy works for bank and does not fit for small funds or individual traders.

      I am a Algo trader, doing much ARB in japan.
      Japanese market provides more ARB opportunities than the US and EUR. Most of brokers likely focus on volume trading instead of protection of ARB. Carry trade is also a good strategy for japanese investors.
      if you are interested in japan market, contact me,

  1. I trade arbitrage same like that. but i face float in my account upto 100$ on 0.01 and same profit also. when I check 6 month history these transaction was giving me 780$ profit I want to know why is it so if i hedge all my position with 3 pairs how a profit and loss can be so high.

  2. Maybe not impossible but most likely more effort and expense than can be justified by the profits? It sounds like you no longer trade using arbitrage for this reason? Shouldn’t that be the central message of the article? As a an academic exercise it is of interest though, thank you.

    • Right. I wouldn’t say impossible either but certainly much harder than it was a few years ago. There are still some structured arbitrage deals like in carry trading that can work.

  3. Hi Steve,

    Great article you have!

    How’s your arbitrage trading so far?

    Would you mind to contact me on my email? We are looking for HFT arbitrage trader to manage a fund.

  4. Hi Steve… thanks for the extremely insightful articles. Just wondering if there are printable or print-friendly versions of your articles? I tried the normal print page function, but the formatting makes it difficult to have a readable print-out. Thank you…

    • Thanks for the feedback. I do have a couple of ebooks with all of the best material. Could look to bringing them here to the site as a download again.

  5. I do a lot of arbitrage a lot and do it for a living even though I am a retail investor.

    Your article is excellent. However, as I scroll down the posts here, it is clear that there are critics here who actually dismiss the notion that arbitrage exists, Arbitrage can be found anywhere really. Just keep your eyes peeled!

    I haven’t done much currency arbitrage though it is something I really need to look at further if I have some time away from my hectic work really.

  6. Hi Steve,
    I read your article its great bro. Got some queries if you can help pls.
    I wanted to ask about cross broker arbitrage which looks simple and 100% risk free as per calculations are concerned but i know those differences are very difficult to spot. My questions are -:

    1. How do we spot these differences.
    2. And, how do we execute our trade.
    Because, as you have explained these differences occur for fraction of seconds, execution and exit takes few seconds. And we gotta act on two different brokers. It seems impossible to do it manually.
    3. How do we connect two Meta Trader and make it possible.

    • 1. How do we spot these differences? You need fast and continual communication between the traders (or systems). This used to be done by two traders over the phone in the past! The only difference now is that markets are much more in sync than ever –because of arbitraging systems, automation and electronic quoting. Thus making these opportunities far fewer and less profitable.

      2. How do we execute our trade? With small profits the timing is extremely critical and if you have execution delays of “a few seconds” it probably won’t be possible. Manual is more or less dead now for this kind of arbitraging – though there is still some scope for manual setups on the more creative arbitrage deals that involve several legs.

      3. How do we connect to Meta Trader? I am not an MT programmer but as I understand it you need a bridging system and a sync server to allow communication between the two systems (using remote procedure calls for example).

  7. Hello Steve,
    Thank you for this article. Its awesome.
    Please i will like to ask you just 3 questions if you don’t mind.
    Which forex brokers do you know that allow arbitrage trading.
    I saw a software that made so much on arbitrage but on demo, it connected two brokers and used one minute chat to spot differences. Do i need to have two account from different brokers?
    If the brokers that allow arbitrage spot this kind of trading will they block the account?

    Thank you

    • If you are arbitraging inefficiencies in the wider market – then no genuine broker should have a problem with that because it does not affect them at all. Or if they are a genuine “straight through” broker (harder to find these days) because if they are not taking positions in the market, then inefficiencies in pricing is not their problem.

      On the other hand if you are aiming your arbitrage at inefficiencies in the market making broker’s pricing (or between brokers) then that’s a different matter. You will have to ask them directly – most prohibit it. Be careful, because if it’s written into their terms and conditions they are within their rights to block the account and seize profits. And it is easy for them to detect this kind of trading too – all they need to do is match your profits against their historical quotes. Better to go to an ECN or at least an STP broker in my view.

    • It’s when the price at execution is different to that quoted – generally because of time delays where the market has moved against you.

  8. very helpful article Thanks Steve for your great knowledge about Arbitrage trading to share with us . I have an Arbitrage EA that work on demo very well and very profitable but when i run it into live account it some trade and not work like demo account . my broker is Tenkofx live and server broker is FXCC demo . can you please give me suggestion which broker allow to run this EA on live account .

  9. Why is there no interest rate risk in the Arbitraging Currency Futures example? If over the next 12 months the USD interest rate goes up, or the GBP interest rate goes down, won’t that eat into the profits?

    • It won’t no. Because if you borrow/lend cash at the 12-month rate (or whatever the deal length is) that is fixed for the duration. And at the end of the deal you deliver on the contract.

  10. Hi Steve

    I have managed to succeed trading arbitrage. My problem is that I cant find a broker that allows me to trade live. Do you have any suggestions please. which brokers do you use for your arb trades.
    thanks a lot

    • We were doing futures arbitrage trades through a tier-1 account so not with a regular broker. Even then the profits were not great. You could try Dukascopy or Ameritrade. You didn’t say which strategy you are using.

  11. Hi steve good to make contact for the first time I am interested in arbitrage trading do you invest for clients this way as it seems safest way of investing please advise
    Kind regards Johm

    • From the retail perspective aribitrage is very difficult in practice. Firstly the profits are quite thin and that makes high leverage necessary to make it worthwhile. Secondly you need to invest a good deal of time and expense with the software and analytics. These events typically move far too quickly to be traded manually.

  12. sir i used ur strategy and i come to know that if i attempt trade in three currency thn net profit is swinging
    after 6-7 hours it becomes $10-15 with volume of .1
    so whats the reason behind that swinging of ratio

  13. hello Steve
    I understand that and i am trying many time butt always facing loss… please help me
    i have 200k almost and i need your help
    my skype id is hami.ahmi
    please give me your skype id …
    if EUR/USD is 1.0750 ,GBPUSD 1.5000, EURGBP 0.7180
    then you place is lots BUy in EURUSD 1.0 and tell me other 2 pairs lots sizes please

    • You can use the calculator here and you must put in the exact bid/ask values of each pair else you will get the wrong result. It will give you the lot size to trade if there is any available arbitrage.

      But in any case the market will probably move by the time you have chance to enter the order. It is better to find some specialist arbitrage software if you want to go into this in a big way. Doing it manually will consume your life!

      • hello steve you have this arbitrage softwear i want TO buy right now …becuase still i am not understand how much place in lotz …in THIS pairs EURUSD,GBPUSD,EURGBP

          • thanks butt this EA not calculate and find the opportunitie and he also not calculate the lots… so please you have your own EA then please sell out to me …other wise bro please tell me how can i do that…. give me your contact details please its request

  14. Hello Steve …….
    Good post butt please explain with lot size’s …for example buy EURUSD 1.22 then sell EURGBP 1 and sell 1.6 USDGBP………. and bro forex broker rate’s (feeds) differnce’s 1 to 2 pips only … i am trying many time… please explain me how can i place trianguler arbitrage in lots on my mt4 ….

    • The lot sizing is because of the different sizes (in notional cash amounts) of each position and the fact that they have to cancel. For eg suppose in my example I have

      EUR/USD 1.3000
      GBP/EUR 1.2288
      GBP/USD 1.6000

      That means when I buy 1 x EUR/USD my notional cash position is really:

      +1 EUR / -1.3 USD

      Breaking down my two trades from the example:

      Buy 1.2288 EUR/USD @ 1.3000 – Notional amount is: 1.2288 EUR / – 1.59744 USD
      Buy 1.0000 GBP/EUR @ 1.2288 – Notional amount is: 1 GBP / – 1.2288 EUR

      So the two positions together effectively cancel my 1.2288 EUR position and gives me a synthetic 1 x GBP/USD at a rate of 1.59744 (1.3000 x 1.2288). This is what I need to do the arbitrage. If I used a different size, the positions won’t cancel. Finally:

      Sell 1.0000 GBP/USD @ 1.6000 – Notional amount is: -1 GBP / 1.6 USD

      I am selling 1 x GBP/USD because it is overvalued (by definition of the cross rates) relative to the other broker. So the upshot of this is:

      Buy 1 x GBP/USD @ 1.59744 x (synthetic)
      Sell 1 x GBP/USD @ 1.6000 (real)

      Which give the risk free profit of .256 US cents.

      Regarding your question about doing this in practice. It is difficult if not impossible to find these triangular arb opportunities unless you’re at the front end of the quote making process. Your best bet would be to find a good ECN (e.g. a CurreneX system) where there may be less pricing efficiency and you might see opportunities there – otherwise markups & broker spreads will kill your profits.

      • hello steven please give me your skype id or add me in your skype my skype id is ******…… i have 200k almost and i want to do this Arbitrage trianguler… butt i need your help please help and contact me .. i am waiting your reply

  15. You have forgotten ton include the spread costs in the above examples………..thus making them ALL losing strategies…..stop giving wrong advice to people.

    • @Charlie : You obviously haven’t read/understood the article:

      See above:

      Broker A (bid/offer rate): 1.3035 / 037
      Broker B (bid/offer rate): 1.3048 / 052

      The calculator includes any spread cost you choose.

      The spread is not shown some examples for clarity of explanation – if you read it explains that the spread can negate a profit.

  16. These long, in-depth blog posts are great Steve, thanks.

    It’s definitely a mountain to climb for the average retail trader to spot and take advantage of these opportunities – but not impossible.

    Quite aside from HFT and all that, transaction costs are a huge factor for retail traders no matter what strategy is being employed, and one that is all too often ignored.

    Thanks for the reminder! Keep up the good work 🙂

Leave a Reply