FOREX: discrepencies in exchange rates?

Jim14Qc · #1 10-19-2007, 11:45 AM

I've been wondering about this for a while and I'm 99% sure this is not a bug that exists, but anyway..

Are there funds that use computers to find discrepencies between currency prices (for example, currency A trading for 2 units of B, and B trading for 2 units of C, but A trading only for 3 units of C so you could get a huge return by using A to buy B to buy C to buy back more A)? If so, wouldn't these funds be a 100%-lock as far as profitability? Is that not possible because there is usually no discrepency even between currencies that have lesser volumes of trade?

Thansk.

stinkypete · #2 10-19-2007, 11:53 AM

this kind of trading is known as arbitrage. the same concept applies to financial securities in many other markets too, not just currencies.

the profits to be made in currency arbitrage are tiny, if they even exist at all. the bid/ask spreads will be such that going A->B->C->A will almost always cost you money. if an opportunity to profit from such a trade somehow comes up, someone's computer machine will pick up on it and make the opportunity disappear by buying and selling to bring the prices back into sync almost immediately.

stinkypete · #3 10-19-2007, 11:55 AM

a while back, there was an arbitrage opportunity on empire/party poker. you could deposit canadian dollars on empire, transfer the money in USD through neteller to party, cash out to your account, and actually make money.

unfortunately, their exchange rates are crap now and if you were to try the same thing you would lose 4-5%.

petp_the_greek · #4 10-19-2007, 02:05 PM

the spreads in FX are so TINY (1 or 2 pips on the majors, sometimes even 'choice' prices, ie; bid/ask is the same) that arbitrage like that is nonexistant. and the spreads in the nonmajors are so big and the liquidity so small that any arb situation that arises quickly dissapears. back in the good ole days, when there were no electronic dealing systems, those opportunities existed....but now theyve all dried up. there are (very few) arb opportunities between the futures and spot/forward markets, but those dissappear so quickly that its not even worth looking for them.