Before I even ask this question, please allow me to be very clear.... I have no intention of attempting a triangular arbitrage trade(for reasons of practicality ). The reason why I've chosen triangular arb. as a case study is because it utilizes concepts that, if understood correctly, could help me in the future.
Bear with me please.....
My question concerns mostly the mechanics underlying what happens after one attempts a triangular arbitrage trade, and the consequences that these mechanics would have on a trade. The term "mechanics" in this case refers to: order processing protocols, accounting protocols etc.... i.e..... things that are mechanical or algorithmic in nature.
Without getting bogged down in the details of a triangular arbitrage transaction, here is my general understanding of what would transpire in a hypothetical trade. In this hypothetical trade, we're intentionally neglecting practical issues like spreads, scarcity of opportunity, time lags, etc....
1.) An opportunity for triangular arbitrage presents itself.
2.) The trader opens up the appropriate three positions simultaneously.
(possibly via an EA)
3.) The trader closes those three positions at the same rates they were
opened.(possibly via an
EA)
4.) Profit is realized.
So here is where my confusion begins.....
Based on my understanding of what happens when you open and then close a trade, NO profit should be made. The Reason: Whenever you close a trade you are simply reversing the process of which you opened it. Example: Open trade -> currency1/currency2 = Long currency1 and Short currency2 . Close trade = Short currency1 and Long currency2. Now apply this method to steps 1-4 given above. It appears that Pair1 close would cancel Pair1 open, and Pair2 close would cancel Pair1 open, etc...
The only way that I can think of for there to be any profit would be if either:
1.) The trader could specify Exactly what he wanted done with his bought
currency. Example: Buy EURUSD, then take the EUR just bought and
exchange them for GBP by shorting the EURGBP, then take the GBP
just bought and exchange them for dollars by shorting the GBPUSD
pair. However, I think that each trade is managed independently, and
there is no "communication" between trades thereby making it
impossible to accomplish this. The above method would require
very specific debiting and crediting.
OR
2.) If while all three trades were open, the amounts bought and sold were
NETTED together. The netted amounts should all sum to zero
EXCEPT for the USD(or home currency). This difference is where the
profit would come from. This would work for this example, but it just
seems like all hell would break loose on the accounting end if they just
started summing amounts without regard to exactly which trade it was
associated with.
So as you can see the accounting practices and/or trade matching protocols etc... effect the outcome. Any ideas on what ACTUALLY happens?
Thank you to anybody and everybody who even takes the time to read through this post. I appreciate your effort/curiosity.
Bear with me please.....
My question concerns mostly the mechanics underlying what happens after one attempts a triangular arbitrage trade, and the consequences that these mechanics would have on a trade. The term "mechanics" in this case refers to: order processing protocols, accounting protocols etc.... i.e..... things that are mechanical or algorithmic in nature.
Without getting bogged down in the details of a triangular arbitrage transaction, here is my general understanding of what would transpire in a hypothetical trade. In this hypothetical trade, we're intentionally neglecting practical issues like spreads, scarcity of opportunity, time lags, etc....
1.) An opportunity for triangular arbitrage presents itself.
2.) The trader opens up the appropriate three positions simultaneously.
(possibly via an EA)
3.) The trader closes those three positions at the same rates they were
opened.(possibly via an
EA)
4.) Profit is realized.
So here is where my confusion begins.....
Based on my understanding of what happens when you open and then close a trade, NO profit should be made. The Reason: Whenever you close a trade you are simply reversing the process of which you opened it. Example: Open trade -> currency1/currency2 = Long currency1 and Short currency2 . Close trade = Short currency1 and Long currency2. Now apply this method to steps 1-4 given above. It appears that Pair1 close would cancel Pair1 open, and Pair2 close would cancel Pair1 open, etc...
The only way that I can think of for there to be any profit would be if either:
1.) The trader could specify Exactly what he wanted done with his bought
currency. Example: Buy EURUSD, then take the EUR just bought and
exchange them for GBP by shorting the EURGBP, then take the GBP
just bought and exchange them for dollars by shorting the GBPUSD
pair. However, I think that each trade is managed independently, and
there is no "communication" between trades thereby making it
impossible to accomplish this. The above method would require
very specific debiting and crediting.
OR
2.) If while all three trades were open, the amounts bought and sold were
NETTED together. The netted amounts should all sum to zero
EXCEPT for the USD(or home currency). This difference is where the
profit would come from. This would work for this example, but it just
seems like all hell would break loose on the accounting end if they just
started summing amounts without regard to exactly which trade it was
associated with.
So as you can see the accounting practices and/or trade matching protocols etc... effect the outcome. Any ideas on what ACTUALLY happens?
Thank you to anybody and everybody who even takes the time to read through this post. I appreciate your effort/curiosity.
