There's been some talk on and off again here on ET about Arbitrage. And from what I've seen, the term is frequently mangled. Legitimate Arbitrage is as rare as hen's teeth - and disappears very quickly. One example might be buying BTC on one exchange for $XYX and selling it two seconds later on another exchange for $XYZ + $20. Usually what most people label as "arbitrage" is actually a highly correlated spread trade that someone is legging into and out of. Even buying a physical commodity and selling the direct analog futures contract is not technically an arbitrage. And it isn't a direct arbitrage in reality. By definition an arbitrage is relatively risk-free and is exploiting a mismatch - usually along the lines of a communication lag or unequal and temporary market duplication typically with multiple marketplace locations. In other words - very temporary market dislocations regarding the same product. For example, buying an On-The-Run US Ten Year Note and selling the CBoT Ten Year Futures Contract has basis risk. The Repo market rates have been unusually volatile the past couple years. Selling physical oil in Texas and buying the Nymex WTI Futures Contract has basis risk. Look at what happened to the May 2020 futures contract - the complete lack of storage compatible with the futures contract specifications and the amazing lack of demand from refineries led to the famous negative futures price.
As someone who's sat in a bank trading floor, hearing a rando retail trader on his laptop claiming to be an arbitrageur is just...
I disagree. The sudden and silent removal of a lower-trading limit of $0.01 led directly to the negative price. There was a cabal there.
And you're missing the point about basis risk because you're preoccupied with the particulars of the May 2020 CL contract.
Wild days of 2017 (and a bit of 2018) and earlier. When the true arb spreads were huge. Not in btc/usd pairs, because that was not rinse/repeat. But others.
Regarding the Bitcoin arbitrage example I agree only under the assumption that both exchanges have the same counter party risk. Some exchanges are more safe then others. In fact Bitcoin price should be lower on exchanges people consider riskier because you suddenly may become unable to withdraw your funds. So it is all theoretically risk free.
I disagree that real arbitrages don’t last long. when I sat on the bank desk we ran an pure arbitrage strategy for years. To my knowledge the opportunity still exists.
Did the trade you are referring to require an ISDA or really serious counterparty capitalization (OTC) ?