I met a guy in Chicago who had an automated Arb system for Forex and it was pretty impressive. I asked him what the downside was, and he said, "The data from the various marketplaces must be in perfect sync for a system like this to work. If that data is out of sync even by a little bit, your automated system will think it's buying low over here and selling high over there, but in reality it's doing the opposite because the data is so out of whack". So to answer your question, you can do the same thing with BTC assuming you can conquer the data challenge above.
Interesting, I have not considered that issue yet. Something I am still unsure of is how to quickly transfer BTC from one exchange to another...
http://bitcoin-analytics.com/ Look for the Arbitrage tab to see a table depicting prices between different BTC exchanges this site makes the arb opp so obvious that I have to wonder why it even exists. The MTGOX/CBX spread is routinely ten percent... with price differentials like that it's too easy... I must be missing something
It isn't data issues, it is regulation and withdrawal issues. People did buy into bitcoins at other exchanges, trasfered the coin to Gox, sold it at a 10% profit, but they got stuck and can not withdraw their dollars. In the maintime bitcoin keeps going up, so they could have made more just staying long at the initial exchange. On the other hand withdrawals in yen has been going on schedule. So if you can transfer the yen back to dollar and buy coins again, the system should work at pretty much ANY price of bitcoin, because the difference has been there between exchanges...
The other issue is the depth of the books. Most Bitcoin books have very thin size at the top of the bid and offer queue.
Thin liquidity is definetly something I considered, but I feel like I could get around that by validating that an adequate bid/offer even exists on the books before making the trade. That would also re emphasize the importance of speed of transaction between markets... so that I could be able to be there in time to fill the order. What do you think?
Liquidity isn't really an issue in itself, it's just to going to be a measure of capacity. Like someone else pointed out, the reason why premiums exist across exchanges is due to lockups. Also no one here has said anything about transaction cost either. If you plan on crossing the spread, it's fairly wide (e.g. 50 bps). Then you have substantial fees for transferring between currencies as well.