Arbitrage and Scalability

There are surprisingly often close to risk-free arbitrage opportunities in the world, the problem is that the relatively few traders that notice such arbitrage opportunities often are recently well off and they only look for reasonably scalable arbitrage opportunities.

Even risk-free arbitrage takes time to execute. So all arbitrages are relative to your alternative cost (your time). The higher your alternative cost the larger the arbitrage must be for you to spend time on it (if not it is not an arbitrage). For example in the next hour I know for sure I can pick off $50 risk-free in the market, is it worth it, probably not. No for me this is not an arbitrage, because I cannot scale the risk-free arb up to cover or beat my alternative time. For someone else making $50 a week it is a great arb. Of course the world is not fair, such people typically do not have access or knowledge about such arbs, if not such arbs would not persist for so long time.

Would I tell you about this arbitrage, no I am trying to figure how to scale one of the worlds most persistent arb opportunities. If you suddenly can do a $50 arbitrage 1000 or 1000000 times over at the same time it takes to execute a $50 arb you have a great business going!

Arbitrage trading is often not about finding risk-free arbs, it is about figuring out how to make them scalable! If I dont figure out how to scale this persisten arb I will write a paper about it ;-) One of the worlds most persitent and least understood arb opportunites.

Since I am bored today I will do this $50 arb once today, then at least I have a real example to use for my paper.

Conclusion: There is no such thing as absolute arbitrage; all arbitrages are relative to your alternative time/cost.