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Triangular Arbitrage
An arbitrage strategy exploiting a price inconsistency across three related trading pairs, converting through all three to end up with more than started.
Triangular arbitrage is an arbitrage strategy (see Kaavon's "Arbitrage" glossary definition) that exploits a price inconsistency across three related trading pairs — for example, Asset A/B, B/C, and A/C — by converting through all three in sequence, ending up with more of the starting asset than began with, purely from the pricing inconsistency.
Triangular arbitrage opportunities are generally small and short-lived, since the act of trading through them itself pushes the three prices back toward consistency, and automated trading systems typically close genuine opportunities within moments.
Examples
- A triangular arbitrage trade might convert BTC to ETH, ETH to a stablecoin, and the stablecoin back to BTC, ending with slightly more BTC than started if a pricing inconsistency existed across the three pairs.
- Triangular arbitrage opportunities are typically closed within moments by automated trading systems, making them impractical to capture manually.