With the recent economic uncertainties, there is increased volatility in the capital markets. The Dow Jones Industrial Average fell throughout March, ending the first quarter of 2020 down 23.2%. The tech-driven Nasdaq composite fell 23.5%, while the S&P 500 fell by 30.7%.
Analysts say stocks and indices are on the rebound in April after the dip through, although, given the trying times, this situation is a good opportunity to fine-tune one’s investment strategies. One thing to consider is algorithmic trading, which can potentially be sustainable without being dependent on the strength of the underlying instruments or economies.
One effective strategy is arbitrage trading, which involves concurrent buying and selling of an asset in different markets while taking advantage of the price difference. Most institutional trading firms have been using arbitrage strategies for decades, but as markets have become more efficient, generating profits from arbitrage has become more challenging.
It is generally a little to no risk strategy but requires a lot of time for traders to find such an opportunity. A trader, for instance, needs to closely monitor a specific asset or commodity on different exchanges to be able to spot price differences that are significant enough to make a profit. In arbitrage trading, timing is everything.
The benefits of arbitrage in a volatile market
Arbitrage is one of the strategies that has been considered potentially risk-free. Since assets are bought and sold simultaneously, there is theoretically no risk in being locked-in with long-term investments, thus ensuring better liquidity compared to investing in stocks, bonds, or other securities. It can be leveraged by cautious investors who want to benefit from a volatile market without taking on too much risk.
Since traders don’t need to worry about long-term price movements, it can be a sustainable way to one’s portfolio growth without heavily relying on any country’s economy or the underlying performance of a stock or company.
There are at least 2,800 cryptocurrencies trading on 333 exchange platforms globally with at least 18,000 markets or pairs for exchange. The prices of assets on these exchanges vary, thus creating arbitrage opportunities. While this is a good thing for potential profitability, it is impossible for traders to manually keep track of all the data from different exchanges and find possible arbitraging opportunities in a timely manner.
How technology is advancing trading strategies
The use of artificial intelligence and advanced trading algorithms can help in executing more profitable arbitrage, and it has been gaining popularity particularly in cryptocurrencies.
Several platforms are now offering technologies that automate the process of arbitrage. Unlike manual arbitrage, these solutions leverage algorithmic trading technology to do the work for traders and investors by extracting all the live data, scanning for any arbitrage opportunities, and executing the trade automatically. This ideally takes into account costs such as exchange fees, making sure that traders profit from each transaction.
The growing number of cryptocurrency exchanges has given these platforms adequate data and opportunities to work with. “With decentralization and deregulation being the main driver of cryptocurrency markets, a central price correcting party does not exist, presenting an abundance of arbitrage opportunities for traders in the know,” reports a study on automated arbitrage.
Maximizing profits and reducing risks through algorithmic trading
Innovations in trading have paved the way for solutions that make arbitrage an accessible and viable means of portfolio growth. Although arbitrage trading has little to no risk, advanced algorithms make sure that every trade is profitable. The data collected from all crypto exchanges are run through an AI for analysis and the algorithm will initiate the trade once conditions are ideal.
AI-driven arbitrage trade does not only benefit traders but it also facilitates efficiency and price parity among exchanges. “Today, there are thousands of exchanges in the markets. Automated arbitrage helps these exchanges in two ways – firstly, by increasing the liquidity by trading actively on their exchanges, and secondly, by closing these pricing gaps between the exchanges,” says Tony Jackson, Chief Executive Officer of Jubilee Ace, which utilizes its Ace Quantum Universal Arbitrage (A.Q.U.A) platform for algorithmic arbitrage trading.
He adds that arbitrage drives the volume of transactions on exchanges, thus promoting liquidity, while also providing opportunities for users to profit.
The future is in automation
Increased market efficiency and the growing number of exchanges on a global scale have made arbitrage trading potentially rewarding but also challenging. Traders thus need to find innovative solutions to take advantage of the arbitrage opportunities across these exchanges and markets.
Automated arbitrage trading systems provide a viable strategy for growing portfolios, thanks to the decentralized nature of cryptocurrencies and the sheer number of markets. Advanced algorithms ensure that traders and investors maximize their assets while minimizing risk. With the current economic conditions, such innovative approaches can cater to portfolio growth even when other investments are facing obstacles such as volatility.