High frequency arbitrage in foreign exchange markets

Abstract

In this thesis we investigate the efficiency of the FX market by searching for triangular and multi-currency arbitrage opportunities from 1997 to 2007. We show that both triangular and multi-currency arbitrage opportunities exist in the FX market. Further, we find evidence of a decreasing trend in relation to the total number of arbitrage opportunities per year. In most cases we see a decrease of over 50 % and all the way up to 80 – 90 %. Finally, we use actual unmasked volume data to investigate the profit potential of these arbitrage opportunities. Our results show the same negative tendency, i.e. the profit potential has been reduced sharply in recent years with a decrease of over 50 % for all triangular roundtrips, and as high as 99 % for multi-currency roundtrips.