Arbitrage is a spread after costs
An arbitrage bot searches for related prices that differ enough to trade. The visible price difference is only a candidate. The executable edge is what remains after every leg, fee, spread, funding payment, delay and failure path.
In crypto markets, “arbitrage” may describe price differences across venues, triangular relationships inside one venue, spot–futures basis or funding-rate capture. These structures do not share the same custody, leverage or failure risk.
Four common structures
| Structure | Trade shape | Hidden constraint |
|---|---|---|
| Cross-exchange | Buy cheaper on A, sell dearer on B. | Prefunded inventory, withdrawal and venue risk. |
| Triangular | Cycle through three linked pairs. | Three fees, depth and partial-cycle exposure. |
| Spot–futures basis | Opposing spot and derivative positions. | Borrow, margin, basis and settlement. |
| Funding-rate capture | Offset direction while receiving net funding. | Funding changes, basis, liquidation and leg mismatch. |
The executable-edge equation
Executable edge = gross spread − all leg fees − slippage − funding/borrow − transfer cost − failure reserve A conservative model uses prices available for the intended size, not top-of-book screenshots. It also reserves for the probability that one leg fills while another does not.
Worked break-even example
Imagine a candidate gross spread of 0.70%. Two trading legs cost 0.10% each. Modeled slippage is 0.12% per leg. Borrow or funding costs 0.08%, and the operational failure reserve is 0.06%.
0.70% − 0.20% − 0.24% − 0.08% − 0.06% = 0.12% illustrative edge A modest change in depth or latency can erase that 0.12%. This is why a high-frequency “opportunity count” is not performance evidence.
Why the legs stop being neutral
- One order fills and the hedge is rejected or delayed.
- Funding changes before the expected receipt.
- The derivative basis moves while the position is open.
- Borrowed inventory is recalled or becomes expensive.
- A venue pauses withdrawals or enters degraded mode.
- Liquidation mechanics differ from the bot’s simplified model.
- Position size exceeds the depth used in the opportunity calculation.
Funding-rate arbitrage is not a fixed yield
A spot–perpetual position can reduce directional exposure while targeting funding or basis, but “market neutral” does not mean risk-free. Funding is variable. Spot and derivative venues may be different. Collateral can be liquidated. The hedge ratio can drift. A strategy must continuously reconcile both legs and the account state.
Because derivatives mechanics determine survival, read the futures-bot risk model and the dedicated funding-rate arbitrage guide before evaluating a carry product.
Arbitrage-bot evaluation checklist
- Does the displayed spread use executable size and both sides of the book?
- Are all legs, fees, funding and borrow included?
- Where must capital be held before the trade?
- How is one-leg exposure detected and closed?
- What venue and counterparty concentration limits exist?
- Is performance backtested, paper/testnet or live?
- Can the user inspect a complete trade and reconciliation record?
Sources and scope
- CFTC — Trading bot customer advisory
- Crypto.com Help Center — Arbitrage trading bot mechanics
- Onchain Off Emotion — Backtests vs live results
The numbers are illustrative. They are not a forecast, product result or investment recommendation.