Guide: arbitrage

Arbitrage is the simplest trading strategy to state: when the same thing has two prices, buy it where it is cheap and sell it where it is dear. If both trades go through, the profit doesn't depend on which way the price moves next. This guide explains the two kinds an agent can run with perps, shows where the profit really comes from, and covers the ways a "riskless" trade loses money.

It assumes the perp guide: the same $1,000 and SPCX at $100. The figures are a teaching model with made-up prices.

1. What arbitrage is

An arbitrage holds two positions, called legs, that cancel each other's exposure to the price. Long 10 SPCX in one place and short 10 SPCX in another is delta-neutral: if SPCX rises $1, one leg makes $10 and the other loses $10. What's left is the reason for the trade: a gap between the two prices, or a payment one leg receives, such as funding.

Every arbitrage answers the same three questions:

1. What is the gap? A difference in price, or a payment like funding.
2. What does it cost to capture? Fees, slippage, and the margin or capital tied up while you hold.
3. What can break the hedge? A leg that doesn't fill, a leg that's liquidated, a gap that widens before it closes.

2. Two prices: cross-venue arbitrage

SPCX's perp trades at $100.00 on one venue and $100.40 on another. You buy on the cheap one and sell on the dear one, at the same moment. You are now long and short the same amount, so price moves cancel, and you've locked in $0.40 a unit.

Locked in, minus costs:

• Fees. Each trade pays the venue a fee. At 2 bp a trade, buying and selling $100 of SPCX costs about $0.04 a unit.
• Slippage. Each venue's book only has so much SPCX near its price. The more you trade, the further down the book you go, and the worse your average price. Slippage grows with size faster than the profit does.

So every gap has a best size: big enough to be worth it, small enough that your own trades don't eat the gap.

3. Funding: cash and carry

The second kind needs no second price, only patience. When a perp's funding is positive, longs pay shorts. So you short the perp and collect funding, and you buy the same amount of SPCX itself (spot) so the price can't hurt you. This is called cash and carry, or a basis trade.

With your $1,000, the trade is two tickets that share it. The perp ticket has the same numbers as in the perp guide:

And the ledger, as SPCX moves, before funding:

What's left is funding: every hour, the perp leg collects it on its $833 notional.

The catch is that the legs are in two places. The spot leg's gains sit in your SPCX, while the short leg's losses eat its margin. In a rally the short leg can be liquidated, even though your total is fine, unless you move dollars to it in time. Once it is liquidated, you're simply long SPCX, the bet you set out to avoid.

4. What can go wrong

5. When to use it, and when not to

6. Parameters

The numbers an arbitrage bot needs before it trades:

7. Arbitrage under a mandate

The mandate can hold both kinds: it allows spot instruments, and a universe that spans several venues, with the account's value added up across them.

Cross-venue arbitrage on SOL allows the same pair on two venues, both sides:

{
  "version": "v0",
  "universe": [
    { "instrument": "openbook:spot:SOL-USDC", "max_position": 100 },
    { "instrument": "phoenix:spot:SOL-USDC", "max_position": 100 }
  ],
  "limits": { "max_drawdown_usd": 500 }
}

Both allowances measure the same SOL, held wherever it is, so the cap bounds the SOL the agent has bought and not yet sold, across both venues.

Cash and carry pairs a spot leg with a perp leg on the same asset: openbook:spot:SOL-USDC long and phoenix:perp:SOL short. The spot position is the SOL held; the perp position is the short. Setting both caps equal keeps the agent from holding more on one leg than the other, and the drawdown limit covers the two legs together, since the account's value adds them up.

Neither mandate says the legs must match: it bounds what the agent may hold, not how it hedges. A short perp leg left without its spot leg is within both caps, and only the drawdown limit catches what it costs.

8. Check yourself

9. Glossary

Every term this guide uses is in the glossary. In the text, an underlined term shows its definition when you hover it or tap it.