Abstract
The efficient markets hypothesis implies that arbitrage opportunities in markets such as those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The "quant" workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in [1] is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets.
Highlights
An arbitrage operation involves taking advantage of discrepancies in the prices at which a particular good or asset can be bought or sold, such operations being distinct from speculation in that they involve minimal risk or capital exposure
The present paper focuses on arbitrage operations in foreign exchange (FX) markets
Applied to FX markets, the EMH implies that profitable arbitrage opportunities are, at most, short-lived
Summary
An arbitrage operation involves taking advantage of discrepancies in the prices at which a particular good or asset can be bought or sold, such operations being distinct from speculation in that they involve minimal risk or capital exposure. Liquidity imbalance strategies aim to detect order book imbalances for currency pairs and pricing discrepancies between different trading platforms. In contrast to the textbook fiction of a single FX market, there are a variety of FX trading platforms distinguished by geographical location and time zone and by the means by which transactions are executed. In this thriller a particle physicist leaves his research post at the Large Electron-Positron Collider at CERN, Geneva to become a “quant”, partnering a banker to set up a hedge fund based on an algorithmic-learning trading strategy.
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