Arbitrage risks: a pre-trade checklist

A “price-neutral” position does not mean a “risk-free” one. Spread and funding arbitrage has its own risks, and most beginners’ losses come not from the market as a whole but from unaccounted costs and restrictions. Below is a list of what to check before opening a pair.

Execution risks

• Slippage and depth. A ticker price relates to a small size. For your amount the price is worse, and at exit the book can be thinner than at entry. Calculate from the order book, not from the quote (how to calculate the spread).
• Leg risk. Two trades cannot be executed simultaneously: while the second leg is being opened the price can move, or it may not fill at all. The position is then left unhedged.
• The spread widening against you. After entry the spread can widen instead of collapsing. It may never return to the needed level in a reasonable time.
• API delays and outages. An unavailable exchange or a service that is down at the moment of closing is a typical situation during a sharp market move.

Position risks

• Liquidation. If the price moves sharply, the losing leg can be liquidated before you manage to top up margin, while the profitable leg on the other exchange is only realized once closed. Different leverage, margin mode and liquidation price calculation on two exchanges are a separate reason to keep a margin reserve.
• Auto-deleveraging (ADL). When the insurance fund is short, an exchange can forcibly reduce profitable positions. A leg that has been closed leaves you with one-sided risk.
• Funding rate changes. The rate changes every period and can flip sign: a pair that looked profitable can start to pay (funding arbitrage).
• Different payment intervals. If the legs have different intervals, over a night or a weekend the number of payments differs; bring rates to one interval.
• Limits. Maximum position size and open interest limit what you can open and how much you can hold.

Venue and asset risks

• Counterparty. Funds sit on an exchange: withdrawal restrictions, account blocks, bankruptcy. For a DEX — a smart-contract or oracle bug (CEX and DEX arbitrage).
• Deposits and withdrawals. If you need to move funds, check that deposits and withdrawals are open, that the network is not congested and that the fee does not eat the result.
• Delisting and parameter changes. Contracts are closed, multipliers and tickers change; exchanges change fees and funding terms without warning.
• Same-name tickers. One ticker can mean different assets or a different multiplier; check the contract specification.

A checklist before opening a pair

1. Entry and exit spreads are calculated from the order book for my size, not from the ticker.
2. The calculation includes fees on four trades and the expected funding over the holding time.
3. Rates are brought to one interval; the history shows that the difference holds.
4. The contracts are one asset with the same multiplier.
5. Both exchanges have enough margin with a reserve, I know the leverage and have calculated the liquidation price.
6. I know how I will close the pair on a sharp move and what I will do if one exchange is unavailable.
7. Deposits and withdrawals of the coin are open if I need to move assets.
8. The position size does not exceed the limits and a safe share of my capital.

What the service helps with

SpreadScope shows the order books of both legs, limits and fees, funding and spread history for a pair, and filters let you drop pairs without the depth you need. The decision to open a position and the responsibility for it remain yours.