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Arbitrage Trading Program (ATP)

Arbitrage Trading Program (ATP)

What Is an Arbitrage Trading Program (ATP)?

An arbitrage trading program (ATP) is a computer program that looks to profit from financial market arbitrage opportunities. These opportunities happen from financial market mispricings which can be profitable when traders take positions on underlying securities like stocks or commodities, or derivatives in light of them.

Arbitrage trading programs are driven by customizable algorithms that can check market prices and distinguish pricing irregularities right away (in some cases alluded to as an "electronic eye"). These systems can be programmed to recognize a wide exhibit of potential trading opportunities and naturally execute trades to make the most of arbitrage opportunities when they emerge.

How an Arbitrage Trading Program (ATP) Works

Arbitrage is the simultaneous purchase and sale of similar asset in various markets to profit from minuscule differences in the asset's listed price. It exploits short-lived varieties in the price of indistinguishable or comparative financial instruments in various markets or in various forms. Arbitrage exists because of market inefficiencies and it the two exploits those failures and resolves them.

Arbitrage trading programs are executed through program trading, or trading via automated computer systems that follow foreordained orders or calculations. These computerized trading systems are able to recognize brief occasions of mispricing, and place trades while there is an opportunity to profit from arbitrage.

High-frequency traders are a subset of arbitrage and program trading, as these traders endeavor to profit from order flow, rapidly, bringing about arbitrage-like opportunities. Roughly half (subject to change) of the trading that happens on US stock exchanges is high-frequency program traders starting around 2018.

Arbitrage Trading

Arbitrage trading programs look to distinguish and take advantage of a wide range of profit opportunities in the financial markets in view of advanced calculations.

Arbitrage opportunities normally just exist for a short amount of time. In this way, the utilization of technology programs can assist with recognizing and act on trading opportunities all the more quickly. Arbitrage opportunities frequently happen in cross-border trading activities where confused pricing results from thin communication channels.

For instance, a company that is dual-listed on the Bombay Stock Exchange in India, as well as the Frankfurt Stock Exchange in Germany ought to have a similar stock price while adjusting for exchange rates, however on the off chance that the prices don't adjust, an ATP program can compute the error and afterward make trades to close the gap in prices, endeavoring to create a gain from the mispricing.

Numerous traders additionally use options and futures in arbitrage trading programs. This might require the trading system to take two market positions on an underlying asset that they accept is reporting profit potential. One model could remember buying grain for the open market and simultaneously buying an option to sell grain from now on. In the event that the price of grain increases over the investing interval, the investor profits from the difference.

Institutional traders or market makers enjoy several upper hands over retail traders comparable to arbitrage trading, including quicker news sources, high-performance computers, and more sophisticated arbitrage trading software programs. Notwithstanding, arbitrage trading stays famous with numerous traders.

Institutional ATP Strategies

Risk Arb

Institutional investment managers might involve an ATP as part of a specific investment strategy. Arbitrage investment strategies might zero in on foreign exchange trading, mergers, or event-driven arbitrage opportunities. While the strategy goes all through favor, a few institutions will buy companies that are engaged with a pending buyout.

Risk arbitrage (risk arb), otherwise called merger arbitrage, is an investment strategy to profit from the limiting of a gap of the trading price of a target's stock and the acquirer's valuation of that stock in an expected takeover deal. In a stock-for-stock merger, risk arbitrage implies buying the shares of the target and selling short the shares of the acquirer. This investment strategy will be profitable on the off chance that the deal is culminated. In the event that it isn't, the investor can lose money.

For instance, say that the announced buyout price for a takeover up-and-comer's stock might be $50, yet the stock trades in the market at $45 prior to the deal being settled — since there is a risk that the deal might fall through. Institutions will investigate the deal, potentially utilizing programs, and afterward buy the deals that are probably going to close. In this case, in the event that the deal goes through, they make 11% ($5/$45) very quickly or months. This strategy would probably use both an ATP and manual human research.

Index Arb

One more illustration of arbitrage-style investing is index arbitrage. This is where an ATP is intended to buy stocks that are being added to a major index. An index, for example, the S&P 500 will declare in advance the thing stocks they are adding or dropping from the index. The index will buy shares of the additional stocks and sell shares of the dropped stocks. Likewise, an index adding a stock will in general increase that stock's visibility and status, which may likewise assist with lifting the price.

ATP programs are therefore set to begin buying the stocks which will be added to the index once the announcement is made. The ATP programs are endeavoring to stretch out in beyond the move up in price which is probably going to happen because of the index purchasing shares and the supported status of the shares among different investors.

As the price pushes up in view of the increased demand, the ATP starts selling the shares as the program is intended to exploit the specific event, and not trade the stock on its own merits essentially. Therefore, the ATP rapidly buys shares when demand for the shares is expanding due to a specific announcement event, and it then, at that point, sells the shares, ideally at a profit, as the event comes to a close or the demand from the event starts to dry up.


  • An arbitrage trading program (ATP) is intended to make the most of arbitrage opportunities, in view of programmed strategies consequently.
  • Arbitrage opportunities don't typically last long, therefore computers are more efficient at finding the opportunities and rapidly taking advantage of them compared to humans.
  • ATP software can be used by the two people and institutional clients, yet is most frequently employed by professional traders.