Forex arbitrage is taking advantage of price differences between two different markets. In Forex arbitrage the trader buys in one market and sells in the other. These transactions must occur simultaneously in order to avoid market risk. Forex arbitrage helps keep Forex markets efficient as traders take immediate advantage of small price differences. Thus Forex markets across the world remain synchronized.
In order for Forex arbitrage to work there need to be three factors in sync. A currency pair does not trade at exactly the same price on all markets. The market’s expectations vary from trader to trader and market to market. The current price of a currency as measured in other currencies floats with the market and is not fixed to a futures price or other controlling situation. In addition, trades of two or even three currency pairs must be executed simultaneously. Without immediate, simultaneous trade execution Forex arbitrage becomes subject to market risk.