About Lesson
While arbitrage trading is considered relatively low-risk, that doesn’t mean it’s zero. Without risk, there’d be no reward, and arbitrage trading is certainly no exception.
The biggest risk associated with arbitrage trading is execution risk. This happens when the spread between prices closes before you’re able to finalize the trade, resulting in zero or negative returns. This could be due to slippage, slow execution, abnormally high transaction costs, a sudden spike in volatility, etc.
Another major risk when engaging in arbitrage trading is liquidity risk. This happens when there isn’t enough liquidity for you to get in and out of the markets you need to trade to complete your arbitrage. If you’re trading using leveraged instruments, like futures contracts, it’s also possible that you could get hit with a margin call if the trade goes against you. As usual, exercising proper risk management is crucial.