The microscopic relationships between triangular arbitrage and cross-currency correlations in a simple agent based model of foreign exchange markets
Fig 4
Schematic of the Arbitrager Model ecology.
The ecology comprises three independent FX markets represented by the red, yellow and green areas. For simplicity, each market allows to exchange a major FX rate: USD/JPY, EUR/USD and EUR/JPY. Trading is organized in continuous price grid LOBs as in [42], see S3.1 Section. Market makers (black agents) maintain bid and ask quotes by adopting trend-based strategies. Transactions occur when the best bid matches or exceeds the best ask. Market makers engaging in a trade close the deal at the mid point between the two matching prices (i.e., transaction price), see S4 Fig for details. Finally, an arbitrager (blue agent) exclusively submits market orders across the three markets (black arrows) to exploit triangular arbitrage opportunities emerging now and then, see S5 Fig.