Triangular arbitrage and why retail cannot catch it

[Shadow Trader]

Take three currencies, say EUR, USD and GBP. The three pairs EURUSD, GBPUSD and EURGBP must stay consistent. If they drift apart, a loop of trades could lock in a risk-free profit.

Such gaps exist, but they last milliseconds, and high-frequency firms with direct market access capture them using co-located servers and sub-millisecond latency. By the time a retail platform displays the discrepancy, it has vanished.

Several retail "arbitrage" products claim to exploit these gaps. The reality is that the tiny edges, if they exist at all, vanish after spreads, commissions and latency.

The concept is nevertheless useful for understanding the market. Cross rates are tightly linked to their components. When EURGBP moves strongly, either EURUSD or GBPUSD, or both, has moved.

Using that logic, a trader watching EURGBP can sometimes see a sterling or euro story forming before it becomes obvious on the dollar pairs.

Has anyone noticed lead-lag behaviour between a cross and its components?