Execution Risk in Arbitrage

Execution risk in arbitrage refers to the probability that a trader cannot complete both legs of a transaction at the expected prices, thereby failing to capture the intended risk-free profit. In high-frequency or cross-exchange trading, this risk manifests when price movements occur during the time lag between the first trade execution and the second.

In cryptocurrency markets, this is often exacerbated by network congestion, latency in order matching engines, or sudden slippage in low-liquidity order books. Even if the theoretical price discrepancy exists, if the order cannot be filled immediately at the target price, the arbitrageur may end up with an unhedged position.

This exposure can turn a profitable strategy into a significant loss if the market moves against the net position before the trade is closed. Successful arbitrage requires robust technical infrastructure to minimize these latency-induced execution gaps.