QUESTION
I don't know what's the mathematical/economical definition, but I would define "room for arbitrage" as the amount of money that can be extracted from the market by doing arbitrage (between the different exchanges). I am sure there is a precise definition of such a concept.
So, given this definition - how much room for arbitrage do the current Bitcoin markets exhibit?
Edit - see also on Quora - How do you measure arbitrage?
ANSWER
I am not an expert on this, but I will answer from my personal experience from the past couple of months. Here are some things I noticed:
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MtGox rules the market. The price there leads and the other exchanges follow. Sometimes TradeHill moves a few decimal points on its own above or below MtGox, but it usually goes back to where it was after a few hours.
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The price difference between exchanges with APIs rarely goes above $0.3 (the most common opportunities are around $0.1/BTC). So with the current fees you will earn very little from each trade - note that on smaller exchanges, it is very easy to move prices up and down so you are doing arbitrage with very small trades.
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You must be fast. There are already people doing this and the opportunities don't stay up for long. If you are not careful your orders will end up pending.
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Exchanges without APIs have much more arbitrage opportunities. Bitmarket for example is some times $1 or more off the current MtGox price. Of couse it is also much more time consuming to arbitrage manually.
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There are days when nothing happens and others when a lot happens. You have to be ready and keep a lot of money on each exchange if you want to catch it all. There are huge volume differences so you should split your money accordingly.
I am still testing things out, but I don't think that you can make a lot of money out of this. It may be interesting to use it as a complement to other automated trading strategies though.
Just another note:
- Moving money/bitcoins around to grab opportunities in exchanges with APIs won't work because of fees (even if small) plus waiting time. You usually have a few minutes to grab opportunities. If you are lucky you can sometimes find an opportunity that lasts a couple of hours, but that happens like once a week.
All of this is from personal observations during July/August 2011. Things will of course change and the market will probably become more and more efficient.
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