Arbitrage Trading Program (ATP)

An arbitrage trading program (ATP) is a computer program that seeks to profit from financial market arbitrage opportunities. These opportunities occur from financial market mispricings which can be profitable when traders take multi-sided positions on underlying securities such as stocks or commodities. Arbitrage trading programs are driven by customized algorithms that can scan market prices and identify pricing anomalies. These systems can be programed to identify a wide array of potential trading opportunities.

Arbitrage trading programs can be deployed by individual or institutional traders. Both entities will follow similar trading strategies for achieving profits. However, individual traders will seek to make market trades for individual portfolios while institutional traders trade on behalf of a company managing funds or accounts for clients. (See also: How do I use software to make arbitrage trades?)

Arbitrage trading programs are executed via program trading, or trading by automated computer systems that follow predetermined orders or algorithms. Program trades account for approximately 30% of daily volume on the New York Stock Exchange. These computerized trading systems are able to identify brief instances of mispricing, and place trades while there is an opportunity to profit from arbitrage.

Arbitrage trading programs seek to identify and exploit all types of profit opportunities in the financial markets based on advanced algorithms. These trading strategies both contradict and support efficient market investing theory which is based on the notion that financial markets are efficient in generating a security’s market price which leaves risk factors to other variable such as volatility. Arbitrage trading opportunities seek to profit from market anomalies, often generated from unmatched pricing in dual positions.

Arbitrage opportunities typically only exist for a short amount of time. Thus, the use of technology programs can help to identify and act on trading opportunities more rapidly. Arbitrage opportunities often occur in cross border trading activities where mismatched pricing results from thin communication channels. Many traders also use options and futures in arbitrage trading programs. This requires the trading system to take two market positions on an underlying asset that they believe is reporting profit potential. One example could include buying grain on the open market and simultaneously buying an option to sell grain in the future. If the price of grain increases over the investing interval, then the investor profits from the difference.

Institutional investment managers may use ATP as part of a specific investment strategy. Arbitrage investments strategies may focus on foreign exchange trading, mergers or event-driven arbitrage opportunities.