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What is the technical term for the placement of assets at exchanges that most efficiently anticipates the appearance of arbitrage opportunities so as to minimize latency and execution risk?
Let me illustrate:
Let's say you have several geographically separated currency exchanges, say A, B, C, D and E. Each internally exchanges some set of currencies, say USD, EUR, RUR YEN and CNY. If an arbitrage opportunity appears between, say A_USD, A_CNY and C_CNY, C_USD, you want to initiate 2 trades simultaneously, one at A and one at C. Moreover, since arbitrage is a highly competitive zero-sum game, you can't wait for assets to be transmitted between exchanges, so you want to make sure you have sufficient reserves of USD and CNY in place at A and C to be able to trade the instant you detect the opportunity. If you have too little of some currency at one of the exchanges, you may not be able to take advantage of the full opportunity. Further, there is some delay in moving currencies between exchanges after a simultaneous pair of trades to rebalance, so you have to increase the amount on deposit to compensate for that delay.
So there is an allocation of assets in various currencies on various exchanges in anticipation of arbitrage opportunities that yields the optimal return.
What is the technical term for such an optimal asset allocation in anticipation of inter exchange arbitrage opportunities?
Let me illustrate:
Let's say you have several geographically separated currency exchanges, say A, B, C, D and E. Each internally exchanges some set of currencies, say USD, EUR, RUR YEN and CNY. If an arbitrage opportunity appears between, say A_USD, A_CNY and C_CNY, C_USD, you want to initiate 2 trades simultaneously, one at A and one at C. Moreover, since arbitrage is a highly competitive zero-sum game, you can't wait for assets to be transmitted between exchanges, so you want to make sure you have sufficient reserves of USD and CNY in place at A and C to be able to trade the instant you detect the opportunity. If you have too little of some currency at one of the exchanges, you may not be able to take advantage of the full opportunity. Further, there is some delay in moving currencies between exchanges after a simultaneous pair of trades to rebalance, so you have to increase the amount on deposit to compensate for that delay.
So there is an allocation of assets in various currencies on various exchanges in anticipation of arbitrage opportunities that yields the optimal return.
What is the technical term for such an optimal asset allocation in anticipation of inter exchange arbitrage opportunities?
