If each bitcoin exchange ran a bitcoin-arbitrage bot (let's say the same one)themselves, would that quickly eliminate the spread, and therefore the opportunity for arbitrage?
3 Answers
Yes, and I recommend researching market making algorithms.
The problem is that verification and confirmation times are high, so the spreads or at least trade fees will remain wide until that problem is fixed.
Yes, it's by design, but it's an economic problem, and wide spreads are the economic result.
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Trading Dogecoin almost daily at Cryptsy, I've seen most of the time the difference between buy/sell offers is just one or 2 satoshis, i.e. between 0.5% to 2% of their value. And the market's usually very, very liquid. Either this demonstrates the lack of stability in the other crypto-currencies is mostly a problem of too many speculators, or small spread in this one's caused by too many bots: I've seen some curious trading patterns I believe are caused by bots... Jan 30, 2014 at 19:26
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@JoePineda Internal to the exchanges, narrow spreads could be possible if they aren't netting with others at the time or processing deposits & withdrawals; otherwise, the uncertainty from confirmation time will cost, all of that despite the quantities at the best orders. In other words, if they're only balancing their own internal books and not relying on the network, it can be "immediate". Also, those spreads might be close to the best we'll ever see with such high confirmation times. Considering the volume, spreads should have narrowed by now which any trader helps to do by trading.– user5107Jan 30, 2014 at 19:37
No it would not. Due to fees involved with transferring assets between exchanges, and exchange commissions, inter-exchange spreads would still exist. Everyone running bots would at best lower spreads, not eliminate them.
There are already bots running on every market you can imagine. Because exchange operators are highly technical, most exchanges offer API's from the beginning.
