What exactly does "stat arb" mean in this context? I assumed it meant "statistical arbitrage", so I was expecting the article to talk about a pairs trading strategy or something in that vein, i.e. a strategy that relies on a statistical relationship. But this seems to be more what I would call "geographical" or "locational" arbitrage where they're trading price differentials in the same instrument between multiple venues.
I defined stat arb in the glossary at the end but probably should have included a more obvious link.
TL;DR: this is a pairs trading strategy that relies on the (very strong) statistical assumption that the price of a token on a centralized and decentralized exchange will converge.
My longer definition below:
Stat arbs: in finance, statistical arbitrage generally refers to any trade where a pair of assets should statistically move in a certain way. However, there are degrees of should. TradFi traders might reason that Meta and Google are both in the ads business, so if Meta is relatively expensive and Google is relatively cheap, they should short the former and long the latter. However, this is a weak argument. Perhaps Meta is just a better business or Google has structural problems. A stronger stat arb thesis is that Royal Dutch Shell used to be traded on both American and European exchanges. If the shares were trading at different prices on each, nearly risk-free profits are available to those who close the spread. This is what stat arb means in a crypto setting. AVAX may be trading at slightly different prices on Binance and on various blockchains.
Isn’t AVAX transferable between blockchains and Binance? If so, this isn’t “stat arb”, it’s just regular arbitrage. When the instruments are fungible, it doesn’t matter whether there’s a statistical relationship; your profit is guaranteed once you complete the trade, regardless of how the prices move later.
The Royal Dutch/Shell case is different because the two stocks were not actually fungible, so the trade would only have been profitable if the two prices eventually converged.
PS I enjoyed the article and it’s clear you’ve spent a lot of time thinking about this space. I just can’t resist chiming in when it comes to well-established terminology.
In theory, yes, the tokens should be transferable between the blockchain and the CEX, but this link breaks all the time and for various reasons (see the crypto problems section). Lots of things that “should” happen in regular, efficient markets don’t in crypto.
That said, call it whatever you want it. Most people in crypto call CEX/DEX stat arb to differentiate from true risk-free arbitrage, but I agree that people coming from a traditional trading perspective would call this pure arb.
