Arbitrage Strategies

This guide covers arbitrage opportunities in Seesaw prediction markets and how to profit from price inefficiencies.

What is Arbitrage?

Arbitrage exploits price discrepancies to generate risk-free (or low-risk) profits.

YES + NO Arbitrage

The most fundamental arbitrage opportunity in binary markets.

The Core Relationship

In a binary market:

YES share + NO share = 1 USDC (guaranteed)

If market prices deviate from this relationship, arbitrage exists.

Identifying Opportunities

Example: Underpriced Market

Market prices:
YES @ 0.48 (4800 bps)
NO  @ 0.48 (4800 bps)
Total: 0.96 (9600 bps)

Arbitrage:
├── Buy 100 YES @ 0.48 = 48 USDC
├── Buy 100 NO  @ 0.48 = 48 USDC
├── Total cost: 96 USDC
└── Guaranteed payout: 100 USDC

Profit: 4 USDC (4.17% risk-free)

Example: Overpriced Market

Market prices:
YES @ 0.55 (5500 bps)
NO  @ 0.50 (5000 bps)
Total: 1.05 (10500 bps)

If you own shares:
├── Sell 100 YES @ 0.55 = 55 USDC
├── Sell 100 NO  @ 0.50 = 50 USDC
├── Total received: 105 USDC
└── Liability: 100 USDC (either YES or NO pays out)

Profit: 5 USDC

Price Convergence Near Market Close

As markets approach resolution, prices converge toward true probabilities.

Trading Convergence

Last-Minute Arbitrage

When the oracle price clearly indicates the outcome:

Scenario: 30 seconds left, price clearly UP

Market prices (stale):
YES @ 0.80
NO  @ 0.25

Actual probabilities:
YES should be ~0.99 (price clearly above start)
NO  should be ~0.01

Opportunity:
└── Buy YES @ 0.80, expect 1.00 payout
    Profit: 0.20 per share (25% return)

Cross-Market Arbitrage

When multiple markets exist for related assets.

Correlated Asset Arbitrage

If SOL and BTC markets show inconsistent pricing relative to their typical correlation:

Temporal Arbitrage

Across consecutive 15-minute markets:

Risk Considerations

Fee Impact

Arbitrage profits must exceed transaction costs.

Gross arbitrage: 100 bps (1%)

Costs:
├── Taker fee: 30 bps per trade
├── Two trades minimum: 60 bps
└── Net profit: 40 bps

Minimum viable arbitrage: ~60 bps to break even

Fee-Adjusted Analysis

Execution Risk

Liquidity Risk

Practical Implementation

Scanning for Opportunities

Monitor continuously:

Every tick:
1. Fetch best bid/ask for YES
2. Fetch best bid/ask for NO
3. Calculate YES_ask + NO_ask
4. If < 10000 - fees: Alert opportunity
5. Calculate YES_bid + NO_bid
6. If > 10000 + fees: Alert opportunity

Execution Strategy

Order Sizing

Calculate maximum profitable size:

Available at price:
YES ask @ 4800: 200 shares
NO ask @ 4900: 150 shares

Maximum size: min(200, 150) = 150 shares
Gross profit: (10000 - 4800 - 4900) × 150 / 10000 = 4.5 USDC
Fees: 60 bps × 150 / 10000 × 2 = ~1.8 USDC
Net profit: 2.7 USDC

Arbitrage Checklist

Before Trading

• Calculate gross spread (YES + NO vs 10000)
• Subtract expected fees (60 bps minimum)
• Verify liquidity on both sides
• Check time remaining (need enough for execution)
• Confirm no pending transactions

During Execution

• Execute both legs as close together as possible
• Use limit orders to control slippage
• Monitor for partial fills
• Have cancellation ready if one leg fails

After Trading

• Verify both positions filled
• Calculate actual vs expected profit
• Log trade for performance tracking
• Prepare for settlement

Common Mistakes

Automation

Successful arbitrage requires speed. Manual trading rarely captures opportunities.

Requirements

See Automation for implementation details.

Expected Returns

Realistic expectations for arbitrage:

As markets mature, arbitrage opportunities decrease due to:

1. More sophisticated participants
2. Automated arbitrageurs
3. Better price discovery

Next Steps

• Review Market Making for related strategies
• Study Automation for implementation
• Understand Risks for comprehensive risk management