Graph algorithms and currency arbitrage, part 2

[ quant ]

In the previous post (which should definitely be read first!) we explored how graphs can be used to represent a currency market, and how we might use shortest-path algorithms to discover arbitrage opportunities. Today, we will apply this to real-world data. It should be noted that we are not attempting to build a functional arbitrage bot, but rather to explore how graphs could potentially be used to tackle the problem. Later on we’ll discuss why our methodology is unlikely to result in actionable arbitrage.

Rather than using fiat currencies as presented in the previous post, we will examine a market of cryptocurrencies because it is much easier to acquire crypto order book data. We’ll narrow down the problem further by making two more simplifications. Firstly, we will focus on arbitrage within a single exchange. That is, we’ll look to see if there are pathways between different coins on an exchange which leave us with more of a coin than we started with. Secondly, we will only be considering a single snapshot of data from the exchange. Obviously markets are highly dynamic, with thousands of new bids and asks coming in each second. A proper arbitrage system needs to constantly be scanning for opportunities, but that’s out of the scope of this post.

With all this in mind, the overall implementation strategy was as follows:

  1. For a given exchange, acquire the list of pairs that will form the vertices.
  2. For each of these pairs, download a snapshot of the bid/ask.
  3. Process these values accordingly, assigning them to directed edges on the graph.
  4. Using Bellman-Ford, find and return negative-weight cycles if they exist.
  5. Calculate the arbitrage that these negative-weight cycles correspond to.

The full code for this project can be found in this GitHub repo.s


Raw data

For the raw data, I decided to use the CryptoCompare API which has a load of free data compiled across multiple exchanges. To get started, you’ll need to register to get a free API key.

As mentioned previously, we will only look at data from Binance. I chose Binance not because it has a large selection of altcoins, but because most altcoins can trade directly with multiple pairs (e.g. BTC, ETH, USDT, BNB). Some exchanges have many altcoins but you can only buy them with BTC – this is not well suited for arbitrage.

Firstly, we need to find out which pairs Binance offers. This is done with a simple call (AUTH is your API key string):

import requests
import json 

def top_exchange_pairs():
    url = (
        "" + 
        "exchanges?topTier=true&api_key=" + AUTH
    r = requests.get(url)
    with open("pairs_list.json", "w") as f:
        json.dump(r.json(), f)

This is an excerpt from the resulting JSON file – for each exchange, the pairs field lists all other coins that the key coin can be traded with:

         "ETH":["PAX", "TUSD", "USDT", "USDC", "BTC"],
         "ONGAS":["BTC", "BNB", "USDT"],
         "ETH":["DAI", "USD", "USDC", "EUR", "GBP", "BTC"],
         "BCH":["BTC", "GBP", "EUR", "USD"]

I then filtered out coins with fewer than three tradable pairs. These coins are unlikely to participate in arbitrage – we would rather have a graph that is more connected.

def binance_connected_pairs():
    with open("pairs_list.json", "r") as f:
        data = json.load(f)
    pairs = data["Data"]["Binance"]["pairs"]
    return {k: v for k, v in pairs.items() if len(v) > 3}

We are now ready to download a snapshot of the available exchange rates for each of these coins.

import os
import tqdm  # progress bar

def download_snapshot(pair_dict, outfolder):
    if not os.path.exists(outfolder):

    # Download data and write to files
    for p1, p2s in tqdm(pair_dict.items()):
        url = (
            + f"ob/l1/top?fsyms={p1}&tsyms={','.join(p2s)}"
            + "&e=Binance&api_key=" + AUTH
        r = requests.get(url)
        with open(f"{outfolder}/{p1}_pairs_snapshot.json", "w") as f:
            json.dump(r.json(), f)

We can then run all of the above functions to produce a directory full of the exchange rate data for the listed pairs.

connected = binance_connected_pairs()
download_snapshot(connected, "binance_data")
"EOS": {
    "BNB": {
        "BID": ".2073",
        "ASK": ".2077"
    "BTC": {
        "BID": ".0007632",
        "ASK": ".0007633"
    "ETH": {
        "BID": ".02594",
        "ASK": ".025964"
    "USDT": {
        "BID": "7.0441",
        "ASK": "7.046"
    "PAX": {
        "BID": "7.0535",
        "ASK": "7.07"

This excerpt reveals something that we glossed over completely in the previous post. As anyone who has tried to exchange currency on holiday will know, there are actually two exchange rates for a given currency pair depending on whether you are buying or selling the currency. In trading, these two prices are called the bid (the current highest price someone will buy for) and the ask (the current lowest price someone will sell for). As it happens, this is very easy to deal with in the context of graphs.

Preparing the data

Having downloaded the raw data, we must now prepare it so that it can be put into a graph. This effectively means parsing it from the raw JSON and putting it into a pandas dataframe. We will arrange it in the dataframe such that it constitutes an adjacency matrix:

I chose this particular row-column scheme because it results in intuitive indexing: df.X.Y is the amount of Y gained by selling 1 unit of X, and df.A.B * df.B.C * df.C.D is the total amount of D gained by trading 1 unit of A when trading via $A \to B \to C \to D$.

The column headers will be the same as the row headers, consisting of all the coins we are considering. The function that creates the adjacency matrix is shown here:

def create_adj_matrix(pair_dict, folder, outfile="snapshot.csv"):
    # Union of 'from' and 'to' pairs
    flatten = lambda l: [item for sublist in l for item in sublist]
    keys, vals = pair_dict.items()
    all_pairs = list(set(keys).union(flatten(values)))

    # Create empty df
    df = pd.DataFrame(columns=all_pairs, index=all_pairs)

    for p1 in pair_dict.keys():
        with open(f"{folder}/{p1}_pairs_snapshot.json", "r") as f:
            res = json.load(f)
        quotes = res["Data"]["RAW"][p1]
        for p2 in quotes:
                df[p1][p2] = float(quotes[p2]["BID"])
                df[p2][p1] = 1 / float(quotes[p2]["ASK"])
            except KeyError:
                print(f"Error for {p1}/{p2}")

Putting the data into a graph

We will be using the NetworkX package, an intuitive yet extremely well documented library for dealing with all things graph-related in python.

In particular, we will be using nx.DiGraph, which is just a (weighted) directed graph. I was initially concerned that it’d be difficult to get the data in: python libraries often adopt their own weird conventions and you have to modify your data so that is in the correct format. This was not really the case with NetworkX, it turns out that we already did most of the hard work when we put the data into our pandas adjacency matrix.

Firstly, we take negative logs as discussed in the previous post. Secondly, in our dataframe we currently have NaN whenever there is no edge between two vertices. To make a valid nx.DiGraph, we need to set these to zero. Lastly, we transpose the dataframe because NetworkX uses a different row/column convention. We then pass this processed dataframe into the nx.Digraph constructor. Summarised in one line:

g = nx.DiGraph(-np.log(df).fillna(0).T)


To implement Bellman-Ford, we make use of the funky defaultdict data structure. As the name suggests, it works exactly like a python dict, except that if you query a key that is not present you get a certain default value back. The first part of our implementation is quite standard, as we are just doing the $n - 1$ edge-relaxations where n is the number of vertices.

But because the ‘classic’ Bellman-Ford does not actually return negative-weight cycles, the second part of our implementation is a bit more complicated. The key idea is that if after $n-1$ relaxations, there is an edge that can be relaxed further then that edge must be on a negative weight cycle. So to find this cycle we walk back along the predecessors until a cycle is detected, then return the cyclic portion of that walk. In order to prevent subsequent redundancy, we mark these vertices as ‘seen’ via another defaultdict. This procedure adds a linear cost to Bellman-Ford since we have to iterate over all the edges, but the asymptotic complexity overall remains $O(VE)$.

def bellman_ford_return_cycle(g, s):
    n = len(g.nodes())
    d = defaultdict(lambda: math.inf)  # distances dict
    p = defaultdict(lambda: -1)  # predecessor dict
    d[s] = 0

    for _ in range(n - 1):
        for u, v in g.edges():
            # Bellman-Ford relaxation
            weight = g[u][v]["weight"]
            if d[u] + weight < d[v]:
                d[v] = d[u] + weight
                p[v] = u  # update pred

        # Find cycles if they exist
        all_cycles = []
        seen = defaultdict(lambda: False)

        for u, v in g.edges():
            if seen[v]:
            # If we can relax further there must be a neg-weight cycle
            weight = g[u][v]["weight"]
            if d[u] + weight < d[v]:
                cycle = []
                x = v
                while True:
                    # Walk back along preds until a cycle is found
                    seen[x] = True
                    x = p[x]
                    if x == v or x in cycle:
                # Slice to get the cyclic portion
                idx = cycle.index(x)
        return all_cycles

As a reminder, this function returns all negative-weight cycles reachable from a given source vertex (returning the empty list if there are none). To find all negative-weight cycles, we can simply call the above procedure on every vertex then eliminate duplicates.

def all_negative_cycles(g):
    all_paths = []
    for v in g.nodes():
        all_paths.append(bellman_ford_negative_cycles(g, v))
    flattened = [item for sublist in all_paths for item in sublist]
    return [list(i) for i in set(tuple(j) for j in flattened)]

Tying it all together

The last thing we need is a function that calculates the value of an arbitrage opportunity given a negative-weight cycle on a graph. This is easy to implement: we just find the total weight along the path then exponentiate the negative total (because our weights are the negative log of the exchange rates).

def calculate_arb(cycle, g, verbose=True):
    total = 0
    for (p1, p2) in zip(cycle, cycle[1:]):
        total += g[p1][p2]["weight"]
    arb = np.exp(-total) - 1
    if verbose:
        print("Path:", cycle)
    return arb

def find_arbitrage(filename="snapshot.csv"):
    df = pd.read_csv(filename, header=0, index_col=0)
    g = nx.DiGraph(-np.log(df).fillna(0).T)

    if nx.negative_edge_cycle(g):
        print("ARBITRAGE FOUND\n" + "=" * 15 + "\n")
        for p in all_negative_cycles(g):
            calculate_arb(p, g)
        print("No arbitrage opportunities")

Running this function gives the following output:


Path: ['USDT', 'BAT', 'BTC', 'BNB', 'ZEC', 'USDT']

Path: ['BTC', 'XRP', 'USDT', 'BAT', 'BTC']

Path: ['BTC', 'BNB', 'ZEC', 'USDT', 'BAT', 'BTC']

Path: ['BNB', 'ZEC', 'USDT', 'BAT', 'BTC', 'BNB']

Path: ['USDT', 'BAT', 'BTC', 'XRP', 'USDT']

0.09% is not exactly a huge amount of money, but it is still risk-free profit, right?

Why wouldn’t this work?

Notice that we haven’t mentioned exchange fees at any point. In fact, Binance charges a standard 0.1% commission on every trade. It is easy to modify our code to incorporate this: we just multiply each exchange rate by 0.999. But we don’t need to compute anything to see that we would certainly be losing much more money than gained from the arbitrage.

Secondly, it is likely that this whole analysis is flawed because of the way the data was collected. The function download_snapshot makes a request for each coin in sequence, taking a few seconds in total. But in these few seconds, prices may move – so really the above “arbitrage” may just be a result of our algorithm selecting some of the price movements. This could be fixed by using timestamps provided by the exchange to ensure that we are looking at the order book for each pair at the exact same moment in time.

Thirdly, we have assumed that you can trade an infinite quantity of the bid and ask. An order consists of a price and a quantity, so we will only be able to fill a limited quantity at the ask price. Thus in practice we would have to look at the top few levels of the order book and consider how much of it we’d eat into.

It is not difficult to extend our methodology to arb between different exchanges. We would just need to aggregate the top of the order book from each exchange, then put the best bid/ask onto the respective edges. Of course, to run this strategy live would require us to manage our inventory not just on a currency level but per currency per exchange, and factors like the congestion of the bitcoin network would come into play.

Lastly, this analysis has only been for a single snapshot. A proper arbitrage bot would have to constantly look for opportunities simultaneously across multiple order books. I think this could be done by having a websocket stream which keeps the graph updated with the latest quotes, and using a more advanced method for finding negative-weight cycles that does not involve recomputing the shortest paths via Bellman-Ford.


All this begs the question: why is it so hard to find arbitrage? The simple answer is that other people are doing it smarter, better, and (more importantly) faster. With highly optimised algorithms (probably implemented in C++), ‘virtual colocation’ of servers, and proper networking software/hardware, professional market makers are able to exploit these simple arbitrage opportunities extremely rapidly.

In any case, the point of this post was not to develop a functional arbitrage bot but rather to demonstrate the power of graph algorithms in a non-standard use case. Hope you found it as interesting as I did!