Spot Perpetual Arbitrage

Arbitrage strategy between spot and perpetual markets to profit from funding rates

Overview

Spot Perpetual Arbitrage captures price differences between spot markets and perpetual futures markets while earning or paying funding rates. This market-neutral strategy profits from basis spreads and funding rate inefficiencies.

How It Works

1. Detect Arbitrage Opportunity: Compares spot and perpetual prices
2. Open Position: When spread exceeds threshold, opens opposite positions on both markets
3. Hold for Funding: Maintains position to collect funding payments
4. Close Position: When convergence spread is met, closes both positions
5. Profit: Captures initial spread + accumulated funding rates

# From source: hummingbot/strategy/spot_perpetual_arbitrage/
arb_pct = (perp_price - spot_price) / spot_price * 100

if abs(arb_pct) >= min_opening_arbitrage_pct:
    if arb_pct > 0:  # Perpetual premium
        buy_spot()    # Long spot
        sell_perp()   # Short perpetual
    else:  # Spot premium
        sell_spot()   # Short spot (if supported)
        buy_perp()    # Long perpetual

Unlike directional trading, this strategy is market-neutral and profits from convergence, not price direction.

When to Use

Ideal Conditions

• High funding rates (>0.1% per 8h)
• Persistent basis spread between spot/perp
• Low transaction costs
• Sufficient capital for both markets

Avoid When

• Funding rates near zero
• High exchange withdrawal fees
• Limited capital (can’t open both sides)
• Extreme volatility causing liquidation risk

Core Configuration Parameters

Market Setup

spot_connector · string · required

Spot exchange connector

Examples: binance, coinbase_pro, kraken

spot_market · string · required

Spot trading pair in BASE-QUOTE format

Example: BTC-USDT

perpetual_connector · string · required

Derivative exchange connector

Examples: binance_perpetual, bybit_perpetual, dydx_perpetual

perpetual_market · string · required

Perpetual contract trading pair

Example: BTC-USDT (perpetual contract)

Position Sizing

order_amount · decimal · required

Order size in base asset for both spot and perpetual

Example: 0.1 opens 0.1 BTC on spot and 0.1 BTC on perpetual

Ensure sufficient balance on both exchanges to open positions.

perpetual_leverage · int · default: "1"

Leverage for perpetual market position

Example: 5 uses 5x leverage on perpetual side

Range: Varies by exchange

Higher leverage reduces capital requirement on perpetual side but increases liquidation risk.

Arbitrage Thresholds

min_opening_arbitrage_pct · decimal · default: "1.0"

Minimum price difference percentage to open an arbitrage position. Enter 1 for 1%.

Example: 0.3 opens position when spread ≥ 0.3%

Range: -100% to 100%

Should exceed: transaction costs + slippage + minimum desired profit

min_closing_arbitrage_pct · decimal · default: "-0.1"

Minimum price difference to close existing position. Enter 1 for 1%.

Example: -0.1 closes when spread narrows to -0.1%

Range: -100% to 100%

Can be negative to close positions even at a small loss, relying on accumulated funding to be profitable.

Slippage Management

spot_market_slippage_buffer · decimal · default: "0.05"

Slippage buffer for spot market orders. Enter 1 for 1%.

Example: 0.1 adds 0.1% buffer to spot orders

Protects against price movement during execution.

perpetual_market_slippage_buffer · decimal · default: "0.05"

Slippage buffer for perpetual market orders. Enter 1 for 1%.

Example: 0.1 adds 0.1% buffer to perpetual orders

Execution Control

next_arbitrage_opening_delay · float · default: "120"

Seconds to wait before opening next arbitrage position

Example: 300 waits 5 minutes between position opens

Prevents over-trading and allows market to stabilize.

Example Configurations

Basic BTC Funding Arbitrage

strategy: spot_perpetual_arbitrage
spot_connector: binance
spot_market: BTC-USDT
perpetual_connector: binance_perpetual
perpetual_market: BTC-USDT
order_amount: 0.01
perpetual_leverage: 3
min_opening_arbitrage_pct: 0.5
min_closing_arbitrage_pct: 0.1
spot_market_slippage_buffer: 0.05
perpetual_market_slippage_buffer: 0.05
next_arbitrage_opening_delay: 300

This configuration:

• Trades 0.01 BTC per arbitrage
• Uses 3x leverage on perpetual
• Opens when spread ≥ 0.5%
• Closes when spread ≤ 0.1%
• 5-minute delay between positions

Aggressive High-Frequency

strategy: spot_perpetual_arbitrage
spot_connector: binance
spot_market: ETH-USDT
perpetual_connector: binance_perpetual
perpetual_market: ETH-USDT
order_amount: 0.5
perpetual_leverage: 5
min_opening_arbitrage_pct: 0.2
min_closing_arbitrage_pct: -0.05
spot_market_slippage_buffer: 0.1
perpetual_market_slippage_buffer: 0.1
next_arbitrage_opening_delay: 60

Optimized for:

• Tighter opening threshold (0.2%)
• Negative closing threshold (closes even at small loss)
• Higher leverage (5x) for capital efficiency
• Faster cycling (60-second delay)
• Relies on funding rate income

Conservative Long-Hold

strategy: spot_perpetual_arbitrage
spot_connector: coinbase_pro
spot_market: BTC-USD
perpetual_connector: bybit_perpetual
perpetual_market: BTC-USDT
order_amount: 0.05
perpetual_leverage: 2
min_opening_arbitrage_pct: 1.0
min_closing_arbitrage_pct: 0.3
spot_market_slippage_buffer: 0.2
perpetual_market_slippage_buffer: 0.2
next_arbitrage_opening_delay: 600

Features:

• Wide opening threshold (1.0%)
• Conservative closing (0.3%)
• Low leverage (2x) for safety
• Longer hold periods
• Higher slippage buffers for safety

Strategy Mechanics

Position Opening Logic

# Calculate basis spread
spot_mid = (spot_bid + spot_ask) / 2
perp_mid = (perp_bid + perp_ask) / 2
spread_pct = (perp_mid - spot_mid) / spot_mid * 100

if spread_pct >= min_opening_arbitrage_pct:
    # Perpetual at premium (normal contango)
    spot_position = buy_spot(order_amount, slippage_buffer)
    perp_position = sell_perpetual(order_amount, leverage, slippage_buffer)
    arb_type = "short_perp_long_spot"
    
elif spread_pct <= -min_opening_arbitrage_pct:
    # Spot at premium (backwardation)
    spot_position = sell_spot(order_amount, slippage_buffer)  # If supported
    perp_position = buy_perpetual(order_amount, leverage, slippage_buffer)
    arb_type = "long_perp_short_spot"

Position Closing Logic

# For existing position
current_spread_pct = (perp_mid - spot_mid) / spot_mid * 100

if arb_type == "short_perp_long_spot":
    if current_spread_pct <= min_closing_arbitrage_pct:
        close_spot_position()  # Sell spot
        close_perp_position()  # Buy perpetual
        
elif arb_type == "long_perp_short_spot":
    if current_spread_pct >= -min_closing_arbitrage_pct:
        close_spot_position()  # Buy spot
        close_perp_position()  # Sell perpetual

Funding Rate Analysis

Understanding Funding Rates

Funding rates are periodic payments between long and short perpetual contract holders:

• Positive Funding: Perpetual > Spot → Longs pay shorts
• Negative Funding: Spot > Perpetual → Shorts pay longs

Typical interval: Every 8 hours (0.01% = ~10% APR)

Profit Calculation

# Example arbitrage profit
entry_spot = 50000    # USD
entry_perp = 50200    # USD (0.4% premium)
position_size = 1.0   # BTC

# Open position
profit_open = (entry_perp - entry_spot) * position_size
# = 200 USD

# Hold for 24 hours at 0.01% funding rate (3 payments)
funding_rate = 0.0001
funding_payments = entry_perp * position_size * funding_rate * 3
# = 50200 * 1.0 * 0.0001 * 3 = 15.06 USD

# Close position at 0.1% spread
close_spot = 51000
close_perp = 51051
profit_close = (entry_perp - close_perp) - (close_spot - entry_spot)
# = (50200 - 51051) - (51000 - 50000) = -851 - 1000 = -1851 USD
# But we collected funding, so:

total_profit = profit_open + funding_payments + profit_close
# = 200 + 15.06 - 1851 = -1635.94 USD

# This example shows importance of proper entry/exit thresholds!

Optimal Funding Strategies

High Positive Funding

Market: Perpetual trading at premium, longs pay shorts

Strategy:

min_opening_arbitrage_pct: 0.3  # Open on smaller premium
min_closing_arbitrage_pct: -0.1 # Close when premium disappears
perpetual_leverage: 5           # Maximize funding income

Position: Long spot + Short perpetual

Income: Initial spread + funding payments

High Negative Funding

Market: Spot at premium, shorts pay longs

Strategy:

min_opening_arbitrage_pct: 0.3  # Open on backwardation
min_closing_arbitrage_pct: -0.1 # Close on convergence
perpetual_leverage: 5           # Maximize funding income

Position: Short spot + Long perpetual (if spot shorting available)

Income: Initial spread + funding payments

Neutral Funding

Market: Funding near 0%

Strategy:

min_opening_arbitrage_pct: 1.0  # Require larger spread
min_closing_arbitrage_pct: 0.3  # Don't rely on funding
perpetual_leverage: 2           # Lower risk

Focus: Capture basis spread, not funding

Risk Management

Major Risks:

• Liquidation Risk: Perpetual position can be liquidated in volatile markets
• Funding Risk: Funding rates can flip, making position unprofitable
• Convergence Risk: Spread may not converge as expected
• Exchange Risk: Outage on one exchange prevents closing position
• Withdrawal Risk: High fees to rebalance between exchanges

Risk Mitigation Strategies

Set Appropriate Leverage

Calculate safe leverage based on volatility:

max_safe_leverage = 1 / (2 * daily_volatility)

# Example: BTC 3% daily volatility
max_safe_leverage = 1 / (2 * 0.03) = 16.67x

# Use 50% of max for safety
recommended_leverage = 16.67 * 0.5 = 8x

Start with 2-3x regardless of calculation.

Monitor Funding Continuously

Track funding rate changes:

# Check current funding
status --funding_rate

# If funding flips against your position:
# - Close position early, OR
# - Adjust min_closing_arbitrage_pct

Maintain Excess Margin

Keep margin ratio > 50%:

# For $10,000 total capital
order_amount: 0.05  # ~$2,500 at $50k BTC
perpetual_leverage: 3  # Uses $833 margin
# Margin ratio = $10,000 / $833 = 1200% ✓

Use Exchange with Low Withdrawal Fees

Factor in rebalancing costs:

Exchange	Withdrawal Fee	Impact on Min Profitability
Binance	0.0005 BTC	+$25 @$50k
Coinbase	0.00001 BTC	+$0.50 @$50k
Kraken	0.00015 BTC	+$7.50 @$50k

Advanced Techniques

Multi-Position Management

The strategy opens one arbitrage position at a time. For multiple positions:

1. Run multiple Hummingbot instances
2. Use different order_amount values
3. Stagger next_arbitrage_opening_delay times

Dynamic Threshold Adjustment

Adjust thresholds based on funding:

# High funding scenario (>0.05% per 8h)
min_opening_arbitrage_pct: 0.2   # Aggressive entry
min_closing_arbitrage_pct: -0.2  # Hold longer for funding

# Low funding scenario (<0.01% per 8h)
min_opening_arbitrage_pct: 0.8   # Conservative entry
min_closing_arbitrage_pct: 0.2   # Close on convergence

Cross-Exchange Optimization

Same Exchange (Binance)

spot_connector: binance
perpetual_connector: binance_perpetual

Pros:

• No withdrawal fees for rebalancing
• Unified margin (if cross-margin enabled)
• Faster execution

Cons:

• Exchange risk concentration

Different Exchanges

spot_connector: coinbase_pro
perpetual_connector: bybit_perpetual

Pros:

• Diversified exchange risk
• Access to better spot/perp pricing

Cons:

• Withdrawal fees for rebalancing
• Slower arbitrage closure

Performance Optimization

Calculating Minimum Profitability

# Account for all costs
spot_fee = 0.001          # 0.1%
perp_fee = 0.0005         # 0.05%
slippage = 0.001          # 0.1% each side
withdrawal_cost = 25      # $25 to rebalance
position_size_usd = 5000  # $5000 position

total_fees_pct = (spot_fee + perp_fee + slippage * 2) * 100
# = 0.35%

withdrawal_pct = (withdrawal_cost / position_size_usd) * 100
# = 0.5%

min_opening_threshold = total_fees_pct + withdrawal_pct + desired_profit_pct
# = 0.35% + 0.5% + 0.3% = 1.15%

Set min_opening_arbitrage_pct: 1.2 to ensure profitability.

Optimal Position Sizing

# Calculate based on funding income target
target_daily_income = 50        # $50 per day
avg_funding_rate = 0.0001       # 0.01% per 8h
funding_periods = 3             # 3 times per day

required_position = target_daily_income / (avg_funding_rate * funding_periods)
# = 50 / (0.0001 * 3) = $166,667

# At BTC = $50,000
order_amount = 166667 / 50000 = 3.33 BTC

Tips for Success

Start Small and Scale

Begin with minimum position sizes:

order_amount: 0.01  # $500 at $50k BTC
perpetual_leverage: 2

After 1 week profitable → increase by 50% After 1 month profitable → scale to target size

Monitor Both Markets

Track metrics:

• Spot balance
• Perpetual margin ratio
• Funding rate history
• Open position P&L

balance --spot binance
balance --derivative binance_perpetual

Rebalance Regularly

Transfer profits weekly:

1. Close all positions
2. Withdraw excess from perpetual
3. Rebalance spot/perpetual allocations
4. Resume strategy

Use Historical Data

Backtest thresholds using historical spreads:

import pandas as pd

# Analyze typical spread ranges
spread_data = load_historical_basis()
p75 = spread_data.quantile(0.75)  # 75th percentile

# Set opening threshold at 75th percentile
min_opening_arbitrage_pct = p75

Source Code Reference

Configuration: /source/hummingbot/strategy/spot_perpetual_arbitrage/spot_perpetual_arbitrage_config_map.py:56

Strategy Implementation: /source/hummingbot/strategy/spot_perpetual_arbitrage/spot_perpetual_arbitrage.py

Proposal Logic: /source/hummingbot/strategy/spot_perpetual_arbitrage/arb_proposal.py

Related Strategies

• AMM Arbitrage: Spot to AMM arbitrage
• Perpetual Market Making: Pure market making on perpetuals
• Cross Exchange Market Making: Market making with hedging