Arbitrage Starts With Substitution, Not Price

Most conversations about arbitrage open with a number on a screen, which is the least reliable place to start. Nicholas Kovalensky, Arbitrage Senior Account Manager at Hirschmann Private, prefers to begin with a narrower question: are the two instruments being compared the same asset under two prices, or do they merely look alike? The distinction sounds academic until an order is live. Everything that follows, from how a position is sized to when it is closed, depends on the answer.

Two Prices Are Only Comparable When the Assets Are Interchangeable

Substitution is the mechanism that makes arbitrage work, and it is a property of the instruments rather than of the market mood. Two positions are interchangeable when they carry the same underlying exposure, settle in the same currency, deliver on the same terms, and grant the same rights. A share and a depositary receipt over the same company can be close, but the receipt may carry different voting rights, a different fee, and a different settlement route. A near month futures contract and a far month contract on the same commodity are two different bets on two different delivery dates. None of that makes comparison pointless. It makes the comparison conditional, and the condition has to be written down before the trade is.

Mr. Kovalensky told us that "Arbitrage is a question about substitution before it is a question about price. If the two things on your screen are not interchangeable on the same terms, you are comparing two markets rather than trading one."

Where Arbitrage Comparisons Quietly Break Down

The details that break a clean comparison are rarely hidden, but they are easy to skip. Contract specifications state the deliverable, the settlement date, and the tick size. Trading calendars differ between venues, so one side of a position may be open while the other is closed. Corporate actions can change what a holder receives while a position is running. Short availability matters if one leg requires borrowing, because a leg that cannot be borrowed cannot be held. Currency is the quiet one: a profit on two legs denominated in different currencies still has to be converted, and that conversion carries a cost and a rate. Those checks are mundane, and skipping them is how a comparison becomes a position that was never quite what it looked like.

Both Legs Belong to One Position, Even When Orders Are Separate

Order handling is where a sound comparison meets the mechanics of a platform. Each leg is submitted separately, so each leg can fill separately, and a partial fill on the side that is easier to trade leaves the other side exposed until it is completed. The practical sequence is usually to start with the leg that is harder to fill, because the more liquid side will still be there a moment later, and to size both orders from the smaller of the two available depths. Margin is assessed across the whole position rather than leg by leg, and a widening spread between the legs can raise the requirement while the position is still open. Monitoring the combined exposure, rather than two separate lines that each look comfortable, is the part that takes discipline.

"Treat the first fill as the beginning of a position, not as a completed trade. The work on the second leg is the same work, and it deserves the same attention." Nicholas Kovalensky talks about it in the interview

When the Two Prices Stay Apart

A comparison can be correct and still cost money, because convergence needs a mechanism and a timeframe. If the same asset can be moved, redeemed, or delivered between the two venues, the gap has a reason to close. Where that route is slow, expensive, or unavailable, the gap can persist, and a position that was meant to last a day may need financing for a month. The exit deserves the same preparation as the entry: a time limit, a tolerance for the spread moving the wrong way, and a plan for unwinding both legs together rather than in the order that happens to be convenient. A gap that widens is information about the mechanism, and it is worth writing down what the widening suggested before the next comparison is made.

"Waiting is a decision like any other. It should be made before the position exists, when the arithmetic is still calm, rather than after the spread has moved against you for a week." says Nicholas Kovalensky.

Nicholas Kovalensky is Arbitrage Senior Account Manager at Hirschmann Private.

Disclaimer: The content of this article is provided for general informational purposes only and should not be interpreted as personalized financial or trading advice. The author makes no representations or warranties regarding the accuracy, completeness, or timeliness of the information presented. Market dynamics are subject to frequent change, and past insights may not reflect current conditions. Readers should independently verify all facts and consult with a qualified financial advisor before making any investment decisions. The author and publisher accept no responsibility for any financial losses, decisions, or consequences resulting from reliance on this content. All actions taken based on this information are at your own risk.

COMTEX_493452467/2891/2026-09-28T13:21:28

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