N°26-55: Taker vs. Maker Arbitrage

Arbitrage is canonically viewed as liquidity-taking: arbitrageurs exploit discrepancies between assets with identical payoffs by taking liquidity on both legs, i.e. taker arbitrage. We show that arbitrageurs can instead provide liquidity on one leg of a payoff-equivalent position and take liquidity on the other, i.e. maker arbitrage. Using more than eight million arbitrage transactions from a leading prediction market, we find that more than half of arbitrage bundles are maker arbitrage, executed by more sophisticated traders bearing limited execution risk. Exploiting the introduction of a taker fee, which burdens taker arbitrage more than twice as heavily as maker arbitrage, we find that the price deviations required for profitable trading increase substantially more for taker than for maker arbitrage. Arbitrage thus emerges not only as a force that corrects mispricing but as a channel of liquidity provision.