How can one find how much "room for arbitrage" is there in the Bitcoin market? I don't know what's the mathematical/economical definition, but I would define "room for arbitrage" as the amount of money that can be extracted from the market by doing arbitrage (between the different exchanges). I am sure there is a precise definition of such a concept.

So, given this definition - how much room for arbitrage do the current Bitcoin markets exhibit?

Edit - see also on Quora - How do you measure arbitrage?
I am not an expert on this, but I will answer from my personal experience from the past couple of months. Here are some things I noticed:


MtGox rules the market. The price there leads and the other exchanges follow. Sometimes TradeHill moves a few decimal points on its own above or below MtGox, but it usually goes back to where it was after a few hours.
The price difference between exchanges with APIs rarely goes above $0.3 (the most common opportunities are around $0.1/BTC). So with the current fees you will earn very little from each trade - note that on smaller exchanges, it is very easy to move prices up and down so you are doing arbitrage with very small trades.
You must be fast. There are already people doing this and the opportunities don't stay up for long. If you are not careful your orders will end up pending.
Exchanges without APIs have much more arbitrage opportunities. Bitmarket for example is some times $1 or more off the current MtGox price. Of couse it is also much more time consuming to arbitrage manually.
There are days when nothing happens and others when a lot happens. You have to be ready and keep a lot of money on each exchange if you want to catch it all. There are huge volume differences so you should split your money accordingly.


I am still testing things out, but I don't think that you can make a lot of money out of this. It may be interesting to use it as a complement to other automated trading strategies though.



Just another note:


Moving money/bitcoins around to grab opportunities in exchanges with APIs won't work because of fees (even if small) plus waiting time. You usually have a few minutes to grab opportunities. If you are lucky you can sometimes find an opportunity that lasts a couple of hours, but that happens like once a week.


All of this is from personal observations during July/August 2011. Things will of course change and the market will probably become more and more efficient.