>Traders looking to do arbitrage probably already have their own bots and scripts to do that.

I doubt this actually happens, at least in any significant scale, in real life. Algorithmic traders already make enough money in less dangerous environments than Bitcoin.

There after any number of algo trading opportunities in bitcoin. In fact, Algo prop shops may be uniquely positioned to trade bitcoin as more established entities can't or won't.

I don't know, APIs are becoming extremely easy to use nowadays. I've managed to create my own simple arbitrage script in about an afternoon using APIs from btc-e and coinbase. I don't have it live and probably never will (written in Python, can only imagine how badly I'll get burned) but it was a fun project!

It happens. I wrote an arbitrage script that makes a little bit of money every day (only requires me to rebalance the wallets every so often). Only risk is holding whatever is presenting the most lucrative arbitrage opportunity.

There are any number of bots trading and arbitraging on the bitcoin exchanges. I've helped someone write one myself.