Anyone can watch crypto going into the exchange. Usually people don’t (shouldn’t?) hold it on the exchange for excessive periods of time, so once it confirms, they try to sell and withdraw.
If you can see this, you can front the sell (before the deposit even confirms) and then be the buyer shortly after it confirms.
But I don’t see this as being much different than providing liquidity and taking the risk that someone else doesn’t want to take.
That depends on the underlying cryptocurrency, for example I think that there is no way to design exchange such that BTC deposit would be readily apparent on blockchain before it is credited to the exchange account. So it is simply another argument why "smart contracts" does not solve any useful problem.
If you can see this, you can front the sell (before the deposit even confirms) and then be the buyer shortly after it confirms.
But I don’t see this as being much different than providing liquidity and taking the risk that someone else doesn’t want to take.