Arbitration is a trading strategy which suggests to find exchange rate differences, and open positions based on these differences. This strategy does not include technical asset analysis, typically of a currency pair in the FIX API Forex market. Also, you do not need to define the timeframe of the instrument for a successful arbitration strategy. The point is to analyze the current asset value (price) and compare it with other stock sites or brokerage companies.
There are several types of arbitration trading:
- FIX API Latency Arbitrage
- FIX API 2-Legs Arbitrage
- Triangular Arbitrage
- Lock arbitrage
Today, we will look at the first form of arbitration trading, and I’ll discuss all the pitfalls and benefits of this strategy.
Latency Arbitrage is a type of arbitration trading, the essence of which is to analyze the same asset simultaneously, but at different FIX API Forex brokers. In this strategy, the trader analyzes the value of the currency pair and seeks exchange differences between the brokers. If these differences are found, it is necessary to determine which broker gives more precise and current prices, and which one has latencies. Then, the transactions are opened at a “slower” broker to the “fast”.
Let’s take an example: The value of the EUR/GBP currency pair is 0.8955 at one broker (let us already know that this one is faster) and 0.8950 at the second (slower). Thus, the trader decides to buy the asset at the second broker. The cost at the faster one is 5 pips higher than at the slower one. This is a signal that the value of the asset will then grow up to the level of the slower one.
As you may see, for a trader it is difficult to perform such an operation, because the FIX API Forex market is not stationary and it’s impossible for a human to keep an eye on all exchange differences. However, the solution can be found in the form of trading robots, which, based on the algorithm above, conduct price difference analysis and open the deals. This reduces the time to commit the deal and increases the number of deals, because the analysis and the transaction take only a fraction of a second.
Advantages of Latency Arbitrage:
- When using an algorithmic strategy, there’s immediate order execution;
- The risk of drawdown is only for the exchange difference, which reduces it to the minimum;
- The account is opened at only one broker;
- Greater trade activity;
- The high rate of return, which is created by many speculative positions.
Shortcomings of Latency Arbitrage:
- Because transactions are committed at the side of the slower broker, there is a risk of poor overall quality of the broker, which may incur investment risks;
- Large spreads and slips can reduce the trade result to zero.
These are the key parameters of this type of arbitration trading. On the basis of these, there is a number of points to consider before opening the positions according to this algorithm:
- First, identify the fast and the slow broker. This will allow the algorithmic system to set parameters on which side to open the position;
- The slow broker is an alarming call for a trader. The trading process has to be controlled. In fact, I recommend that you search for the best of the worst brokerage companies. Let the delay between the prices of brokers be less, but that will guarantee the security of your funds.
- Automate the algorithm for FIX API. If you already have a robot that trades by the Latency Arbitrage strategy, you should optimize it under trading via FIX protocol. This will allow to circumvent the spreads and slips on the side of the broker and trade by the exchange rate only, which would increase the financial result of FIX API trading.
I recommend that you pay attention to all the nuances of this type of trading, because knowledge of the key features will help optimize the algorithm and improve the financial performance.