Experienced forex traders have probably noticed that there is sometimes a slight difference between the quotes of a given financial instrument displayed by different brokers. In addition to the potential manipulation by brokers, this is due to temporary delays in quote feeds, smoothing out quotes, and so on. The point of an arbitration trade is to take advantage of this inconsistency. The trader places a purchase order with a broker whose price is low and at the same time places a sale order with a broker for the same security which shows a high price. The trade is executed when the profit that can be made from the existing difference in quotes exceeds the cost of the trade (e.g. spreads and commissions paid to both brokers). This operation is known as classic (two-leg) arbitration. The main advantage of classic arbitration is the absence of risks and drawdowns. If one dealer’s quote always lags behind another dealer’s quote, it is more understandable to apply one-legged arbitration, where the transaction is done only with the lagging broker. The advantage of one-legged arbitration over classic arbitration is that it carries a greater profit potential; The downside is that this strategy involves drawdowns.
If we study the reasons behind the trading conditions that make forex arbitrage possible, we will see that in most cases they occur due to the gap between the market quotes of one broker compared to the timely quote feed of another broker. Delays can occur for a variety of reasons: the amount of time it takes for a broker to send a quote from a liquidity provider through a broker’s server to your trading terminal may be longer for some brokers; Because quotes go through brokers, they can go through changes like filtering, smoothing, etc. As a result, when a security price goes through a significant change, the security quote that you see in your trading terminal lags behind the actual market quote. Order, with the aim of capturing the difference between the lag quote and the actual quote from the broker with a quick quote. In that case, you will have a statistical advantage over other traders. If the facility is used properly, it is possible to achieve a steady increase in profitability.
It should be noted that, with one-legged arbitration, it is completely unnecessary to hedge your open position with a second (faster) broker when using the classic arbitration technique. There are two reasons for this: however the profit will be credited to your lagging broker and hedging will result in higher trading fees in the form of spreads and commissions which you will have to pay to the second broker. This type of hedge-free arbitration is referred to as one-legged arbitration.
It should be clear that successful implementation of Forex Arbitrage requires access to a source that will provide quotes that will not lag behind. You can use a broker with a faster quote feed. A more reliable option is to use a market quote provided by a large bank or broker, such as LMAX or Saxobank.
The number of opportunities for arbitrage trading can vary greatly from broker to broker, from a few dozen a day to just a few per month. It depends on which paid broker is lagging behind the actual market quote.
We can conclude by breaking down a popular myth that is often published on the Internet. In the opinion of some people, there is no point in getting involved in arbitration transactions because brokers will not give you the benefit of your arbitration. They are able to do so because the arbitration advisors available in the market run the business very fast which is bound to warn the brokers about the arbitration activity. Furthermore, today almost all brokers require a minimum waiting time between buying and selling a position, usually no less than 1-3 minutes. Terms fall under the terms of the brokers, and brokers have the right to cancel all trades that do not meet their trading conditions. However, arbitration trades do not have to be performed immediately. If you extend the holding time of your position, you should not have any problem with your broker. Based on our own experience, if you wait at least 10 minutes before leaving your position, you will have no problem closing it.
Let me explain why arbitrage trading can still be profitable even when there is a waiting time between buying and selling a position. You always have a small advantage when the quote is delayed and you order an arbitration. It is impossible to say where the price will go after the quote differential disappears, but if the volume of your trades is large enough, then half of your trades will be profitable regardless of subsequent price movements, when you lose money. On the other half. Thus, when your trading volume is large, the gains and losses that occur during the next price movement after the differential disappears will offset each other, giving you a small advantage. When this benefit is growing, you will ensure a steady increase in profitability. Basically, the increase in the holding period between the entry and exit of your position will lead to an increase in dispersion in your profit chart (which will be reflected in the account drawdown increase, something to consider when choosing. Lot size), while the average profit of your trade will remain unchanged. Remember, however, that this is only true when you trade a large number, because a large number of laws work for you.
The result is that Forex arbitrage strategies remain a useful and highly profitable way to invest your money.