Latency Arbitrage: what is this?

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Latency Arbitrage: what is this?

Category : Robots

Automated trade with every year causes the increasing interest of traders. And there is no wonder why. The time of trading “via the phone” is already gone. In the digital industry, everything must be automated, including trading on the financial market.

A lot of resources and support tools were created to help traders and major market players with algorithmic trading. FIX API Protocol is one of them. It allows to bypass the brokerage platform (terminal and server) and to trade directly with the market liquidity. However, it is not an easy task for a trader, so one still should use a FIX API broker.

It is the direct access to prices and quotes that lets one use such a popular form of trade in the High frequency trading as arbitration.

Arbitration is a kind of trading system, which is based on trading on the minimum difference in the value of currency pairs or brokerage time latencies. On this basis, there are two ways of performing trading operations via this method:

  • FIX API Latency Arbitrage
  • FIX API 2-legs Arbitrage

 

Today we will focus on the first one, Latency Arbitrage. We will tell you about the key advantages, disadvantages, and key points of the strategy.

Advantages of Latency Arbitrage

Latency Arbitrage is also often referred to as 1-Leg FIXAPIarbitrage, which implies access to quotations and prices well ahead of other bidders. Direct connection to liquidity through the FIX API or to the servers close to marketplaces provides an early access to market prices. For example, in the United States a large portion of brokerage firms operate on the NBBO system. This allows HFT traders who use the Latency Arbitrage to obtain price information much earlier, and make several transactions in these fractions of a second.

Disadvantages of Latency Arbitrage

The popularity of this kind of FIX API trading had reached a peak, so that brokerage houses often block or impede normal trade. For example, they install additional spreads, slippage, or delay the execution of orders, which simply kills the trade regime, according to this algorithm.  As a robot performs around 100 or 200 transactions per day for a short period and fixes around 5-10 points, it is easy to detect.  This is the reason why brokers with non-market liquidity “don’t welcome” such trade.

Key points of Latency Arbitrage

In order to successfully trade according to this strategy, one only needs one account with a broker, which will directly be used for trading. You should understand that the account should be at a “slow” broker which gives you access to the FIX API Protocol. But due to the fact that usually there are, in truth, weak brokers, there may be additional manipulations on the company’s part. For this purpose it is necessary to test the broker on a small sum and make sure it provides regular open trading.

An example of arbitrage trade, on the principle of arbitration latency

The robot carries out the analysis of the “lagging” broker and compares its quotations with the market’s. For example, the EURUSD currency pair has a market price 1.07122 and 1.07115 at a broker. This 7 pips gap comprises the yield for a robot which decides to open a short-term speculative position for the purchase of the asset. Via such algorithm a robot can compare multiple assets and transactions at a time. A large number of tools and trade deals guarantee success of approximately 90% of deals, with a high rate of return.

In conclusion, I’d like to point out that the robot that works with this algorithm should use the principle of FIX API trading. This is an important factor in the success of the trading robot. After all, any delay or “sand in the wheels” from the brokerage firm have a negative impact on the result.


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