Why don’t brokers welcome trading according to the strategy of arbitration latencies?

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Why don’t brokers welcome trading according to the strategy of arbitration latencies?

Category : Robots

Arbitration trading is a modern type of high-frequency trading, which consists of working with speculative positions based on analysis and comparison of currency pair prices in the FIX API Forex market. The main idea of this strategy is to find the exchange differences between two different sites, as a rule FIX API Forex brokers. This makes it possible to identify where quotations appear faster at the trading terminal, and where they are lagging behind. Based on this, the trader or the algorithmic trading strategy opens the transaction at the site where the quotations are lagging behind in the direction of the “faster” broker.

Arbitration trading is divided into several types, based on the internal features of the process of performing transactions. I distinguish three key types:

  • FIX API Latency Arbitrage
  • FIX API 2-Leg Arbitrage;
  • Triangular Arbitrage

 

Each type gets criticized and has a number of both supporters and opposers. But it is worth noting that trading robots written by these trading strategies demonstrate positive results. Therefore, it is necessary to look for the problem not in the principle of arbitration, but in the software or the trading site.

Today, we will discuss the characteristics of the first strategy. Let me begin with its key advantages:

  • Minimum (or even zero) risks;
  • A large number of speculative operations;
  • The possibility of trading different currency pairs;
  • Historical analysis of the movement of quotations is not necessary;
  • There’s an opportunity to trade through the FIX financial protocol.

Why do most brokerage companies prohibit trading under this technique?

The fact is that such a technique is prohibited by those same brokers who conduct a “non-pure” game and open trading transactions within the company. That is, on internal servers in the Dealing Desk system. Those companies that allow their traders to trade through the FIX API protocol, thereby giving access directly to the market, do not restrict the trader in the choice of the technique.

Of course, with regard to the first type of companies, any yield of the trader is a direct loss of the brokerage company. And based on the features of FIX API Latency Arbitrage, this strategy is prohibited and in most cases this is even noted in  a separate paragraph when signing the agreement. And that’s why:

  1. Latency Arbitrage implies a low-risk strategy, and often such a system does not go to drawdown. No other trading system can provide such results. 0% risk is guaranteed to a trader. Since the system opens transactions based on the exchange rate which can be around 3-4 points, it constitutes the guaranteed profit.
  2. By fixing the minimum price movement, the trading strategy opens many transactions. So, about 100 transactions in one trading day are the average for Latency Arbitrage. Some brokers warn traders in advance that the withdrawal of funds will be available only after there’s certain volume traded. This type of arbitration, due to many transactions, allows to quickly trade the minimum volume set by the broker.

How to understand that the broker bans trading according to the Latency Arbitrage strategy?

As I mentioned above, it is set in the agreement with the brokerage company. Even if you read the agreement thoroughly, it doesn’t mean that you can trade with the arbitration system. Before opening an account and signing th agreement, I recommend that this particular issue be clarified directly with a broker’s representative, and even better, to get a notary certification of the data that the broker’s manager will report.

Let me emphasize that this strategy is ideally combined with integrated strategies. Although this strategy requires a “slower broker”, I recommend that you search for a brokerage company among stable top companies.


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