Latency Arbitrage vs 2 Leg Arbitrage

HFT trading induced a lot of techniques and algorithms for financial asset trade. The strategies which previously required to spend a lot of time and effort on, are now run in a matter of milliseconds. And all this thanks to the automated trading robots.

As with every software, trading robots were continuously improved, updated and optimized. In turn, the number of their specifications only increased. Impulse development of this sphere also provoked additional conditions for trade, thus creating the FIX API Protocol. The essence of this protocol is that financial information, quotations included, can be acquired much faster. Furthermore, regular traders can get access tothisprotocolviatheFIX APIbroker.

As this protocol provides access to more quickly received quotations which makes a trade advantage, it brought arbitration transactions to the world.

But in turn the arbitration trade also divided into two types:

  • FIX API Latency Arbitrage
  • FIX API 2-Legs Arbitrage

Today I will make a small FIX API tutorial in which we go over every type of algorithmic arbitration strategy.

FIXAPILatencyArbitrage is a strategy which transactions are based on brokerage “latencies”.

FIXAPI2-LegsArbitrage is the simultaneous opening of different (sell/buy) orders for the same financial asset, but on different sites, at the moment when there is a difference between prices for this asset.

The basic principles of these strategies

FIXAPILatencyArbitrage conducts the analysis and monitoring of currency pairs values and finds the deviations in them. Then, the robot makes the decision of buying the cheaper asset. The bottom line is to identify a “quick” broker. That one quotations vendor who ensures their timely updates, and also has a real picture of the market. In addition, you need to identify a “slow” broker to whom quotes come slower. The account is to be opened and trade is to be done at the second broker.

For example: the price of the currency pair EURGBP at the quick broker is 1.22343, while at the slower one it is 1.22333. The difference in 5 pips is the yield for the algorithm. The robot, according to the strategy of FIXAPILatencyArbitrage, buys the currency pair at the second broker and will record the result by the “fast” broker price at the time of opening.

2-LegsArbitrage, as well as LatencyArbitrage analyzes the same asset and compares for the presence of deviations. Note! In this strategy, you do not have to define which broker is “slower” because the trading is conducted simultaneously at two sites. The robot analyzes the asset, compares prices and in case of difference, opens up a deal to buy at the broker where the quotes are lower. Respectively, it sells where the quotes are higher.

For example: the cost of EURGBP at one broker is 1.23455, and 1.23450 at the second one. Trading robot that works with the FIX API 2-Legs Arbitrage strategy will open the transaction for the sale at the first broker, and will purchase from the second. These 5 pips will become the potential income of the trader.

What are the advantages and disadvantages of FIX API arbitrage strategies

In order to determine which one is better, it is enough to look at the weaknesses of each of the options. LatencyArbitrage is very easy to be tracked by the brokerage companies which also have robots to search for this kind of trade. That is because the transactions span less than one second and are commited in large amounts. Thus, the broker may affect trade through an additional spread or delay. On the contrary, 2-LegsArbitrage trade is difficult to track. Indeed, in any case, the trader will have a minimum yield (5 pips in our example), that allows to hold the positions from several seconds up to several minutes. This type of operations is impossible to track. In addition, the second part of the deal is traded at a whole other broker, which makes the tracking process even more complicated. Also, a key shortcoming of the LatencyArbitrage strategies, and at the same time an advantage of 2-LegsArbitrage, isinfindingthe “slower” brokerwhichentailsconstantmonitoringoftradespecificationsofbrokeragefirms. For the FIX API 2-Legs Arbitrage it doesn’t make a difference.

To sum up, I would like to emphasize that for the successful work, a FIX API forex broker is needed, which will provide the opportunity to trade on market quotations. It is also worth mentioning that each of these strategies is profitable, and this is essentially the main factor. Yet more simple to use, as well as less defect-prone, is the 2-LegsArbitrage strategy.

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