That’s a great question for a long discussion. I have decided to demonstrate the relations between a broker and a trader through a very interesting tool – High Frequency Trading – Latency Arbitrage and 2-leg Latency Arbitrage.
Let’s start by understanding what Arbitrage is all about. It is a forex trading strategy based on spotting fast and slow brokerage and taking advantage of it. In simple words – a trader is using a forex robot software that finds a difference in quotes for the same asset on a faster and a slower broker and does the trade netting the tiny positive result. With the huge number of trades (and that is why it is called High Frequency Trading), the robot is scoring decent profits. So, it looks like a football game between a trader and a broker. To get things going both parties invest into a lot of training J to win. Both invest into more and more sophisticated software but brokers do have advantage over traders. They have more money, they control their broker servers and they have access to more information than traders.
Theoretically, brokers are interested in traders, more traders – more trades and more profit for brokers. That’s easy to understand. The question is whether a broker is interested in a losing trader or a winning trader.
Traders have employed Latency Arbitrage and HFT strategy to make money on very small quotes differences between different brokers. How did brokers fight back?
Well, some have introduced a policy on their sites that trades with minimal time are not allowed, some brokers purposefully delayed order time and increased slippage. Generally, a broker has a million tricks to get a trader to lose. The traders, however, answered with a 2-leg arbitrage that is a lot harder to spot for a broker to understand that Arbitrage trading is going on.
How does it work? 2-leg arbitrage is when a trader gets an asset from one broker and sells it immediately with the second broker. This type of trading is harder to identify as an arbitrage trading.
So, if you are a trader and your key strategy is HFT then you need to arm yourself with a quality 2-LEG Arbitrage software. Choosing one is a serious job. The good start would be to view forex robot review sites and read about different software developers. Usually the best software comes from a company experienced enough in trading and working with brokers. The key point in successful trading is to know how brokers operate, how they think and where they are ready to catch you. There always be fast and slow brokers due to a million of different reasons and smart traders must use this situation to score profits. However, it can be properly done only with the help of a very good software and one more trick. Most of the software will require VPS (virtual private server) installation, so always keep your VPS in the same data center as you broker server. This will allow you for a speedy trading.