Types of arbitration strategies and their specification

Most recently I set a goal for myself to deal with popular strategies of high-frequency trading. For several weeks I collected content and analyzed both different software and just strategies for speculative trading. And today I want to share with you my observations and opinions regarding arbitration fix api trading.

Arbitrage trading (http://www.investopedia.com/terms/a/arbitrage.asp) is a modern type of trading operations in the financial market, which consists of the selection of assets not on the basis of their historical movement, but on the difference of the current value on different stock exchanges.

My search was reduced to three different types of arbitrage trading:

  • Fix api Latency Arbitrage
  • Fix api 2-leg Arbitrage
  • Triangle Arbitrage.

 

Fix api Latency Arbitrage

This type of arbitrage trading consists of the analysis of the same financial asset on different stock exchanges or in different brokerage companies with the subsequent opening of a trading operation where quotes are received with a delay.

Example:

The trader already knows which one of the two fix api brokerage companies has more relevant quotes, and which one delivers them with a delay. The algorithm analyzes the same asset, let it be EUR / USD, and when the fast broker cost 1.0850, and of the slow one – 1.0840, the robot opens the purchases on the accounts of the second broker.

From the shortcomings I note the fact that such an algorithm is easy to identify and if you open an account with a poor-quality broker – this carries an increased risk for investment funds.

Fix api 2-leg Arbitrage

Similarly to the first type, this one analyzes the exchange differences on two sites, but it opens the deal for the first and second. This allows you to find two quality brokerage companies and make transactions in the direction of the spread between the price of the asset in different companies. There is already ready-made software that performs automatic analysis and conclusion of transactions: http://www.forexzzz.com/product/forex-zzz-lock-arbitrage/. This program allows you to choose the prime broker and adjust the work of your broker, which will indicate a fast and slow broker. If the exchange difference between two identical assets is more than a given parameter, the robot will open the transaction.

Example:

Take the data similar to the example above: the price of EUR / USD in the prime broker is 1.0850, and yours – 1.0840. Parameter of opening of the transaction – at achievement of 10 points of a difference. Thus, the robot will open a deal to buy from the second and sell to the first. When the exchange difference returns to the normative value of 2-3 points of difference, the robot will close the trading operation. Let’s assume the cost was 1.0875 for the first broker, and 1.0873 for the second. Transactions are closed with results – 25 points from the sale and +33 points from the purchase. Thus, this trading strategy has no risks, because there will always be profit in several points.

Triangle Arbitrage

This type of arbitrage strategy is based on the analysis and discovery of several operations at once. And if fix api Latency Arbitrage and fix api 2-leg Arbitrage everything is clear, then the specificity of this kind is more complicated, although it is easy to execute. In order to understand this, let’s go through a specific example.

Example:

The trader analyzes the market and finds some deviations in the prices that are now present on the market. Let’s model the situation.

Trader A has 10,000 dollars in its assets and is looking for the most profitable investment zone. Trader B sells EUR / USD at the price of 1.0780. Trader C buys the EURGBP currency pair at a price of 1.2200. Hence, the GBPUSD rate is 1.3151. However, trader C buys GBPUSD at a price of 1.3155. Trader A, watching this situation on the market, decides to “wedge” into this triangle and perform an operation with all the participants.

As a result, the arbitration triangle looks like this:

1. Trader A buys the EURUSD currency pair from trader B for its assets: 100000 / 1.0780 = 92764.37 euros.

2. Trader A sells euros for pounds to trader B: 92764.37 / 1.2200 = 76036.37 pounds.

3. Trader A sells a pound to trader C for 1.3152 dollars: 76036.37 * 1.3155 = 100025.84 $.

Thus, the trader for a fraction of a second made three trading transactions with a yield of 0.025%.

These three types of arbitration have the same goal, but are fundamentally different in their specification and the algorithm for completing trading operations. Knowledge of the functioning of each strategy will allow you to study the specification in more detail and adjust the algorithm to the comfortable conditions of fix api trading.

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