Latency or 2-Leg Arbitrage: what to choose for automatic trading

There are many methods of algorithmic trading in the financial market. Every manager can choose software that on the basis of indicators will demonstrate high profitability results without the participation of a fix api trader. Most of these programs are used to diversify the trading and to reduce the risks of independent trading. This combination of two approaches makes it possible to make the yield curve more even and to hide the moments of drawdown from each other.

One of the first algorithms implemented in the form of a trading robot is the fix api arbitration technique. The fact is that this approach is very difficult to implement in a manual mode and with the development of the market it became even more complicated. Therefore, robots have been created that included the principles of this methodology and had several types of arbitration approach.

Thus, today arbitrage trading has been implemented with the help of two strategies:

Each of these two approaches is trading based on the exchange rate differences and delays between the price of the same asset, but on different stock exchanges. Each technique has its own trading parameters, risks and methods of application. Therefore, I propose you to consider each of them separately and choose which one is more suitable for you.

Latency Arbitrage

This approach is based on the application of arbitration techniques directly on the exchange rate delay. The trading robot performs only one trading operation, but for this purpose the fix api trader should initially determine at which platform the price quotes are delivered more quickly and accurately, and for which there is a small delay. It is this delay that is direct earnings according to the fix api latency approach. To put it simply, when the cost of the same currency pair in the fix api forex market has a course difference between two different brokers, the robot will make transactions towards the fast broker, but on the side of the slower one. For example, the trader has identified a fast and slow broker and installed a trading robot to track exchange rate delays. Let the cost of EURUSD on one platform is 1.1980, and on the second one – 1.1965. At the same time, the value of 1.1965 is located at the faster broker. When the divergence parameter extends beyond the average range (let it be 10 points), the trading robot will open a deal. In our example, a sale transaction will be opened at a price of 1.1980 and will hold until the value of the asset reaches 1.1965.

2-leg Arbitrage

This type of arbitrage approach is traded not on the quotation delay, but directly on the price difference between the two platforms. The robot takes into account the maximum discrepancy between the same asset, but commits two trading operations towards this difference. Thus, it sells the asset on the side where the quotes are higher, and buys on the side where the quotes are lower. For example, the value of the EURUSD currency pair is 1.1950 and 1.1935 at different platforms. At the same time, the normative discrepancy is 10 points. Then, the robot will open a deal for sale at 1.1950 and buy at 1.1935 on different platforms. When the value returns to the regulatory range of 10 points, there will be two trading operations with a total return of 5 points.

Based on the description of these algorithms, we can come to a simple conclusion that all profitability is formed due to the number of speculative transactions. When choosing one or another approach for automatic fix api trading, you need to take into account all the necessary parameters, as well as trading indicators. However, remember that arbitrage will not correlate with the manual trading strategies.


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