Latency Arbitrage: what is this?

An automated trading is gaining more and more interest from traders each year. The reason for that is that nowadays digital industry requires all processes to be automated. The trading on the foreign exchange market is not an exception.

There were many resources and helping instruments developed in order to allow traders and significant market players to do the algorithmic trading. The FIX API is one of them. It allows to bypass the brokerage platform (terminal and server) and to trade directly with the market liquidity. However, it may be challenging for an ordinary broker to do it, so one still should use a FIX API broker.

Exactly direct access to the prices and quotes allows using such a popular trading type as an arbitrage for the high-frequency trading.

An arbitrage is a type of a trading system. It is based on the trading on the minimum price difference on the particular currency pair or brokerage time latencies.

Based on this method there are 2 types of the trading operations:

  1. FIX API Latency Arbitrage
  2. FIX API 2-legs Arbitrage

Today we are going to discuss the first one, which is a Latency Arbitrage. We would investigate the crucial advantages, disadvantages and key features of this strategy.

The advantages of the Latency Arbitrage

The Latency Arbitrage is also called 1-Leg fix api arbitrage, which means, that you get an access to the quotes and prices way ahead of other bidders. The direct connection to liquidity through the FIX API or to servers close to the exchange platforms gives an early access to the market prices. For instance, the most of the broker companies in the US work on the NBBО system. It allows HFT traders, who use the Latency Arbitrage to get the data on prices much earlier than the others. It means they can commit several trading operations within milliseconds.

The disadvantages of the Latency Arbitrage

The brokerage houses often block or “interfere” with normal trading because of the tremendous FIX API trading popularity. They set additional spreads, slip or delay execution of orders and it simply kills the trading mode, according to this algorithm. The robot can be easily detectable as it commits about 100-200 transactions per day for a short period of time and fixates approximately 5-10 points. This is the reason why brokers with the non-market liquidity are not welcoming such trade.

The key Latency Arbitrage features

The one only needs one account with a broker, which will be directly used for trading in order to successfully trade according to this strategy. It is worth mentioning, that the account should belong to the “slow” broker”, which gives an access to the FIX protocol. However, there could be some manipulations on the companies’ part, as sometimes the weak brokers are used. To avoid this you need to test the broker with a small amount of money and make sure it works properly on the open trading.

Here is an example of the arbitrage trade, on the arbitration latency principle

The robot provides an analysis of the “lagging” broker and compares its quotes to the market ones. For instance, EUR/USD currency pair costs 1.07122 on the market and 1.07115 from the broker. This 7 pips difference is a profit for a robot, which decides to open a short-term speculative position to buy the asset. Following this algorithm, a robot can compare a couple of algorithms simultaneously and make transactions at the same time. The great amount of the instruments and trading operations guarantee success for 90% of the transactions and the high rate of return.

Finally, I want to emphasize that the robot, working according to this algorithm should use a fix api trading principle. It is an important feature in a robot’s success. This is because any delays or problems from the brokerage company can have a negative impact on the result.

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