There are many techniques and algorithms for trading financial assets in HFT trading. Strategies, which required a lot of time and efforts, are now completed in a matter of milliseconds. This has become possible by the automated trading robots. Trading robots were repeatedly improved, updated and optimized, as any other software. Therefore, the number of their specifications has grown. The impulse development of this area has also provoked additional improvements for the trading and the FIX API protocol was created. The idea of this protocol is that the financial information including quotes now comes much faster. Moreover, nowadays any trader can access this protocol through the FIX API broker.
Since this protocol allows getting the quotations faster, this is an advantage for trading. This feature influenced the emergence of the arbitration type of transactions.
The arbitrage is divided into two types:
- FIX API Latency Arbitrage
- FIX API 2-legs Arbitrage
Today I will provide you with a short FIX API tutorial, where we would analyze each type of the algorithmic arbitrage strategy.
FIX API Latency Arbitrage is a strategy which allows performing trading operations based on brokerage “delays.”
FIX API 2-legs Arbitrage strategy simultaneously opens different orders (of selling or purchasing) for the same financial asset at different platforms. It happens when the price for this asset differs on these platforms.
Here are the main principles of these strategies:
FIX API Latency Arbitrage conducts an analysis and monitors the price on the currency pairs. Then it finds the deviation in price and purchases the cheaper pair. The main idea is that it identifies the “fast” broker, who ensures the timely data update and follows a real situation on the market. Moreover, it is crucial to identify the “slow” broker on the market, who gets the quotations slower than the others. The account would be opened in the second broker and the trading would be done through it.
For example, the price for the EURGBP currency pair is 1.22343 from the “fast” broker and 1.22333 from the slow one. The difference of 5 pips is the profit for the algorithm. The robot buys a currency pair from the second broker and fixes the result according to the “quick” broker price at the moment of opening. It is done within the FIX API Latency Arbitrage API strategy.
2-legs Arbitrage analyzes the same asset on two platforms and compares if there are any price deviations. The Latency Arbitrage does the same thing. However, it is not necessary to identify which broker is “slower” as the trading is done on the both platforms. The robot is analyzing the asset, compares the prices on it and if there is an exchange difference it opens a deal with the broker, who has the lower price. Accordingly, it sells the asset where the quotes are higher.
For example the price for EURGBR currency pair is 1.23455 form one broker and 1.23450 from another. The trading robot, which works on the FIX API 2-legs Arbitrage strategy would open the deal for purchasing from the first and the second broker. These 5 pips would be a potential profit for the trader.
So what are the advantages and disadvantages of the fix api arbitrage strategies?
You need to investigate the weak sides of the both strategies in order to identify which one is better.
It is very easy for the broker companies to identify the Latency Arbitrage, as they also work with robots that conduct a search for this type of trade. After all, the deals are concluded in less than a second and are completed in large numbers. Thus, the broker can affect the trade due to an additional spread or delay. 2-legs Arbitrage trade is hard to track. It is because the trader will have a minimum profitability (5 pips in our example), which allows keeping the position from a few seconds to several minutes. This kind of operations cannot be tracked. In addition, the second part of the transaction is traded from an absolutely another broker, which makes the detection process even more difficult. Also, the key disadvantage of the Latency Arbitrage strategy, which is the advantage of 2-legs Arbitrage at the same time is the search for a more “slow” broker, which leads to the constant tracking of trading specifications of brokerage companies. Worth mentioning, that it does not make a difference for the FIX API 2-legs Arbitrage.
Summarizing, I want to emphasize that you need a FIX API forex broker, for a successful robot, which will enable you to trade at market quotes. It is also worth mentioning that each of the considered strategies is profitable, and this is, in fact, the main criterion. Still, the 2-legs Arbitrage strategy is simpler in use and lacks disadvantages.