How can a broker find out that you’re trading with the Latency Arbitrage strategy?

How can a broker find out that you’re trading with the Latency Arbitrage strategy?

The market for algorithmic trade is growing rapidly with every year, and only increases the number of automatic trading systems. Therefore, each trader is already familiar with the concept of algotrading, but I’d still give a definition of this type of trading. Algotrading, or algorithmic trading strategy is a type of performing trade transactions that consists of an integrated asset analysis, includes basic entry and exit rules, capital management parameters (money and risk management), and shows the availability of trading signals in the market. The whole process is presented as code, which is essentially a trading robot.

There are many ready-made trade advisers on the Internet, typically for the FIX API Forex market with integration into the FIX API MT4 trading terminal. Today, I suggest that we consider such type of algorithmic trading as arbitration.

Arbitration is one of the types of high-frequency trading (HFT), which implies to analyse the price positions of the same financial instrument, but at different stock sites or brokers.

For example: The algorithm, according to Latency Arbitrage, buys the EUR/USD currency pair at the price of 1.0800 from one FIX API Forex broker, and sells the currency at another one for the price of 1.0805. Thus, this type of arbitration minimizes or even excludes the risks, because in view of the buy and the sell of the same asset, the system is market-neutral and stably receives a small percentage of income.

This is a fairly popular method of algorithmic trading, but at the same time the most problem-prone. The whole “problem” is in the brokerage companies that prohibit this type of trading. The risk of this strategy is simply zero, which guarantees the preservation of the funds and also makes it possible to earn a stable income. It is, of course, “unreliable” brokers who do not benefit from it. In such companies, which the FIX API traders call “kitchens”, all transactions are executed on the broker’s server. Thus, the trader’s loss is the broker’s income, and vice versa.

I recommend that this kind of trading be carried out only with those brokers that give access to the FIX financial protocol. Then your bid will go straight to the market and the revenue will be generated on market terms, not the broker’s.

I would like to note that some brokerage houses also use the software that reports to the dealing centre on any suspicious trading, which looks out of the ordinary. And indeed, a large number of open positions, according to the algorithm of Latency Arbitrage, for 3-4 points each will cause suspicion and interest in your trading with the broker.

However, how do brokerage companies find out that you trade by this technique?

Latency Arbitrage leaves “traces”, namely:

  • A large number of open transactions within a day;
  • Minimum fixed instrument movement (3-4 point return);
  • Lack of bidding at a time of increased volatility;
  • A lack of trading at the time of a big slippage (because if it turns out more than the potential revenue, the transaction will be negative);

As you can see, these trading operations are simple to track. And if, when signing a contract with a brokerage company, there was a paragraph prohibiting arbitration activities, the entire profit of this system would simply be cancelled. Because you signed up to trade only by the quotations of the selected broker.

With this in mind, I recommend that you pay attention to the agreement and search for the brokerage company among market leaders. The ideal condition will be market access through the FIX API. The brokerage company should then give access to the market conditions under which all arbitration trading strategies are employed, including Latency Arbitrage. There are software solutions that help you as a trader to avoid detection from a broker. We will do the review of such products soon but you can have a look at Lock Arbitrage from forexzzz and read its description to understand the details and principles. This particular product is one of my favorites for my Arbitrage trading needs.

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