Hedge Forex Arbitrage vs. Latency Forex Arbitrage
How does latency arbitrage differ from hedge arbitrage? This article compares the two most popular arbitrage strategies for trading forex and cryptocurrencies. The algorithm of both strategies is described, as well as the criteria for choosing a strategy and the criteria for choosing an arbitrage trading program.
How does latency arbitrage differ from hedge arbitrage?
Latency arbitrage is based on the idea of comparing quotes coming from a fast feed. Usually, unfiltered quotes are taken via FIX API (Financial Information eXchange) or ITCH (ITCH is a direct data-feed protocol such as TCP (Transmission Control Protocol) or UDP (User Datagram Protocol) from a broker like LMAX or Saxobank, with the slow broker quotes and opening an order when the advance in quotes from the fast feed appears.
For example, if the price of a fast view is higher than the price of a slow broker, then this is a signal to open a buy order on a slow broker, and vice versa if the price is lower, then this is a signal to open a sell order. Trading can be carried out both on one slow broker and two brokers for hedging. Not to confused with hedge arbitrage. Hedging in this case is the opening of an opposite order on the second broker instead of closing the order opened on the arbitrage signal. In this case, hedging is necessary to comply with trading conditions and disguise arbitrage trading.
Hedge arbitrage is the comparison of quotes for the same instrument between two brokers and in case of the occurrence of a difference in quotes, they simultaneously open a sell order with the higher price and open a buy order with the lower price, thus fixing or hedging a small profit. In such a pair of brokers, there is no concept of a fast or a slow broker; i.e. a fast feed does not take part. Orders are closed after a specified time or upon the opposite arbitrage signal, or on another condition. If one broker is always faster than the other, such trading can also referred to as latency arbitrage with hedging on the fast broker.
Which strategy is better, hedge arbitrage or latency arbitrage?
Latency arbitrage is a popular strategy for investors with small deposits since it is usually applied at brokers with MT4, cTrader, and MT5 tour platforms where deposit requirements are low and start from $100-220. But this does not mean that this strategy cannot applied to large accounts.
Hedge arbitrage works poorly between accounts on MT4, cTrader, and MT5 platforms because of the big delays in order execution. For this reason, a hedge pair usually involves a FIX API account or accounts, and deposit requirements are much higher. Usually, a broker opens a FIX API account with a deposit of $10,0000 or more. There are FIX API with lower initial deposit requirements, but unfortunately, they are few.
If we talk about the profitability of both strategies, it is comparable.
Which strategy is more suitable for you, hedge or latency arbitrage?
Many traders choose latency arbitrage as this strategy can be applied to one account. I would recommend even in the case of latency arbitrage using two accounts to disguise arbitrage trading. The masking is necessary because many forex brokers “cook the kitchen”; i.e. they do not output deals to liquidity providers and play the role of market makers. In this case, there is a situation that which the trader wins and the broker loses.
For this reason, brokers try to find clients using latency arbitrage and get rid of them. In most cases, the broker will simply apply a plugin that allows a random increase in the order execution time and the strategy will start losing due to slippage. All kinds of 2-Levels disguised arbitrage bots developed to avoid quick detection of arbitrage trade by forex brokers. I can also recommend you to read this article: “which arbitrage strategy is more suitable for you” to make the right decision.
Passing contests of prop companies.
Use on a single account can only be accepted for passing the test of prop companies; this type of trading has recently been gaining popularity among traders. In this case, also apply latency arbitrage with hedging in the same account; but you should prepared because not all proprietary companies welcome this type of trading. It should also be noted that most prop companies are unregulated, and they may.
How to choose the right program for arbitrage trading.
To choose a program for arbitrage trading, you need to find a trustworthy vendor; read reviews on all sorts of review sites and look at the ratings of programs. The review sites should not be of advertising character but have links to the affiliate IDs of the program’s producer. Usually, the owners of correct arbitrage software review sites, where you can choose the best arbitrage program, earn money by placing google ads or forex-related ads, such as ads for forex brokers, but not ads for forex robots.
Once you have chosen a program, request a trial period of 2-3 days. This will be enough to see if the program works or not. Testing should done on a real account at a broker. For testing, you need a VPS in the same data center as the broker hosts its servers. Buying without testing is possible only if your friend’s or trader’s opinion of whom you trust successfully uses the program or the producer offers a money-back guarantee, or if the program price is not important to you and you are ready to lose this sum.
Arbitrage trading is quite a difficult type of trading on the forex market because of the difficulty of finding brokers who will work well for arbitrage strategies; as well as the choice of professional, often expensive, software for arbitrage trading, which will have ample masking capabilities. Brokers often have to be changed and searched for. Still, arbitrage trading remains one of the most profitable and least risky of all forex strategies.