FX Market Watch
to differences between similar assets (relative value or convergence trades), as in merger arbitrage.
People who engage in arbitrage are called arbitrageurs (IPA: /ˌɑrbɨtrɑːˈʒɜr/)— such as a bank or brokerage firm. Te term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives,
commodities and
currencies.i TYPES
OF ARBITRAGE
• Arbitrage betting • Covered interest arbitrage • Fixed income arbitrage • Political arbitrage • Risk arbitrage • Statistical arbitrage • Triangular arbitrage • Uncovered interest arbitrage • Volatility arbitrage
FINANCIAL BROKER ARB
Broker arb is where a trader capitalizes on a price discrepancy between 2 brokers in the same market. For example Broker A offers a price of 1.4542 and Broker B offers a price of 1.4556. Broker arb is fair in that the broker is offering the price, but brokers who throw many bad prices may not like that traders are taking advantage of those bad prices.
Some customers of large retail US based brokers have said that certain brokers will give different prices to different customers. In cases like this, broker arb would be a viable trading strategy but it would be questionable if they would allow you to keep your profits.
LATENCY ARB
Latency arb is when a trader takes a network advantage over the markets.
Tis may take many forms, but the concept of latency arb is a network or ‘speed’ advantage that allows you to see into the future.
Latency arb is practiced both on a retail and institutional level. It became popular in Forex in 2007ii, however, due to a large amount of new participants entering the strategy, and due to large scale network and I.T. infrastructure upgrades undertaken by major market players, it is less viable today.
Retail latency arb is a highly debated topic in the MT4 community. On forums you will find many developers offering soſtware that uses a ‘fast broker’ and a ‘slow broker’ to arb based on what is in fact latency arb. Te dangers of this type of trading are that:
• If the ‘slow broker’ is really slow, your profits could be large and he may not allow you to withdraw them
• There can be network or software upgrades that the strategy may work for a certain period of time and then stop working.
SOFTWARE ARB
Te least ethical, most dangerous, and most difficult to execute, is arb that takes advantage of discrepancies inside the soſtware trading platform. Tis was noticed in 2007 by some EA developers that had strategies that could effectively trade price discrepancies between MT4 server and MT4 terminal. In certain builds of MT4, MT4 would only update the terminal every X ticks (let’s use 10 as extreme example) – the
52 FX TRADER MAGAZINE October - December 2011
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