Arbitrage trading is an automated trading strategy that aims to exploit inefficiencies in the pricing of a financial asset.

What are Arbitrageurs?

Arbitrageurs trade the same asset on two different markets by opening two opposite positions (one Short and one Long). An effective arbitrage strategy does not include any market risk and offers small risk-free returns.

Arbitrageurs are working in favor of the market and retail traders as they push quotes to be more efficient, and at the same time, they add significant liquidity to the system.

Example

Suppose the share of an airliner called BlueLines trades simultaneously in London and the New York stock exchanges. The spread between bid and ask in both markets is 20 points. When there is a difference in BlueLines pricing between New York and London that exceeds these 20 points, an arbitrage opportunity is emerging.

If you buy and sell the same amount of BlueLines in both markets the trade is risk-free. When both positions are opened you just have to wait until the pricing of BlueLines comes back into sync. When that happens both positions close and a risk-free profit is realized.

 

Arbitrage Strategies

Cross-Broker Arbitrage Strategies

Here are two common Cross-Broker Arbitrage Strategies:

(i) Speed-Arbitrage Strategy

The arbitrageur can use specialized automated software that exploits differences between the quotes of a slow market maker (dealing-desk) and a fast ECN broker (no-dealing-desk. The arbitrageur executes only one trade, this trade is executed on the slower broker. The trade remains opened until an opposite arbitrage situation occurs. When the opposite arbitrage situation occurs when the trade may close with a profit.

-Requires a common MT4 Account (Slow Broker) and an M4 Account (Fast Broker)

-Your server (if using VPS) must use the same data center location as the Slow Broker

-It is an effective strategy for news-trading periods or after major price breakouts

(ii) Hedging Arbitrage Strategy

Using specialized automated software, the arbitrageur seeks differences in the spreads between two brokers and then executes trades on both brokers. A position is opened in one broker and the opposite same-sized position to another broker. One position hedges the other. The trade remains opened until an opposite arbitrage situation occurs. When the opposite arbitrage situation occurs, the trade can close with a profit.

-Requires two FIX-API Accounts

-Both Brokers and your server must use the same data center location

Note: FIX means Financial Information eXchange and it is a trading technology offering faster execution, anonymity and better liquidity.

 

Cross-Currency or Triangular Arbitrage Strategy

Cross-currency arbitrage or else triangular arbitrage is a trading technique that aims to exploit inefficiencies in the quotation of three Forex pairs.

For example, take 3 pairs EURUSD, EURTRY, and USDTRY that offered by two different brokers

• Broker-1 offers:

EUR/USD = 1.0000

USD/TRY = 3.0000

According to the above quotation, EUR/TRY must trade also at 3.0000

• Broker-2 offers:

EUR/TRY at 3.0015

That means there is an arbitrage opportunity that can be exploited by opening opposite positions in both brokers.

 

Tips for Avoiding Problems with your Forex Broker

The arbitrage activity is likely to be forbidden by your broker, these are some tips to avoid any problems:

(i) Trade in more than one arbitrage accounts

(ii) At least one month before starting your automated arbitrage strategy trade manually on a daily basis or trade via a common Expert Advisor (Forex Robot) using the same currency asset as for your arbitrage trading strategy

(iii) Keep your arbitrage trading activity no more than 1/4 of your total trading activity in your account

(iv) Make sure your broker does not apply an anti-arbitrage plugin in your trading account

 

■ Forex Arbitrage

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