Last updated on September 10, 2020 by Vincent Nyagaka
Latency Arbitrage is a very clever automated Forex trading strategy that uses a basic yet highly effective principle to exploit the market and make a profit. It works on the premise that for a tiny fraction of time, there are discrepancies in the price offered by two different brokers. The strategy assumes that the trader will deal with two types of brokers.
A fast broker
A forex broker that uses a low latency infrastructure and has access to a price feed that is refreshing very fast;
A slow broker
A forex broker that uses aged or poor infrastructure and the price feed does not refresh as fast as the fast broker.
Latency arbitrage checks for prices on the fast broker and places a trade on the slow broker. Here’s an example of how it works in real life:
At a moment in time, the price quoted by a slow broker for EUR/USD is 1.34560. At the same time, the price quoted by a fast broker is 1.34570.
The latency arbitrage software will open a trade with the slower broker at 1.34560. Within milliseconds the slow brokers’ price will catch up to the fast broker (which is the more accurate representation of the real market price) and that’s when the latency arbitrage software will close the trade with a 10 pip profit.
Sounds simple enough… so what’s the problem? Why isn’t this all over the news and why isn’t everyone doing it? Like always, it’s the broker.
For latency arbitrage to work, you need a broker with the fast price feed. This broker will never receive any trade from you and consequently, you could just maintain a demo account with this broker. You don’t care and neither would he. Its the slow broker that’s your problem.
You see a slow broker does not like the fact that you’re taking advantage of the loopholes within his infrastructure and capabilities as a broker to make a profit. As far as the broker is concerned, you’re not being fair and hence he considers you a cheater and wants to stop you at every cost.
There’s an “anti-arbitrage” plugin out there that almost all the brokers that I’ve tested (more than 153) latency arbitrage have used to stop me from making money. I have written more about this particular plugin in my article about the dirty tricks used by brokers to deny you this golden opportunity.
I tried latency arbitrage on more than 150 brokers with different amounts using LMAX and CQG as my fast feed brokers. It worked amazingly well for a few days and then as soon as the broker caught onto this, he started delaying my execution and increasing slippage, etc. I believe in this strategy and I know that it can work really well, given the right tools and the right broker.