Hedge Arbitrage Thursday June 20th, 2019 – Posted in: Arbitrage Software – Tags: hedge arbitrage, مراجحة التحوّط, ヘッジアービトラージ, 对冲套利, 헤지 차익거래
Before discussing our Hedge Arbitrage software, it might be useful to explain how hedge arbitrage works. Hedge arbitrage involves comparing quotes between two brokers. Suppose you have two brokers, broker A and broker B. As a hedge arbitrage trader, your job is to monitor quotes provided by brokers A and B on an ongoing basis. When a difference between their quotes is detected, you open an order.
For instance, if broker A shows a lower price for a given security, while broker B shows a higher price, you’ll open a buy order with broker A and a sell order with broker B. You end up with two open positions, both of which are profitable. Once the arbitrage situation is reversed, you close the orders and make a profit again. Essentially, you earn a profit when you open the orders and when you close them, too.
This kind of arbitrage is easier to conceal than latency arbitrage. Our Hedge Arbitrage software makes it more difficult for a broker to identify the trader as a hedge arbitrage trader. In fact, the settings of this software product make it somewhat comparable to the Locking Arbitrage software developed and provided by us. Both programs are our leading products, and both are also leading products on the market.
Hedge arbitrage works best with a combination of brokers that includes at least one FIX API broker, although it is possible for the combination to have more than a single FIX API broker. There is a reason why a FIX API broker has to be part of the equation. If you work with two MT4 brokers only, it will be difficult for you to find price disparities that happen frequently. Consequently, a hedge arbitrage trader might work with one MT4 broker and one FIX API broker, or perhaps with two FIX API brokers. Either way, at least one FIX API broker would be used for arbitrage. This helps the trader find as many price discrepancies and arbitrage opportunities as possible.
As a FIX API broker typically requires a higher deposit than an MT4 broker in order to open an account, our hedge arbitrage program is ideal for traders who have a deposit of at least $10,000. Usually, one of the accounts used is an LMAX account, while the other account is with an MT4 or a FIX API broker. The reason that LMAX is used for one of the accounts is that, aside from being a fast provider of quotes, LMAX also fills orders at an exceptionally fast speed. Unlike other FIX API brokers, which offer execution times of some 30-40 milliseconds, if not longer, LMAX fills orders within 4 milliseconds on average. This considerable difference in the speed of order execution makes LMAX the preferred choice for arbitrage trading with other MT4 or FIX API brokers.
If you opt for the VIP version of our software, you will be able to use a combination of one LMAX account and multiple other accounts. For example, you can have one LMAX account and ten MT4 accounts. You can then pair the LMAX account with each of the MT4 accounts to look for arbitrage opportunities and trade them.
If you decide to go with the standard version, you will be able to use a single LMAX account along with one other account, whether it’s an MT4 or a FIX API account. In other words, while the VIP version makes it possible to use multiple pairs, the standard version only allows the use of a single pair.
There are other benefits to using the VIP version. It is faster and, if you work with MT4 accounts, your trading activity will be made to look like manual trading – the broker will believe that your orders are entered manually. Additionally, the speed of the connection to the MT4 server is very high – higher than even the one you get with an MT4 terminal.
The use of our hedge arbitrage software is not limited to the forex, CFD, or precious metals markets. If you have the cryptocurrency option activated, you can also use the software for cryptocurrency hedge arbitrage. You get to work with both the forex and cryptocurrency markets within a single software application. If you have the forex and cryptocurrency options enabled, you can look for arbitrage situations between an MT4 cryptocurrency account and a cryptocurrency exchange, or compare two different cryptocurrency exchanges (for example, an account at Kraken can be used for arbitrage trading purposes along with a Bitstamp account; it can also be used with an MT4 or an LMAX account, since both LMAX and MT4 offer cryptocurrency trading).
In a word, a variety of different combinations involving MT4, FIX API, and cryptocurrency accounts can be used for hedge arbitrage, increasing the number of arbitrage opportunities available to you and enhancing your profit potential.
In order to ensure that the broker does not identify your trading activity as arbitrage trading, the software contains a number of settings designed to make your trading look inconspicuous. The software allows you to set your own minimum order duration and the minimum profit you’d like to make on each trade. For example, you could set the minimum order duration to 2-3 minutes and the minimum profit to several pips. When you open an order, the software will not attempt to look for an opposite arbitrage situation until the order has been open on the market for at least 2-3 minutes and until several pips have been captured in profits. Until these conditions are satisfied, your order will remain open. This will make your trading activity look ordinary, and your strategy won’t resemble an arbitrage trading one.
There are also limits on the maximum change in prices. If you have an open position and the market moves in a certain direction, the position will be closed once the limit is reached. This will help you avoid a large imbalance between your accounts.
There is also a maximum difference setting. Suppose you set the maximum difference to 20 pips. This means that if the price difference between two brokers is 5, an order might be opened; if it’s above 20, the software will prevent an order from being opened. This is important for the following reason. Any trades based on price changes between brokers that happen as a result of time-related differences – changes that occur because one broker shows the latest quotes faster than another broker – can be considered to be latency trades. However, if you trade based on price differences between the market providers used by the brokers, either one of the brokers will not be able to easily identify the nature of your trading, since the broker can only control and monitor its own prices as well as the prices provided by the liquidity provider used by that broker. The broker cannot keep tabs on prices provided by other liquidity providers.
All of these settings will help you use the software program effectively for a long period of time. They will make it possible for you to stay ahead of other traders, including other arbitrage traders.