How does the most advanced latency arbitrage strategy work?

Introduction – motivational.

If you want to get ahead in a big way as a latency arbitrage trader, I just urge you to read this article thoughtfully to the very end. If you don’t understand any of the following, email me questions and I’ll be sure to answer you. I promise I will answer everyone. If you want to be a latency arbitrage trader and you don’t read this material, you won’t become one. You will blame everybody for your failures: the software developers you use, the broker you work with, your VPN provider, and your fast feed. You will be looking for something, but the problem is with you – you don’t want to exert minimal effort and learn the minimum, but 100% necessary, knowledge. I will try to make this material as concise as possible so that even the laziest fans of short TikTok videos will read to the end.

Let’s get to the point

I would say that my years of experience in the industry, which is about 16 years, developing arbitrage strategies for various markets can be a guarantee that I am right, 2-legs Latency 3 arbitrage strategy is the most promising and modern arbitrage strategy. 

Why do I think so? There is a simple explanation – at the moment this strategy is the best on the market. I call it the best strategy not because it is the most profitable, but because it disrupts arbitrage trading by masking it with orders not open at arbitrage times. Let’s find out by order why it is important to mask the fact that you use latency arbitrage from your broker, how you can mask latency arbitrage from your broker, and how the most modern arbitrage strategy that meets all these qualities still works.

Why is it important to disguise an arbitrage strategy?

Almost all brokers I know use a hybrid scheme of work. That is, they technologically can transfer your account to the A or B side. Let me briefly explain the difference. A Book is when the counterparty to any transaction is another trader or financial institution.  For example, when you open a BUY 1 Lot GBPUSD position, you buy GBP for USD from a bank or trader just like you. When you close the position (Close BUY 1 Lot GBPUSD) with SELL 1 Lot GBPUSD, you sell 1 Lot GBPUSD to another financial institution.

Your broker acts as the counteragent. In a B-Book scheme e.g. by opening a BUY 1 Lot GBPUSD position, you buy GBP for USD from your broker. This means that if you lose, the broker receives not only the commission but also your winnings and if you win you win from the broker. Have you ever wondered how a broker can give you a deposit bonus? In a B-Book scheme, the broker is interested in you losing and for that reason, he will do everything to help you do it.

How does the broker decide to put your account in B or A book?  There is no certain rule because the instructions to the dealer are written by a certain brokerage company, but there are a few rules, by which many brokers live. 

1. The bigger the deposit, the bigger the lot size you can enter into a position, so the risk of loss increases, so the broker initially puts accounts with a large deposit in a book, and then observes your strategy. 
2. A b-book strategy can be transferred to an a-book if it is a winning strategy, if it is latency arbitrage, or if you use active dealing (with plugins that increase the time of order execution and therefore slippage).
3. Your nationality also plays a role. If you open an account with a European broker (registered in Europe) and your country of residence is not the EU, the broker is likely to open your account under the license of an offshore country, such as Vanuatu, and put you in the B-book. 

From the above we conclude: 

• Any arbitrage strategy must be disguised. 
• Any trader should look like an inexperienced novice.
• The trader in any case should not disclose what strategy he is using, especially the latency arbitrage, and in general, that he has it.
• The broker will never help you because of how he runs his business. 

How to disguise latency arbitrage?

High frequency traders and arbitrage strategists resort to many ways to disguise arbitrage. 

1. Imitation of manual trading. There are different methods of manual trading imitation such as clickers, etc., but here it is important that the masking does not slow down the order execution time.
2. Increasing the time between order opening and closing by using the hedge on the same account or another account.
3. Increasing the difference between the closing and opening prices through the same hedging.
4. Applying additional strategies in the same account where latency arbitrage works to mix toxic flow (latency arbitrage) and non-toxic flow (other strategies).

Let’s analyze all four points in light of current trends

• Imitation of manual trading is necessary but it should be done with API which will not slow down the order execution and will increase at the expense of a lower load on the CPU. Imitation with the help of clickers is ineffective in modern conditions.
• Hedging is effective only on 2 accounts. 
• Application of other strategies is possible only if they are also masked by manual trading. Copying trades with manual trade imitation can help with this.
• And what if the latency arbitrage strategy itself could open not only toxic orders (opening at the moment of arbitrage situations) but also non-toxic ones and thus create a mixed flow? In my opinion, this is an ideal solution. Here we come to the description of the principle of operation of the 2leg latency 3 strategy, which combines all of the above methods of masking latency arbitrage.

2-leg latency 3 – the principle of action (read it carefully until you understand the principle)

The 2-leg latency 3 principle is based on long-term observations of the price behavior of one or another instrument after the arbitrage signal. In most cases, the arbitrage signal is an impulse for the beginning of a short-term or long-term movement of a trading instrument in the direction of the impulse. For example, if the price of a fast broker (feeder) has increased by several points in comparison with the price of a slow broker (usually this difference is called a difference to open), this phenomenon is called an arbitrage situation for buying and the price of a slow broker in several milliseconds will also start to grow and will soon become equal to the price of a fast feed after which in most cases the prices of slow and fast brokers will keep growing for a while. The same happens if the slow broker price decreases by several points concerning the slow broker, there will be an arbitrage situation to sell and the price of the slow broker in a few milliseconds will also begin to fall and soon will be the same as the price of a fast feed after which in most cases the prices of slow and fast brokers will continue to fall for a while.

Imagine that we have two accounts (read the article Latency Arbitrage Software – how not make mistakes before opening these accounts. This is important and will save you a lot of time! ) in which we open opposite orders for the same trading instrument, with the same lot size, before the arbitrage situation. Let’s say on account 1 we open a buy 1 lot for EURUSD and on account 2 we open a sell 1 lot for EURUSD.  Both orders are not toxic from the broker’s point of view as they are not opened when there is an arbitrage situation. If we get a buy on EURUSD, we close a part of the sell order on account 2, for example, 0.1, and apply a trailing stop with different minimum profit levels that we want to obtain. For example +10 pips for 0.02 lot.  +25 pips for 0.03 lot and +60 pips for 0.05 lot. 

• When the first trailing stop triggers, we close 1 part of the 0.02 lot buy position at the broker; 
• when the second trailing stop triggers, we close 1 part of the buy position with the size 0.03 lot; 
• and when the third trailing stop triggers, we close one part of the buy position with the size 0.05

Now we have an open buy position on account 1, but for 0.9 lot, and on account 2 we also have a sit position of 0.9 lot. I.e. we have a standby situation until the next arbitrage situation. 

The cycle continues until the moment when there are no more open positions in positions 1 and 2. 

Then we start a new cycle, but vice versa – in account 1 we open a sell 1 lot for EURUSD, and in account 2 we open a buy 1 lot for EURUSD. 

Account 1	Account 2

Note that only the first order in the closing cycle may be considered toxic and the rest of the orders will be non-toxic, especially since the program HFT Arbitrage Platform, of which the built-in 2-legged latency 3 strategy is a part, fully imitates manual trading without losing the speed of opening and closing orders.

Conclusions

Now we know how to mask latency arbitrage and that the 2-leg latency 3 strategy is the best in terms of masking.  If you want to be notified by us about new educational articles, subscribe

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