FIX API protocol for Latency Arbitrage Software

Introduction

Recently more and more brokers began offering traders to trade via the FIX API protocol. To attract clients to trade via the FIX API protocol brokers started to lower the entry threshold for clients. I mean that a few years ago to open an account for trading via the FIX API a trader had to make an initial deposit of 10,000 and show a significant volume of trade. Nowadays brokers have a minimum deposit of several thousand dollars and some brokers even offer to open accounts for trading via FIX API with a minimal deposit of several hundred dollars. There are several reasons for that:

• Having your bridge allows brokers to create FIX API accounts with no restrictions and therefore no additional costs;
• Technology providers lower the price of creating sub-accounts for brokers with good volume;
• It is interesting for the brokers to offer different methods of access to the market for their traders and this way they show a higher level in comparison with the brokers which offer only one platform.

What is a FIX API protocol?

FIX API is a banking data transfer protocol. FIX stands for Financial Information exchange (FIX), and was created in 1992. It is an open messaging standard that is not controlled by any individual or organization, and it can be used and structured for specific purposes to meet the requirements of each financial institution that uses it. For this reason, a connection for a FIX written for example for an LMAX broker will not work for a DukasCopy broker.  The brokers use a software called FIX Engines which is a part of a software called the bridge to connect with the FIX protocol. 

Why the FIX API protocol is good for arbitrage trading

The FIX API protocol allows you to use different types of orders for trading. Which orders are available to trade depends on the broker or bridge the broker is using. Before you open a FIX API account for latency arbitrage trading with a certain broker, you should make sure that you can use limit IOC or Limit FOK order types. If these order types are not supported then the broker is probably not suitable for latency arbitrage trading as you can expect slippage in market orders which will kill your trading profit. If the orders are supported then there is an option to control slippage. 

How the FOK limit order works and how it differs from the IOC limit order

FOK limit order – when submitting an order you indicate the price at which the order should be executed. The order should be executed at this price or a better price or it should not be executed.  I.e. if the current price of EURUSD is 1.01000, slippage of 10 pips is good for your strategy, you should send a FOK limit order BUY order with the price 1.01000+10=1.01010, EURUSD Buy order cannot be executed at the price higher than 1.01010, but can be executed at a lower price (a price you prefer). If you send a Sell order at 01000, and you are happy with the 10 pips slippage, you should send a FOK limit order Sell at 1.01000-10=1.00990, so a EURUSD buy order cannot be filled at a price lower than 1.00990, but can be filled at a higher price (cheaper for you).

IOC Limit order is different from a FOK limit order only in that it can be executed in a certain part of the requested volume. I.e. if the current price of EURUSD is 1.01000 and you are happy with the 10 pips slippage, you should send an IOC Limit order BUY with a price of 1.01000+10=1.01010. Let’s say you send a 100,000 volume order and the broker executes 20,000 at 1.01010, 30,000 at 1.01005 (better than you requested because it is lower), and $50,000 for the remaining volume.

Which arbitrage strategy is best suited for trading on a FIX API account?

One-Leg Latency arbitrage – the classic one-leg arbitrage is suitable for working on a FIX API accounts and it looks like the easiest solution but unfortunately, even brokers providing FIX API accounts have the possibility of manipulation. You may see that after a while 90% of your orders are rejected. Also, a broker may call you and tell you that this strategy is not acceptable. For this reason, I recommend not considering the standard one-legs Latency arbitrage strategy for long-term trading on FIX API accounts.

2-legs Latency 1, 2, 3 – to use these strategies you will need two accounts and it creates all sorts of inconveniences but hedging (locking) will help you to trade with one set long enough. 

Of the 3 strategies, I would choose 2 or 3 because both strategies do not use opposite orders (buy and sell for the same instrument) in the same account. What it means. In the real forex market, there is no concept of closing an order. That is if you opened a buy 100,000 order at EURUSD, then to close it, you should send a sell 100,000 EURUSD order.  If you need to close a part of an order, say 30,000, and leave a part of 70,000 EURUSD, you should place a sell 30,000 EURUSD order.  For this reason, it is better to use strategies that do not place opposite orders to better disguise your arbitrage strategy.

If you have to choose between 2-legs Latency 2 and 2-legs Latency 3, I would go for 2-legs Latency 3 since it perfectly masks the latency arbitrage trade while not opening opposite orders as described in our article “How does the most advanced latency arbitrage strategy work?” If you open both accounts with the same broker, you should follow all the rules described in the article “Forex Arbitrage Software – how not to make mistakes”. I recommend you read it carefully before you open an account.

Hedge arbitrage – for this strategy to work you will also need two FIX API accounts, one of which should be opened at a fast broker and the second at a slow broker. The strategy has a huge number of infusions that allow you to bypass any obstacles in arbitrage trading created by brokers. For example, if you see that one of a couple of brokers almost always opens an order and the other often rejects the order, you can set up a hedge arbitrage strategy so that first the opening of an order on a broker who often rejects the order, and only after the order is open the program will open order on a broker with good execution. 

There is no clear recommendation about 2-legs Latency 3 or Hedge arbitrage because it depends on the broker and your ability to open an account. If you are planning to trade on FIX API accounts I would recommend having both strategies especially since Hedge arbitrage is also good for trading between cryptocurrencies.