Hedge arbitrage for Forex and Cryptocurrencies in 2022


Hedge arbitrage is a method of trading when the program compares quotes between two or more brokers. In case there is a difference that should exceed a certain threshold value set by the trader in the hedge arbitrage quotes, the program buys the trading instrument, for which the price difference is fixed, from the broker with the lower price and sells it from the broker with the higher one. The algorithms for hedge arbitrage can vary further. In one case the hedge arbitrage program can close the hedged orders at both brokers when the prices align, in the other case the hedge arbitrage program can wait for the price skew of the same trading instrument in the opposite direction and then close the orders. There are other algorithms for hedge trading but we will not go into details at this stage. The main difference between hedge and latency arbitrage is that hedge arbitrage does not use a source of fast quotes. 

Is hedge arbitrage trading legal?

Hedge arbitrage trading as well as other arbitrage trading is legal and helps the Forex or cryptocurrency market to equalize prices between different market participants. If hedge arbitrage trading is perfectly legal, then the question arises why Forex brokers are not happy when traders use hedge arbitrage. The problem is that in most cases traders use slow brokers together with a fast broker like LMAX or SaxoBank. With this combination of brokers, most of the trading signals will arise from the difference in the quotes at the moments of delays. I.e. in essence, a broker that has slower quotes will work as a latency arbitrage, but trades will be hedged on the fast broker. 

What are the advantages of a professional hedge arbitrage program in comparison with a hedge expert adviser?

Professional arbitrage programs cannot be written in programming languages offered by some popular platforms such as MT4, and MT5. This happens because programming languages such as mql4 and mql5 have limitations that lead to slowdown and of course, this is unacceptable for arbitrage trading. There are several ways out of this situation. The hedge arbitrage program is programmed as a standalone software product but communicates with platforms like MT4, and MT5 via sockets through MQL4 functions or all kinds of API. In this case communication with the open platforms is carried out through available API, for example through FIX API.  This approach is fast enough and has a place. The main task of programmers is to create fast connectors, avoiding the internal delays of a program for hedge arbitrage. It is also important to be able to configure the program flexibly and conveniently. Many options in this situation on the market will be just necessary. But I would like to dwell on the options of hedge arbitrage, which are available only in professional programs, and which were added and tested quite recently because they have become necessary.

Professional Hedge Arbitrage Trading Algorithms in 2021 – 2022

In addition to all of the above, a professional and up-to-date hedge arbitrage program should have the following options:

  • Set the minimum lifetime of hedge orders. If the orders will close fast enough after opening, the broker will easily identify the arbitrage trade.
  • Setting the minimum profit of hedge orders. If the closing price of hedge orders will differ from the opening price by only a few points, the broker will also easily identify an arbitrage trade.
  • Set the trading time. This option comes in handy when the instrument is not traded 24/5.
  • Trade pause between orders. This option will also help disguise hedge arbitrage from the broker.
  • To open an order first on the chosen side and then on the opposite side. What does this mean? Let’s assume that in your broker pair one of the brokers often does not open an order due to rejection or no quotes. It is common for B-book brokers. In this case when the order will not open on this broker, but at the same time will open on the broker in the pair, the program will be forced to close the unhedged order. The repetition of such closings will lead to losses. This setting allows you to first open an order on the problem broker and only after it has opened a hedge order.
  • The maximum difference in prices for closing and opening orders. This setting will allow you to filter orders which arise not because of the difference in quotes but because of latency – I wrote about it above. If the difference in prices is not too big, then we can say with a high probability that this difference is due to the difference in quotes of liquidity providers. The big differences in prices indicate their origination at the expense of latency. Therefore, this portion will help not to open orders on the latency signal. 

How to trade using hedge arbitrage in 2022 – tips from a professional arbitrage trader

Many traders using latency arbitrage or hedge arbitrage set themselves the goal of making the maximum profit quickly, and this is the main mistake that leads to disappointment in arbitrage trading. Any quick profit is like a red rag to a bull for a forex broker. Such accounts are immediately checked and flagged. They are simply transferred to another group with different liquidity or with an anti-arbitrage plugin. So in this case, before you start trading you have to ask yourself what is important for me to make a profit within 2-3 days and then change broker or trade for a few months making less profit. Before you start arbitrage trading I would advise you to prepare your account. It might be a small transfer of deposit (10-20%) from one account to another by opening hedging orders in the same direction on correlated instruments. Also, I would recommend at the beginning and after you have started using the arbitrage robot, also to use other robots or trade with your hands to disguise arbitrage trading as much as possible. By no means try to negotiate with a broker and tell them about your plans to use an arbitrage robot.

A little bit about hedge arbitrage bots in the cryptocurrency market in 2022

Hedge cryptocurrency arbitrage bots as well as latency cryptocurrency arbitrage bots worked quite well in the cryptocurrency bull market until the end of March 2022. At first cryptocurrency bear market, crypto arbitrage bots work very difficultly. There are several reasons for this when working hedge arbitrage crypto bots there is a need to keep a balance in the traded cryptocurrency and to actively work in multiple cryptocurrencies In a falling market, the profit from working crypto arbitrage bot is eaten up by the loss from falling cryptocurrency. When using a latency arbitrage bot it is possible to keep the deposit in USDT and trade only in Buy but in this case number of arbitrage situations will be limited and strong falls of traded altcoin stops can be triggered.

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