What is Arbitrage

[lordoftruth]

What is Arbitrage:

If a new client opens an account with one broker and another account with same broker or with a different broker, and then deposits $10,000 in each account, he then receives a bonus of $10,000 in each account.
The trader can then go long on XAU/USD (or any other volatile product) at 400:1 with the first account and short the same trade with the Account. Eventually one of the accounts will lose $20,000 and the other will make $20,000 When the losing account reaches $20,000 the client will close the winning position and walk away. Subsequently he could withdraw the $20,000 profit and initial deposit from the first account and leave the $10,000 credit loss in the second account held .In this scenario, the client could accrue a risk-free profit of $10,000.

How do you use an arbitrage strategy in forex trading?

Forex arbitrage is a risk-free trading strategy that allows retail forex traders to make a profit with no open currency exposure. The strategy involves acting fast on opportunities presented by pricing inefficiencies, while they exist. This type of arbitrage trading involves the buying and selling of different currency pairs to exploit any inefficiency of pricing. If we take a look at the following example, we can better understand how this strategy works.

Example - Arbitrage Currency Trading

The current exchange rates of the EUR/USD, EUR/GBP, GBP/USD pairs are 1.1837, 0.7231, and 1.6388 respectively. In this case, a forex trader could buy one mini-lot of EUR for $11,837 USD. The trader could then sell the 10,000 Euros, for 7,231 British pounds. The 7,231 GBP, could then be sold for $11,850 USD, for a profit of $13 per trade, with no open exposure as long positions cancel short positions in each currency. The same trade using normal lots (rather than mini-lots) of 100K, would yield a profit of $130. This can be continued until the pricing error is traded away.

As with other arbitrage strategies, the act of exploiting the pricing inefficiencies will correct the problem so traders must be ready to act quickly. For this reason, these opportunities are often around for a very short-time, before being acted upon. Arbitrage currency trading requires the availability of real-time pricing quotes, and the ability to act fast on the opportunities.

This constitutes arbitrage, and in most cases, especially if a Dealing Desk is in place and the firm is a Market Maker
The dealers will be able to notice a pattern and figure out that arbitrage has taken place, and in some cases, cancel all profitable trades.

 

[Pharaoh]

Hedging between accounts is a possible form of arbitrage (more often called bonus hunting), but brokers have ways to make this less effective. Margin calls don't always wait for an account to be wiped out. This means you may lose part of one account and then a price reversal takes out a big chunk of the second account. Even so, taking a bonus and making one big trade designed to either result in doubling or destroying an account is a way to instantly put yourself on your broker's hit list.

The usual reason a broker accuses traders of arbitrage is because the broker claims that the trader is somehow exploiting a faster price feed, so "knows" when the broker's price is a few pips off from the "real" market. Usually, what this really means is that a market maker doesn't want to officially ban scalping and a successful scalper made too much money.

Brokers can also use this accusation against news traders. After all, how can you tell the difference between a trade launched just when the NFP numbers are announced by an autoclicker like Forex News Gun vs some special arbitrage software noticing that the broker's prices are lagging a bit behind the market at exactly the same moment?

Personally, I doubt that any so-called arbitrage software really works. A broker's server should have access to much faster price feeds than any individual trader can get access to. If there is a difference in price between one broker and another, that's either because of forex being decentralized (in which case, it's fair game - just like comparing prices between grocery stores) or else it's because the broker is too cheap to pay for a fast price feed from it's LPs.

 

[RahmanSL]

I believe real arbitrage that most brokers are concerned with is the false price feed that somehow got into their system through some quirks from their LP.
I have experienced that a few times with at least 3 well known brokers (which I will not name here in case Asst Moderator think that amounts to advertisement for these brokers).
It doesn't matter whether I enter a sell or a buy, but immediately upon acceptance, the trade shows a profit, but it lasted only a few seconds. When I close that trade out immediately upon opening it, the "profit" shows up in the "Account history" as a profit.
So you can imagine what "profits" I can derived from making huge lot trades just by simply opening and immediately closing out trades while that "quirk" in the system exist.
....BUT OF COURSE I know these are false price feed and do not bother to argue with any of the broker when they removed those "profits" from my trading account.........BUT it was fun making fantastic "profits" while that quirk in price feed exist....however, these days, whenever I see that situation, I don't bother to do that anymore and simply leave my trade as they are as I know the real price feed will be reflected in a few seconds. Waste of time!

 

[lordoftruth]

Dears Pharaoh..RahmanSL,
Thank for reply

So There is a pattern emerging! If they do not like the way one trades they cry foul..

My POV,
MARKETMARKERS DO NOT SENT ALL THE TRADES TO THE MARKETS IN STP (STRAIGHT-THRU-PROCESS)... THEY KEEP THE TRADES IN-HOUSE FROM CLIENTS.... AND HEDGING SOME OTHERS CLIENTS... ALSO THEY BOOKING SOME TRADERS ... AND THIS DESK DEALING SIDE... IS JUST EAT YOUR POSITION... BECAUSE THEY PUT YOUR MONEY IN THEIR POCKET.

 

[LoRio]

Hedging between accounts is a possible form of arbitrage (more often called bonus hunting), but brokers have ways to make this less effective. Margin calls don't always wait for an account to be wiped out. This means you may lose part of one account and then a price reversal takes out a big chunk of the second account. Even so, taking a bonus and making one big trade designed to either result in doubling or destroying an account is a way to instantly put yourself on your broker's hit list.

The usual reason a broker accuses traders of arbitrage is because the broker claims that the trader is somehow exploiting a faster price feed, so "knows" when the broker's price is a few pips off from the "real" market. Usually, what this really means is that a market maker doesn't want to officially ban scalping and a successful scalper made too much money.

Brokers can also use this accusation against news traders. After all, how can you tell the difference between a trade launched just when the NFP numbers are announced by an autoclicker like Forex News Gun vs some special arbitrage software noticing that the broker's prices are lagging a bit behind the market at exactly the same moment?

Personally, I doubt that any so-called arbitrage software really works. A broker's server should have access to much faster price feeds than any individual trader can get access to. If there is a difference in price between one broker and another, that's either because of forex being decentralized (in which case, it's fair game - just like comparing prices between grocery stores) or else it's because the broker is too cheap to pay for a fast price feed from it's LPs.

So ,essentially ,for me and other few people here-who like to hunt news on full risk on extreme(and fun) accounts- by trading this way we make our trades eligible for cancellation?

Does this extend to position trades ?
For instance if brother Rahman puts a position trade during the slow Assian session on full risk because he is convinced thats where price will move , is he flagged for arbitrage as well?

I though hedging full risk on the same pair on the same account was arbitrage,which - at times- can be ridiculously profitable (until it breaks from unexpected reversals in the way you mentioned above).

 

[LoRio]

Dears Pharaoh..RahmanSL,
Thank for reply

So There is a pattern emerging! If they do not like the way one trades they cry foul..

My POV,
MARKETMARKERS DO NOT SENT ALL THE TRADES TO THE MARKETS IN STP (STRAIGHT-THRU-PROCESS)... THEY KEEP THE TRADES IN-HOUSE FROM CLIENTS.... AND HEDGING SOME OTHERS CLIENTS... ALSO THEY BOOKING SOME TRADERS ... AND THIS DESK DEALING SIDE... IS JUST EAT YOUR POSITION... BECAUSE THEY PUT YOUR MONEY IN THEIR POCKET.

The question is why is that nowhere to be found on terms of service agreements.
Are they afraid that by telling you they might be also teaching you something?

 

[lordoftruth]

Yes,
This is the reason
Never will say anything to do not teach and how they discover the arbitrage has taken place!!

They Write

After reviewing the trading patterns in your Account although you may not have been aware that the style of trading which you were using in your Account was a form of ‘arbitrage’ trading unfortunately the style is not permitted on our platform and pursuant to the terms and conditions such activities are considered as fraudulent.
From our research we saw that this type of activity had also been done in a previous account belonging to you which further raised concerns.

 

[RahmanSL]

"...So ,essentially ,for me and other few people here-who like to hunt news on full risk on extreme(and fun) accounts- by trading this way we make our trades eligible for cancellation?

Does this extend to position trades ?
For instance if brother Rahman puts a position trade during the slow Assian session on full risk because he is convinced thats where price will move , is he flagged for arbitrage as well?"

The answer is "NO".....if you do not immediately close that false feed position, the correct entry price will revert to the real price feed and you can close that trade when and as you like as there is no arbitration trade here.

When you have the chance to experience this false price feed for yourself, you will know what I mean and should be able to recognized what's happening.

 

[LoRio]

The answer is "NO".....if you do not immediately close that false feed position, the correct entry price will revert to the real price feed and you can close that trade when and as you like as there is no arbitration trade here.

When you have the chance to experience this false price feed for yourself, you will know what I mean and should be able to recognized what's happening.

They send you a notification i presume.
Hey , are you still with fxo?
Any words of caution?

 

[lordoftruth]

The answer is "NO".....if you do not immediately close that false feed position, the correct entry price will revert to the real price feed and you can close that trade when and as you like as there is no arbitration trade here.

When you have the chance to experience this false price feed for yourself, you will know what I mean and should be able to recognized what's happening.

Then why when you ask them how they discover that the arbitrage has taken place never will say
They wrote

After reviewing the trading patterns in your Account although you may not have been aware that the style of trading which you were using in your Account was a form of ‘arbitrage’ trading unfortunately the style is not permitted on our platform and pursuant to the terms and conditions such activities are considered as fraudulent.
From our research we saw that this type of activity had also been done in a previous account belonging to you which further raised concerns.

Some of my clients had this problem the last weeks and the broker tell them ..we can not tell you else will help you and other to do that