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Does Forex Arbitrage Work?

Discussion in 'General Forex Talk' started by TheBluePrince, Apr 28, 2011.

  1. TheBluePrince

    TheBluePrince Private

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    I received an email today from a forex "guru" trying to sell a new arbitrage system. He claims his system searches multiple brokers for pricing anamolies that allow risk-free arbitrage profits. In theory if broker A has a bid for EUR/USD at 1.4210 and broker B has an ask for EUR/USD at 1.4200 you can buy Euros from B and sell them to A for a quick 10 pip profit. In practice I doubt that 2 brokers ever have a tradeable difference. Plus, I think you would need to already have an open account at each broker you are tracking to be able to take advantage of this situation. Is this new system total BS or do these arbitrage opportunities commonly exist?

    Then there is another type of arbitrage which is the triad or multiple pair arbitrage. Here the prices of 3 or more currency pairs are out of balance to the extent that you can use A to buy B then use B to buy C and finally close the trade by using C to buy A. I've followed the bid/ask prices with a computer program in the past and never saw large enough differences to cover spread and commission and then have a profit left over. Has anyone else found that such arbitrage opportunities exist? I'm always willing to invest in some risk-free income, but other than my dynamite 0.5% CD I don't think they exist.
     
  2. Pharaoh

    Pharaoh Colonel

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    Theoretically, you could monitor a faster feed from one broker to anticipate price changes at a slower broker.

    There are several problems with this.

    1. Any broker that catches you will close your account and nullify all your trades. Virtually all brokers ban this practice. Quite a few use it as an excuse to shut down accounts from legitimate scalpers who are profitable.

    2. Despite claims of STP and ECN, most brokers are really market makers. Since the forex market is decentralized, they can set their own prices. Also, even real STP and ECN brokers will have different liquidity providers, so you would need a faster feed from the same liquidity provider used by the broker you are trying to cheat.

    3. Think about it carefully. This is not trading. It is an attempt to cheat the broker. Yes, brokers often can and do cheat traders. That doesn't make it right for traders to do the same thing. If you do succeed for even a short time, you'll just be giving the broker an excuse to add more rules that will make it easier for them to nullify legitimate profitable trades later.

    As for 3 way arbitrage, that is taking advantage of market imbalances instead of trying to rip off a broker - so at least there aren't any legal or ethical considerations.

    The drawback is that I've seen a number of people come up with this idea independently and vaguely recall one EA based on it. The most likely reason that trades like this can't ever quite cover the spread is that some large institutional traders with access to very low spreads probably have their own programs running to take advantage of this. If they can get all 3 pairs at 1 pip spreads, anything much over 1 pip will get grabbed by their programs before it widens enough for retail traders like us to have a shot at it.
     
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  3. TheBluePrince

    TheBluePrince Private

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    Pharaoh, thanks for taking the time to reply to my question. I think you are correct and complete in your answer. I wasn't looking for a way to cheat a broker. Based on what I've seen and what you've said I'm not planning to invest any more time or money in these ideas.
     
  4. DitterPD

    DitterPD Private, 1st Class

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    Pharaoh, does someone who has actual access to ECN can use arbitrage?
     
  5. Pharaoh

    Pharaoh Colonel

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    Trying to cross-check prices between brokers using very fast data feeds might give a pip now and then, but most ECNs have rules against "latency arbitrage". If they catch you, or even suspect you, things will get ugly.

    Three-way arbitrage on an ECN broker is hypothetically possible within the rules. The problem is that the opportunities to come out ahead after spread and commission (not to mention the possibility of slippage) are rare. You would need to trade large amounts on those rare opportunities, and one bad slippage incident could wipe out many profitable trades.

    The only place that arbitrage really works reliably is on demo accounts.
     
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  6. DitterPD

    DitterPD Private, 1st Class

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    I have read some articles about ECNs and as I understand the main disadvantages will be:
    1) ECNs have dynamic spreads.
    and
    2) ECNs have higher commissions.

    Both these facts will kill your "profit" from arbitrage.

    So it's either rules against it (be it retail broker or ECN rule) or you won't make profits from it?
     
  7. Pharaoh

    Pharaoh Colonel

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    It's hypothetically possible, but the chances of making (and keeping!) any significant number of winning trades is low.

    Look it at this way. If it was easy, some institutional trader tied into a much faster connection and a deeper pool of liquidity has very likely already taken the trade.
     
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  8. manish88

    manish88 Recruit

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    One of the most exciting ideas in currency dealing comes from what would seem to be a essential industry ineffectiveness that would seem very easy to manipulate by most industry members. Three way arbitrage is a dealing technique that looks for to manipulate variance in forex rates coming up from dealing action, variance that apparently lead to easy to trade industry issues.
     
  9. DitterPD

    DitterPD Private, 1st Class

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    Who would knew that Wikipedia would test their bots on Forex sites first.. :D
     
  10. iMusingKiMi

    iMusingKiMi Sergeant

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    I don't think arbitrage works in currencies but sports betting definitely works but bookmaker will limit your betting sizes. Maybe it works by trading correlation such as USD against OIL.
     

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