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Risk Free Forex Arbitrage System... Possible?

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  • First Post: Nov 22, 2006 12:28pm Nov 22, 2006 12:28pm
Hi People,

I just wanted to share with you a thought which crossed my mind. and I wanted to check with youll if some thing like this is at all possible/ practical.

When I am talking about Forex Arbitrage, I am not talking about "risk free arbitrage opportunities on forex cross rates." I do not belevie its possible to profit out off.

Instead I am looking to Arbitrage against diffrent brokers, let me explain.

In my trading over the last few years I have dealt with diffrent brokers, dealing desks, non dealing desks, variable spreads, fixed spreads.

I have noticed that there are times during a day (Not including the news times, {bcoz the market goes absolutly crazy}) when diffrent brokers have diffrent quotes.

Like for instance on the GBP/USD 4 brokers could have 4 quotes e.g:
Broker a: 1.9138/43
Broker b: 1.9135/42
Broker c: 1.9132/36
Broker d: 1.9143/48


Now I would like to Buy gbp/usd from broker c and sell to broker d simultaneously.

Eventually when the market is not moving as much, broker C and broker ds prices will match eventually, thats after they finish playing their games on small account holders. at that time i would like to close the position.

This happens day in and day out at least about 2-3 times a day for every currency pair. If my system works its small risk free profits .

pls let me know what you think.
i don't see the arbitage thing in this diffrent broker price ,,, if they can change the price slightly upward, they can do it down ward too, and the difference of spread is diminished the possibilities ..... it can be profitable if the difference is biger than the spread, but again, the price must be get in the same time with diffrent platform....
it is like having 2 key for a same door that need to be turn in the same time.

among diffrent broker ,is the price still differ biger than the spread?
we discussed this here at FF. yes, it is real, but thats all i will say.
Relax and be happy.
Huskins...

Funny thing you mentioned this because about 6 months ago, I was hot on this topic. You are absolutely right, this happens at least 3 times a day between any 2 brokers (although between ECNs not so much).

I wrote a program that utilized 3 (MetaTrader, MBTrading and Interactive brokers) different APIs and basically traded exactly what you're saying...when the bid of one broker was greater than the ask of another by a certain amount, I would put a simultaneous buy and sell order.

However, what I found was rather disappointing...it would work great 3 or 4 times, but every so often, one of the orders would get a requote, or the order would take too long to clear, and by the time orders were cleared, the wonderful arbitrage was gone...

I found that often times, those things you think are brokers messing with the prices are actually "hangs" in the system and that the prices end up closer than you think most of the time (which sucks for this type of trading).

I didn't lose a great deal of money because the lot sizes I used were so small during live account testing, but ideally, you would want to trade larger trade sizes for this...and thus the risk.

The issue, I think is the "transactional" nature of the operation...you need to ensure that both orders go through in order to take advantage of the situation, but it turned out that too often, one of the orders would fail to execute at the expected price...thus possibly causing a catastrophy since the gains from the arbitrage are so small.

Ideally, you'd want to execute these orders near simultaneously AND at the expected price...I just found that it never happened that way...even when using highly liquid providers...and my thought was that most of the time, price arbitrage occurs in fast moving markets...hence the reason for the requotes.

Like I said, my program worked like a charm, it's just that the brokers didn't play along very well.

Good luck, though...

Quoting huskins
Hi People,

I just wanted to share with you a thought which crossed my mind. and I wanted to check with youll if some thing like this is at all possible/ practical.

When I am talking about Forex Arbitrage, I am not talking about "risk free arbitrage opportunities on forex cross rates." I do not belevie its possible to profit out off.

Instead I am looking to Arbitrage against diffrent brokers, let me explain.

In my trading over the last few years I have dealt with diffrent brokers, dealing desks, non dealing desks, variable spreads, fixed spreads.

I have noticed that there are times during a day (Not including the news times, {bcoz the market goes absolutly crazy}) when diffrent brokers have diffrent quotes.

Like for instance on the GBP/USD 4 brokers could have 4 quotes e.g:
Broker a: 1.9138/43
Broker b: 1.9135/42
Broker c: 1.9132/36
Broker d: 1.9143/48


Now I would like to Buy gbp/usd from broker c and sell to broker d simultaneously.

Eventually when the market is not moving as much, broker C and broker ds prices will match eventually, thats after they finish playing their games on small account holders. at that time i would like to close the position.

This happens day in and day out at least about 2-3 times a day for every currency pair. If my system works its small risk free profits .

pls let me know what you think.
Quoting mrmikal
Huskins...

Funny thing you mentioned this because about 6 months ago, I was hot on this topic. You are absolutely right, this happens at least 3 times a day between any 2 brokers (although between ECNs not so much).

I wrote a program that utilized 3 (MetaTrader, MBTrading and Interactive brokers) different APIs and basically traded exactly what you're saying...when the bid of one broker was greater than the ask of another by a certain amount, I would put a simultaneous buy and sell order.

However, what I found was rather disappointing...it would work great 3 or 4 times, but every so often, one of the orders would get a requote, or the order would take too long to clear, and by the time orders were cleared, the wonderful arbitrage was gone...

I found that often times, those things you think are brokers messing with the prices are actually "hangs" in the system and that the prices end up closer than you think most of the time (which sucks for this type of trading).

I didn't lose a great deal of money because the lot sizes I used were so small during live account testing, but ideally, you would want to trade larger trade sizes for this...and thus the risk.

The issue, I think is the "transactional" nature of the operation...you need to ensure that both orders go through in order to take advantage of the situation, but it turned out that too often, one of the orders would fail to execute at the expected price...thus possibly causing a catastrophy since the gains from the arbitrage are so small.

Ideally, you'd want to execute these orders near simultaneously AND at the expected price...I just found that it never happened that way...even when using highly liquid providers...and my thought was that most of the time, price arbitrage occurs in fast moving markets...hence the reason for the requotes.

Like I said, my program worked like a charm, it's just that the brokers didn't play along very well.

Good luck, though...
Could you not include a slippage function and take it as a loss or ideally break even when you get requoted?
haha i tried that in the news time and i earned around $90 off the gbp/jpy...like a month ago...but it doesnt work all the time...my suggestion is to pratice with it and maybe you're able to gain profit with it...THIS IS VERY RISKY and you can loose a lot of $$ with this..so Practice with it first
If the arb is too great, the broker can negate the transactions claiming there was no such price.

it happened to me so forget it. making $1 or $2 may work; $100+ (ie, 5~10 lots) wont work. Once you are trading against the brokers, they will trade against you and throw everything against you whether it be in the books or not.
Quote
Hi People,

I just wanted to share with you a thought which crossed my mind. and I wanted to check with youll if some thing like this is at all possible/ practical.

When I am talking about Forex Arbitrage, I am not talking about "risk free arbitrage opportunities on forex cross rates." I do not belevie its possible to profit out off.

Instead I am looking to Arbitrage against diffrent brokers, let me explain.

In my trading over the last few years...


as the arbitrage rules states, you must buy a currency A, and sell it against other, and so on. In forex market you trade with a default currency(dollar, I bet). Therefore, you only take profit in forex when the rates go out of equilibrium(trade!) and goback in normal levels(close!)

However, don't desist, do some tests and improve your idea.
Huskins - you still around? This is an old thread, but it just came to the front so I looked at it. I tried this technique on 2 at a time MT brokers using euro and with just a 1 or 2 pip difference - could not make anything with it. Your idea of using a more volatile pair and waiting for a wider spread might work. Did you do any tests? Any results? Interesting idea. Ken.
Back in the day a friend of mine and me became obsessed with the idea of triangular arbitrage. This was all done through one broking house and we used the fractional product inefficiency.

The FPI is an indicator of whether a currency is over or undervalued in an impeccable hedge. For example:
Long: EUR/USD
Long: AUD/USD
Short: EUR/AUD

The simple idea of the system was to buy long when the currency was undervalued in contrast to the FPI and sell when the pair was over valued. We knew that the FPI would always never deviate too far from 1, because real arbitrages would come in and make the market efficient.

We back tested this system with historic data and found that it was a profitable risk-free system. On a daily basis we would pick up on average 5 trades with a value of 3pips after spread. This doesn't sound like a lot but it was completely risk-free! My friend coded in application to run the system live and I already started to go down to dealer to pick up my Ferrari…

Essentially out system was flawless except for one thing. There is the possibility of slippage in any foreign exchange trade. It was impossible to be able to buy all three currency pairs at the exact price we needed to achieve under or over efficiency. Furthermore, there were times where the spread changing could ‘accidentally’ cause us to sell all three pairs at a combined loss.

If only a foreign exchange company had a system where three trades could be set up and executed if all the other trades met the requirements. It would also be essential that the spread of this company did not deviate at all (even if they had large fixed spreads). However, this would not happen because they are essentially giving away free pips.

After this long period of time of research on arbitrage I have come to the conclusion that the broking setup is designed to discourage any chance of possible arbitrage.

Sorry to piss on your parade.
Quoting huskins
Hi People,

I just wanted to share with you a thought which crossed my mind. and I wanted to check with youll if some thing like this is at all possible/ practical.

When I am talking about Forex Arbitrage, I am not talking about "risk free arbitrage opportunities on forex cross rates." I do not belevie its possible to profit out off.

Instead I am looking to Arbitrage against diffrent brokers, let me explain.

In my trading over the last few years I have dealt with diffrent brokers, dealing desks,...
Good way of thinking, I think its definitely doable.

This means u have to program another small code to manipulate the four platforms, right? If the four platforms using different language, what did u do to solve this? Or u just using different brokers all using MT?

Cheers
Quoting Kent
Back in the day a friend of mine and me became obsessed with the idea of triangular arbitrage. This was all done through one broking house and we used the fractional product inefficiency.

The FPI is an indicator of whether a currency is over or undervalued in an impeccable hedge. For example:
Long: EUR/USD
Long: AUD/USD
Short: EUR/AUD

The simple idea of the system was to buy long when the currency was undervalued in contrast to the FPI and sell when the pair was over valued. We knew that the FPI would always never deviate too far from 1, because...
Hi here, have u tried this with interbank brokers? Do they allow u to do this? and do they also have slippage often?

Cheers
Huskins,
One of the best real traders I know (people should pay attention). I'm glad I caught you on the forum.
I've noticed FXCM vs PFG prices can be arbed a couple times a day. I mainly trade EURUSD so that's all I'm aware of but I'm sure other pairs could be arbed as well.

Jeff Swanson
It really is that easy.
One can not be afraid of risk when trying to make money.
If Jaun trades forex; risk is implied.
It really is that easy.
Quoting The Fxorce
If Jaun trades forex; risk is implied.
Har Har Har.....very funny.
Quoting rosymoon
Hi here, have u tried this with interbank brokers? Do they allow u to do this? and do they also have slippage often?

Cheers
Yes you can use interbank brokers! Brokers such Retures can be arbed, however I dont have a million spare... Feel free to contact me if you have a mil i'm sure we can work something out ;-) hahah
Quote
Risk Free Forex Arbitrage System... Possible?
Arbitrage is risk free only in theory. In practice, you can minimize the risk using right tools. Trade only "safe" arbitrage opportunities, which means open orders when price discrepancy is at least 2, 3 times greater than summed spreads. Use "Rescue Trigger". Don't trade news. Limit your profits, yes! this is very important if you want to stay in the game. If you want to be rich in one week, this is not for you, otherwise just gogle for "arbitrageur advanced".
Is there anyone, who is trading arbitrage?

I am using statistical arbitrage (not real arbitrage, but some people call it arbitrage) on shares. Looking for correlated and cointegrated pairs and scalping, when spread is +/- 2 or 3 Std. Dev. away.

Till now, pretty good profit on real account. I was not trading last weeks because of referendum but this week trades you can see on attached image.

I want to know, if there is anyone who can share his experiences of this type of strategy.

Regards Ondrej
Attached Image (click to enlarge)
Click to Enlarge Name: Untitled.png Size: 31 KB
Yes, on many markets.

I also make simple intraday trades in these two FX pairs, most time in the direction of the longer term trend.
AUD/CAD (because of AUD/USD and CAD/USD)
or
AUD/NZD (AUD/USD & NZD/USD correlation).

Arbitrage in Gold-JPYUSD-Nikkei-Silver works also in the medium-term.

There are some "instruments & synthetics or synthetics & synthetics" with much higher correlations (which also reveals real market information about banks and CBs) but are more complex.
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