Latency Arbitrage
Latency Arbitrage Description
Latency arbitrage is a high-frequency trading strategy that capitalizes on price discrepancies arising from delays or "latency" in the transmission of market information. These time delays occur because of the physical distances between markets and the time it takes for data to travel from one location to another.
In a typical latency arbitrage strategy, high-frequency traders use sophisticated algorithms and high-speed networks to gain early access to market price information. They then use this information to execute trades before other market participants have received the same information.
Here is a simplified example to illustrate how latency arbitrage might work:
- A trader with advanced technology receives information that a particular stock's price has risen to $101 on Exchange A.
- The same stock is still priced at $100 on Exchange B due to latency, so Exchange B's price hasn't been updated yet.
- The trader quickly buys the stock at $100 on Exchange B before the price information from Exchange A has had a chance to reach Exchange B.
- When the price on Exchange B updates to $101, the trader can sell the stock, making a $1 profit per share minus any trading costs.
Latency arbitrage has risks and complexities. The strategy requires substantial investments in technology and infrastructure, including proximity hosting, algorithmic trading platforms, and real-time data feeds. Additionally, the strategy is only profitable if there are sufficient price discrepancies to take advantage of, which can disappear in highly efficient markets. Finally, the strategy is often criticized for contributing to market instability, and there's an ongoing debate about the fairness of giving some market participants preferential access to price information.
Latency Arbitrage Instruments & Orders
Enabled - controls if the instrument is allowed to trade or not.
Name – instrument name on feeder.
Lot size – lot size to be traded.
Lot type - You can select from the list 2 type of the lot size. The lot size can be Fixed or Balance %. Fixed - software will trade set lot size. Balance % - software will calculate lot size like set percent from the current balance on the account.
Digits – how much digits instrument has in decimals.
S/L – hidden stop loss for the position.
T/P – hidden take profit for the position.
Min profit – how much profit the order should get (in points) for system to start trailing on this position.
Pips for Min Profit – reserved, not used.
Trailing distance – the distance (in points) that is used for trailing on position.
Trailing units - Points / Present . The software can calculate trailing stop in points or like percent from instrument's price.
Order lifetime – the maximum time the position can be opened.
Slippage – for instant execution brokers - maximum allowed distance from requested price.
Commissions - you can set commissions for round turn for your broker.
Diff calculation method - please select one of 3: Standard, Reversed, SpreadCorrected.
Standard
BuyDiff = FastAsk - SlowAsk
SellDiff = SlowBid - FastBid
Reversed
BuyDiff = FastBid - SlowBid
SellDiff = SlowAsk - FastAsk
SpreadCorrected
BuyDiff = (FastBid - SlowAsk)
SellDiff = (SlowBid - FastAsk)
Include spread - check this box if you want to include the spread for differ to open calculation. The slow broker's spread will be extracted from the difference to open.
Diff to open – distance between price on slow and fast to open the position.
Units - select units points or percent for difference to open calculation. the percent is useful for crypto currencies arbitrage.
Bid offset - constant distance between bid on fast and bid on slow (in points)
Ask offset - constant distance between ask on fast and ask on slow (in points)
Offset Calc – controls if the offset recalculation is used on instrument or not.
Comment - internal identifier. The comment should be different for similar instruments.
Diff limit – maximum allowed difference for arbitrage signal.
Curr Buy Diff- current difference for buy arbitrage signal.
Curr Sell Diff- current difference for sell arbitrage signal.
Max Buy Diff – the maximum difference for buy arbitrage signal that was detected during software was
running
Max Sell Diff – the maximum difference for sell arbitrage signal that was detected during software was
running.
Curr Spread Slow – current spread on slow broker (in points)
Curr Spread Fast – current spread on feeder (in points)