HEDGED (2-LEG) VS. LATENCY (1-LEG) ARBITRAGE
"All Arbitrage Strategies work well - if you don't get detected!"
Many traders do NOT know that there are 2 different types of Arbitrage. They are called:
a) Hedged Arbitrage also called 2-Leg Arbitrage (Hedge4) that speculates the price differences between any 2 brokers and
b) Latency Arbitrage also called 1-Leg Arbitrage which uses a faster price feed as a signal to take advantage of a slower price feed.
Hedged (2-leg) Arbitrage has a lot more Advantages compared to Latency (1-leg) Arbitrage:
First of all, the trader must determine which is the "fast" and which is the "slow" broker. That alone can be a challenge as markets nowadays move very fast - back and forth. Many times there is not enough time to execute a trade fast enough before it changes the direction again.
Second, Latency Arbitrage is very easy to detect by brokers. They have automated systems and reports to detect traders who are using Latency Arbitrage against them and when they find those traders they add Slippage, Spread or delay the execution of the trades which eventually "kills" Arbitrage and makes it impossible to profit. Latency-based trades are short-term (1-10 seconds, with small profits (1-5 pips), 90% of the trades are "profitable" with the same broker and the trades are very frequent (50-500 trades per day). All this criteria makes it easy to detect and so easy to manipulate. In some cases brokers can cause significant losses for Latency Arbitrage traders, i.e. by disconnecting them from the system until the prices moved towards a bigger loss.
With Hedged (2-leg) Arbitrage all of these Disadvantages can be overcome so your Arbitrage Strategy becomes undetectable!
When you use Hedge Arbitrage you look for differences in prices, so there is no need to specify who is the "fast" and who is the "slow" broker. Every position is hedged so you can hold them for minutes and hours without having to close them after a few seconds. The broker has "time" to cover (STP) the position before you close it again. in your profit" for as long as you want.
When you close your position you can use another Arbitrage to make even more profit and by letting positions go towards one direction you can close them with higher profits (10-100 pips) or even some losses (not real losses because it is hedged) and so it becomes virtually impossible to detect you as an Arbitrageur. So you can continue this this strategy virtually "forever".
If you have more questions please contact us at: info@hedge4.com