It is hardly a secret that arbitrage expert advisors can help generate substantial profits with minimal risk in the Forex currency market. However, things are not as straightforward as they may seem at first glance when dealing with arbitrage.
What Forex Arbitrage Means and Why It Is So Profitable
As soon as the position starts generating profit, it is immediately closed, usually with a small gain. The main advantage of this method is the complete absence of any drawdown. You might ask, how is this possible? How do we know what the future price will be?
The term “future prices” is actually misleading, and here is why. Forex quotes are provided to the broker by liquidity providers. The company’s server takes some time to process these quotes and other incoming requests. This processing delay creates the lag necessary for the arbitrage system. Server load depends on the number and performance of clients, the volume of order requests, and other factors. The more information the server receives, the longer it takes to process it. In common terms, the server starts to “lag.”
Thus, there are two sources of quotes – a fast one and a slow one. During a price gap caused by increased volatility, the expert advisor opens an order from the slower source in the direction of the quotes coming from the faster source. In other words, the arbitrage advisor enters the market at a price that no longer exists because, due to technical features, it is delayed.
The system’s task is to receive quotes earlier than they appear in the trading terminal, calculate potential profit, open the corresponding order, and close it as soon as the position becomes profitable. For this reason, open orders in such advisors last only a few seconds, and the quotes for this system come from a broker with faster information processing. This method is called inter-broker arbitrage.
There is another type of arbitrage, which sellers of such systems call inter-exchange arbitrage. The principle remains the same – the difference between slow and fast quote sources, but the fast source is not a broker but the liquidity provider itself, for example, a large bank. Banks do offer market access to their clients, but this requires a substantial dollar account, not a cent deposit.
Inter-exchange arbitrage has several advantages since quotes from liquidity providers are naturally faster than those from even the fastest brokers, giving the arbitrage system more time to open positions.
Forex Arbitrage Expert Advisors Are “Outside the Law”
Theoretically, this looks promising, but brokers have developed comprehensive countermeasures against arbitrage systems. Organizationally, for example, most companies’ regulations specify parameters aimed at preventing arbitrage: minimum time a position must remain open (e.g., at least one minute), minimum profit size, and so on. Most likely, the regulations also explicitly prohibit the use of arbitrage systems in any form.
Among technical countermeasures, brokers may apply requotes, refusing to open an order if the requested opening price differs favorably from the market price. Naturally, these anti-arbitrage measures frustrate regular traders because quote verification increases order processing time, creating server queues and causing the aforementioned “lag.”
Some sellers claim their arbitrage systems have found ways to bypass these restrictions and that their system is unique. In 100% of cases, this is a marketing ploy because technically bypassing requotes is currently impossible. Usually, such “unique” arbitrage advisors simply send repeated requests to open positions, hoping to catch a “window” without requotes. This typically results in the broker banning the robot or installing additional slowing filters that reduce the arbitrage advisor’s effectiveness to zero.
If you are lucky and your advisor generates noticeable profit, this trading will not last long. The company’s technical team will quickly investigate, and your IP, account number, and possibly all your accounts will be blocked.
It is worth noting that many Forex brokers’ arbitrage advisors perform well on demo accounts but fail on real deposits. Therefore, finding suitable conditions and testing an arbitrage advisor is only possible on a real account, which consumes a lot of time and money due to losses and transfer commissions between companies.
Do not assume that buying an arbitrage advisor or system will let you rake in money effortlessly. Such trading is illegal with all brokers, who continuously improve their methods to combat it, punishing the most active traders with wiped deposits.
