Forex Arbitrage

Forex Arbitrage It is an activity that takes advantages of pricing mistakes in financial instruments in one or more markets.

There are 3 kinds of arbitrage:

(1) Local (sets uniform rates across banks)
(2) Triangular (sets cross rates)
(3) Covered (sets forward rates)

Local Forex Arbitrage

Example: Suppose two banks have the following bid-ask FX quotes:
Bank A Bank B
USD/GBP 1.50 1.51 1.53 1.55
Sketch of Local Arbitrage strategy:
(1) Borrow USD 1.51
(2) Buy a GBP from Bank A
(3) Sell GBP to Bank B
(4) Return USD 1.51 and make a USD .02 profit (1.31% per USD 1.51 borrowed)

All steps should be done simultaneously.   Bank A and Bank B will notice a book imbalance. Bank A will see all activity at the ask side (buy GBP orders) and Bank B will see all the activity at the bid side (sell GBP orders). They will notice the imbalance and they’ll adjust the quotes. For example, Bank A can increase the ask quote to 1.54 USD/GBP.

Triangular Arbitrage (Two related goods, one market)

Triangular forex arbitrage is a process where two related goods set a third price. In the FX Mkt, triangular arbitrage sets FX cross rates. Cross rates are exchange rates that do not involve the USD. Most currencies are quoted against the USD. Thus, cross-rates are calculated from USD quotations.

We’ve tested several methods: two-way arbitrage (2 brokers), triangular arbitrage (3 brokers), etc. Such systems can work quite confidently on demo accounts, but during real trade any MT4 failure or interference from broker’s side will result in losing all profit, gained on difference of quotes. Even if you use API and increase speed of receiving ticks and sending orders, it won’t improve the situation.

Learn more about Forex Arbitrage on our website

BJF Trading group inc.
www.iticsoftware.com