In recent years analyzing the trading results on our client accounts, we have found several factors that affect the arbitrage trading.
- VPS or dedicated server;
- Broker and account type;
- Type of arbitrage software
Let's dwell upon each of them.
VPS or dedicated server
We noticed that the trade performance is quite different even if traders use the same VPS location, the same account type (it means not only the same account name but the same server name as well), and the same settings. Some VPS providers declare that they are in the London equinix data center, but it is proving to be that they do not even in London (LD1-LD9). Usually brokers use LD4 and LD5
They are in cheaper datacenters in Ireland, France or Germany. Not to mention the fact that many our clients, in spite of all our warnings and recommendations, are trying to install latency arbitrage software on home PC. And they do not hesitate to assert that the program does not work properly from PC located from thousands of kilometers from brokerage company and with ping =100-300ms.
It is very important what kind of internal network, network card, hypervisor or virtual machine monitor (VMM) your VPS provider have and how is your vps connected with your brokerage company. We use Ultrafx VPS and we can recommend their premium packages for arbitrage trading. Feel free to contact me if you need discount coupon on 10%.
It is good idea to run test on demo account first. If software doesn’t work on demo account – you have a problem with your vps or settings.
If you use 2 legs arbitrage and if your broker is LMAX FIX API, it is very important to have cross-connected VPS and have unthrottled feed (100 updates per sec). It is also great advantage for all types of arbitrage trading if your VPS provider has fiber optic direct cross-connects with your broker.
Broker and account types
Еhere is a perception that it is practically impossible to find a broker for latency arbitrage trading. This is not true. In the market, there is a huge number of brokers which have not undergone a large influx of latency arbitrage traders and therefore do not apply special anti-arbitrage methods.
A lot of broker make decision to change trading condition for trader after several trades and they do this manually. Some technologies allow broker to change this conditions only on weekend etc.
Also on the market there are always new brokerage companies are not “scared” by arbitrage traders.
Different accounts types, can have not only different trading conditions described on broker’s website: like spreads, commissions…, but also different execution time and slippage. Broker can provide different server for different regions (for example server-EU- Asia; server-EU…) and these servers can have different trading conditions as well.
A trader should understand that the broker is loss only if the trader's account in B -book (in house).
Based on the above trader should build its strategy.
If broker true ECN/STP/DMA (but it is bad idea to make any conclusions based on information from broker’s website. Very often brokers use “STP”, “ECN”, “DMA” works only for advertising), and there is not much competition (usually it is good to use local small and not so popular brokers), the most important to be faster then others. It means you should have fastest feed and fasters VPS. The best software for this strategy is Latency Arbitrage Software.
If brokerage strategy to change trading conditions if trader use latency arbitrage software, the best way is camouflage trades:
-use another EAs together with arbitrage;
-use Locking arbitrage software or 2-legs Arbitrage software.
Type of arbitrage software
Еhere are many types and varieties of arbitrage trading: latency Arbitrage, Latency arbitrage with locking, 2-legs (hedge) arbitrage, triangle arbitrage… We described all pros and cons in our previous articles, but I would like to explain two major advantages of locking latency arbitrage.
This type of algorithm helps to solve two major problems:
-To increase the lifetime of the orders and thereby camouflage the arbitrage trading;
-Replace the orders opening by the orders closure, and thereby reduce the time of execution and therefore slippage.