Difference Between 2-Legs and 1-Leg Arbitrage

Difference between one leg arbitrage and hedge (2 legs) arbitrage

Our company has developed two types of software for arbitrage trading: one-leg (or latency) arbitrage, and 2 legs (or hedge) arbitrage.

We received a lot of questions about software and the most frequently asked questions is what is the difference between 1 leg and 2 legs arbitrage, what product is the best, and how it works.

The main difference between 1 leg and 2 legs arbitrage

1 leg arbitrage

The arbitrage software searches for an arbitration situation between fast broker (We provide free feeder) and slow broker(s), and opens orders only on one (slow) broker(s). In this case you should have account only with slow broker.

Arbitrage situation: slow broker price for any symbol has temporary difference with fast broker price.

Example: EURUSD price on fast broker: 1.10642 but price on slow broker 1.10633

Price difference: 9 pips

arbitrage-1-leg

First of all software will compare price difference between fast and slow broker and “Diff to open” parameter.

Then software will check spread on fast and slow brokers and compare them with “Max Spread Fast“, and “Max Spread Slow”.

In our example Price difference =9 > “Diff to open”. Software will open buy order on slow broker. Software use trailing stop to keep order open as long as possible, but no longer then “Order lifetime (In sec)).

2 legs arbitrage

The arbitrage software searches for an arbitration situation between two brokers and opens orders on both brokers to lock (hedge) position and keep order open before software will find opposite arbitrage situation.

Example: EURUSD price 1.08731 on 1st broker and 1.08723 on 2d broker. Price difference = 0.8 pips and it is = “Difference to open”.

hedge-arbitrage-6

Software will open SELL on first broker and BUY on second broker and keep orders open. Further, it should fulfill two conditions:

  • The price on slow and fast broker shouldbe changed on “MinPips” value
  • It will taketime (since the openingposition)more than “MinTime” value

 

We use this conditions to prevent classification for this strategy as a high-frequency or scalping strategy.

Once these two conditions are met, software will start to search for opposite arbitrage situation: price on 2d broker should be higher than price on 1st broker on “Diff to close” value.

 

Which one arbitrage is better?

2 legs arbitrage software is solution for professional traders who have enough money to open fix api accounts*.

*- Reasons for a client to start using FIX API

  • The client is not satisfied with existing financial platforms and interfaces because it is impossible to control all system functionality simultaneously.
  • Limitations of existing interfaces. For example, many well-known platforms need two or more ticks to fill an order, which is unacceptably slow for high-frequency strategies.
  • A need for safety and maintaining the anonymity of a client’s automated systems.
  • A desire to cross-connect with the liquidity provider.

 

If you trade with 2 FIX API brokers, you can use FOK* orders to prevent slippage and this strategy ( I mean 2 legs arbitrage) can be attributed to as low risk and high profit strategy.

 

*- DEFINITION of ‘Fill Or Kill – FOK’

A type of time-in-force designation used in securities trading that instructs a brokerage to execute a transaction immediately and completely or not at all. This type of order is most likely to be used by active traders and is usually for a large quantity of stock. The order must be filled in its entirety or canceled (killed). The purpose of a fill or kill order is to ensure that a position is entered at a desired price.

Important advice:

You can open FIX API account with LMAX or accounts with another FIX API brokers via IB (affiliate companies), in this case you will be able to open account with min deposit 1000+ instead 10 000+.

I also recommend you to arrange: “no minimal trading volume’ for several months (up to 6) with FIX API broker.

 

You can use 2 legs arbitrage with 2 MT4 or MT4 and FIX API broker, but we recommend to use 1 leg arbitrage for MT4 accounts and 2-legs for FIX API accounts.

Useful Links:

One-Leg Arbitrage Software

Two-Legs Arbitrage Software

 

It is possible to use Fix Api brokers via PrimeXM Bridge (PrimeXM FIXAPI )

PrimeXM Customers:

ADS Securities
Armada Markets
Bank Direct FX
Benchmark Group
Blackwell
DCFX
Divisa Capital
Ethos
FinFX
Finotec
ForexFS
FXCM Mena
Forex.com (UK)
GoMarkets
LMAX
Sensus Captial markets
Synergy FX
Traders Trust