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Ask Your Advocate: Is Automated Arbitrage Possible?

23 Years ago | January 02, 2014 1/28/23, 12:00 AM

Question for the Advocate:

Can you give some tips regarding automated arbitrage trading (with different brokers). In theory I know what it is, however, lack credible info/referral towards software to be used. 

jay meisler

Your Advocate Says:

In theory you can arbitrage between forex brokers but in practice this is not a viable strategy. The reason is there is no common clearing between brokers. So if you trade with Broker A and offset the trade with Broker B, you cannot net out the trades. Instead you have to close each one individually, paying away the spread to close with each broker, thus more than negating any profit you would make from the forex arbitrage trade.

In other words, if you were long EURUSD with Broker A and short the same amount with Broker B, you would have to sell your long position with Broker A and buy back your short position with Broker B to close out your arbitrage trade. If you decided to wait until the market lined up with an arbitrage in your favor (which may or may not happen), you would be eating up margin and likely costing you on the rollover. The alternative is to try and leg out of the trades but then you are taking on risk, which runs contrary to what should be a riskless arbitrage trade.

 So the bottom line is even if there is software that claims it could arbitrage between forex brokers it would likely not be worth the effort unless there was a clearinghouse to net out trades between different brokers.



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