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One-legged arbitrage on Forex: MegaTrader and SaxoTrader

When studying arbitrage opportunities on Forex market, we found out that most of them occur due to one broker’s quotes lagging to other’s. This happens because of many reasons: price feed aggregation from multiple liquidity providers, quote feed smoothing or filering, big latency etc. So, if you have two quote feeds, one real-time and one lagging, you can open orders on lagging feed in the direction of real-time, of course assuming the price gap covers spread + commissions. Thus, we will have a permanent statistical advantage, resulting in stable profit = robust winning strategy.

It is important to note that using this strategy, there is no need to hedge open positions on the second broker, as we should do in classical arbitrage. Why, you may ask? Because even if using traditional arbitrage, profit will mainly accumulate on lagging broker, plus you will pay double the commissions! So it is better and more profitable to use one-legged arbitrage here.

As was said earlier, we need a source of leading, preferably real-time quotes. Another broker with faster quotes can be used, but there is a more reliable option - it has been verified by many professional traders that quotes speed of well-known Danish broker and bank SaxoBank, supplied through their own terminal SaxoTrader, is more than of majority of forex brokers, especially during high volatility times. Therefore, in MegaTrader’s new version the ability to get quotes SaxoTrader terminal was implemented.

Here is an instruction of setting one-legged Forex arbitrage with SaxoTrader terminal using MegaTrader software.

To get started, download and install SaxoTrader 2 from http://www.saxobank.com. Then you should open a demo account with SaxoBank. Note it lasts for 20 days only, so you should renew it from time to time, or just open a Live account (they have a 10’000 USD minimal deposit though).

SaxoTrader does not support any means of direct quotes export, so we had to develop a special module, SaxoExporter, which gets quotes directly from Saxotrader’s “Trade Tickets” window. So, all the pairs that are exported from SaxoTrader should have a “Trade Tickets” window opened.

In addition, for the correct recognition of quotations, it is necessary to set English language and United Kingdom location in SaxoTrader terminal settings as it is shown on a picture below:

Now to the settings of MegaTrader: they are simple. You should just choose SaxoTrader in “Choose terminal” and input symbol’s name in SaxoTrader (for example, GBPUSD or EURUSD).

Then, press “Connect” - "Connect to SaxoTrader» menu item, which will launch the SaxoExporter module. You should be able to see its icon in your tray.

The interface is very simple and contains only two buttons: "Run" and "Stop", which respectively start and stop the export process:

If you need a new symbol to be added to MegaTrader, you should first open its “Forex orders” window in SaxoTrader, then restart SaxoExporter by clicking “Connect” - "Connect to SaxoTrader”.

Below is a typical example of arbitrage spread using SaxoTrader. We marked possible arbitrage opportunities with red circles:

Some dealers’ quote feeds provide one-two tradable arbitrage situations per month, some - more than ten per day! You just have to find a suitable one.

Finally, a word to people who are confident arbitrage won’t work due to some reasons, for example some dealers cancelling orders with less than 1 (5, 10) minute duration. By opening the transaction at the time of price feed delay, we always get a slight statistical advantage. We can’t know whether the price will rise or fall while filling the delay gap, but when a large number of transactions occurs it can be assumed that half of the cases price will move in our favor, giving us profit, the other half - against our position, resulting in a loss. Thus, when a large number of transactions is made, gains and losses after the elimination of the gap will very likely cancel each other, so we will end up with that slightest statistical advantage which will provide a steady balance growth. Thus, increasing the duration of position holding, in fact, will just lead to an increase in balance dispersion (which will be reflected by increased drawdown that must be taken into account when choosing lotsize), and the average profitability will remain unchanged. However, we must remember that these statements are only valid if a large number of transactions was done, when the law of large numbers starts to work.

So, arbitrage on Forex using MegaTrader software still remains an actual and highly profitable trading strategy. Examples of arbitrage trading on live accounts (including withdrawals) are in our Video section.

Note. Currently Megatrader, aside from reading quote data from SaxoTrader, supports a couple of other, often faster, market data sources: CQG, Rithmic, LMAX and Intergal. We're constantly working on adding new leading data sources, so please check for updates periodically.