I was asked whether it is possible to arbitrage price differences between two brokers. Let’s start with a definition of arbitrage and then discuss whether it is feasible.
Arbitrage is defined as the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset (Oxford).
Is it feasible to arbitrage between two brokers?
In theory, you can arbitrage between two 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 trade individually, paying away the spread to close with each broker, thus more than negating any profit you would make from the 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.
For those who have access to CFDs, be aware that, unlike the forex market, there is no common price feed. In fact, even brokers with the same symbol (e.g. US500) may have differences in prices.
In addition, two brokers may have different symbols for the same instrument (e.g. SPX500 vs US500, NAS100 vs NDZ100), So, even if you wanted to try and arbitrage, with CFDs it would be like trading apples vs oranges.
Let me tell you a story. I once had an account with a broker who for whatever reason consistently had a pricing feed in currencies that were always off the real market. Sometimes it would be 5 pips. Other times it might be a 10-pip difference of more.
It was too tempting not to try and arbitrage with my other broker and wait for the pricing to come back into line. The problem was that the mis-pricing could go on for days, not only tying up my margin with both brokers but costing on the rollovers as they were not matched evenly.
In the end, when I finally traded out of the positions it was not worth the time and effort. I hadn’t thought about this experience until I was asked the question that encouraged me to write this article.
So, the bottom line is even if there was software that could arbitrage between brokers it would not work for you unless there was a common clearinghouse to net out trades between different brokers.
The moral here is that there is no free lunch in trading.
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