Arbitrage Opportunities and Forex Trading Algorithms
Trading algorithms require execution strategies that can be used by fund managers to buy or sell a large number of suggested assets. The trading system follows the prescribed rules and is programmed to execute orders under certain prices, risks and other investment variables. In the forex market, Direct Market Access (DMA) allows institutional traders to execute direct orders in the market. DMA uses an electronic platform, with minimal cost and error. Usually, trading on the market with DMA is limited only to brokers and market makers. With trading algorithms in the forex market, order execution becomes very fast, allowing traders to seize short-term trading opportunities. It’s like being in DMA.
As the most common (common feature) of trading algorithms is high frequency trading that is becoming increasingly popular in the forex market. Based on a rather complicated algorithm, high frequency trading is executing large numbers of transactions at very fast speeds. As financial markets continue to grow, faster execution speed allows traders to take advantage of the opportunities in the forex market, a number of high-frequency trading strategies designed to recognize arbitrage opportunities and favorable liquidity conditions as well. This arbitration opportunity for hedge so as to have a risk-free profit opportunity. Arbitration can also be made in place and price for the same currency.
Trading algorithms are capable of creating high level liquidity and transparency in trading and pricing. In the forex market, liquidity strategy aims to detect order imbalances and price differences between certain pairs. Order imbalance occurs when there is an excess amount of buy or sell orders for a particular asset or pair. In this case, the high-frequency trader acts as a provider of liquidity, obtaining the spread by arbitrating the difference between the buy and sell price.
The adoption of trading algorithms that grow as a forex system can effectively improve transparency in the forex market. In addition to transparency, maintaining market liquidity with low price volatility. Trading algorithm strategies, such as auto hedging, statistical analysis, direct market access and high-frequency trading, can provide price inconsistencies, leading to lucrative opportunities for traders.