(I've been downgraded on this question, and it's because most people don't understand what I mean. If you ever did hft arb, you will understand what I mean. If not, please do not answer)

Everybody has heard that when you do arb between different venues (ie: currenex and fxall) they can call you "sharp" Your provider will start to complain saying that you are being sharp, and may start taking out some liquidity.

My question is, how they know you are doing arb and why you are being sharp. And if anything, how to avoid it.

  • $\begingroup$ I suspect that the writer is asking for something along the lines of that counter-parties measure their adverse selection from their interactions with you, which isn't necessarily targeted at identifying latency arb specifically, but any incidence of high short-term adverse price movements after interacting with your flow. $\endgroup$ – afekz Feb 23 '16 at 9:57
  • $\begingroup$ I can say only about small dealers, they're no liquidity providers, but schema may be the same. Forex doesn't have common exchange, only separate ECN networks, sometimes one of these networks may execute big orders and other ones have to adjust their prices which may lead to significant gaps in prices, and this gap will lead to huge loss or profit to other traders. To prevent this, dealers usually use indicative prices and fill this gap slowly with multiple intermediate quotes. Latency arbitrage is a placing order in the place of this gap, so they know where you place your before you do this. $\endgroup$ – Anonymous Mar 9 '18 at 16:21
  • $\begingroup$ So, you're trying to use a "feature" that was intentionally created by a dealer. Dealer tracks all such "features" and every time when you try to use it against the dealer, he has a permission to cancel your profit saying that the quote was not from a live market. Because you're trying to trade quotes that were created by the dealer itself. $\endgroup$ – Anonymous Mar 9 '18 at 16:24

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