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Disclaimer: Latency Scalping is considered illegal by most brokers.
Before I proceed with this article, please understand that this is purely an informational article and in no way encourages anyone to apply the methods discussed here.
In 2005, I remember trading on two platforms exclusively... mainly because one did not charge rollover interest (which I liked for long-term aggresive trades) while the other allowed hedging (very profitable for sideways trading).
There was also something that separated those two brokers, which I never noticed until a trader friend talked to me about it.
During very active market periods, usually during large news releases or surprise events (I also wrote an article on this:) ), broker quotes, or the prices they display, can do one of two things:
1. lag, then suddenly jump or drop in price changes 2. widen in spread
Coincidentally, the two brokers I used each did different things during price spikes... the first always took a moment or two to adjust to the price change (while maintaining its spread), while the 2nd broker would be slower to react to price action, and widen its spread to over 10 or even up to 20 pips!
Closer inspection on many brokers will reveal that this is common... some brokers will be slow to react, some will be faster and widen the spread. Many traders noticed this and took advantage.
Here is an example:
GPB/USD price is 1.9867/1.9870 on Broker 1 and Broker 2.
The Bank of England raises interest rates by 0.25% in a "surprise event". The market is shocked because there was no indication of this ever happening. Naturally this news is good for GBP... and the following happens
Broker 1 lags for a few moments, and its price suddenly jumps to 1.9912/15 to reflect sudden demand for GBP/USD.
Broker 2 reacts instantly, but the ask price stats, while the bid price rises, as the spread widens. Now its quote is 1.9867/1.9887 (20 pip spread).
Smart traders who notice this would instantly BUY at the Broker 2 and SELL at Broker 1 in the same amount. Then, later, as the market returns to normalcy and prices return to stable quotes... the traders would close both positions at the same time. This gives them guaranteed profits.
This method of trading is known as "latency scalping" because it is short term (10 to 30 minutes), and it depends on latency of brokers. Most brokers ban this form of trading - although there is no way for them to detect it properly, they usually limit trader accounts whom they suspect of this.
There are of course certain assumptions that "latency scalpers" make:
1. Brokers will guarantee their fill at time of request. 2. No server lag will occur due to frantic trading.
And that's it! Remember, don't try it without practice if you're interested... and don't even try it if your broker's User Agreement forbids it:)
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