Hi Yodel,
I may not be understanding you clearly so correct me if I am not.
Take EUR/USD, You buy 100,000 EUR and sell 130,000 USD at rate 1.3000 (0 spread). Your account has 10,000 margin in USD. This is a long position.
What’s happening here is the Broker has arranged a loan of 130,000 USD from party A who wished to sell it. Now you have 130,000 USD Which you now sell and buy 100,000 EUR from party B who has loaned you through the broker now party B is on the short side.
Fast forward… Rate moves to 1.3500 you then now reverse the transaction. You ask party B to return your now 135,000 USD to you while you return his 100,000 EUR bearing in mind you gave 130,000 USD he must now pay you an extra 5,000 USD he will not do this via the 100,000 EUR instead it will be deducted from his margin assuming he had a 10,000 USD margin, he will now have to take 5,000 USD from his margin. You on the other hand would receive that deducted $5000 from party B into your account giving you 15,000 USD.
Not forgetting Party A who now needs his initially 130,000 USD back as well, this will now be returned to him and everyone is now content.
So what has happened? Party A (liquidity provider) granted initial loan based on your margin 130,000 USD.
You traded it with Party B who also received a loan from Party A (two faced bastard) on the other side of the market for 100,000 EUR based on his margin. Now the rate/price controlled by Party A and his buddies in the interbank market have moved the price against one of you and has charged both of you a cost/spread to make money.
You were right and Party B was wrong and party A does not care as he has not spent money in fact has gained from the spread and any position he himself has held. In the end all he had to do was wait. Let us for one second entertain the possibility that in fact no cash existed at all and this whole transaction was based on nothing and didn’t even take place, in fact all party A did was open 2 positions and close them, then change the digits in each persons account to match the trade. That’s it… And you just paid him for it too.
Okay! That’s out the way…
So now do you really think that by trading correlating pairs you are arbitrage trading? The most common arbitrage possible is from taken advantage of a swap rate. I have never tried this so not sure but one could perhaps buy AUD/USD for example with a large margined account and leave it with out stops or TP’s and then hedge the trade with a pair that is known to move in the opposite direction with a higher yielding swap rate, the hedge should take out the margin risk all the time the swap rate will be accumulating after a month or two you close out all trades and work away with the swap.
Brokers close you account instantly if this is discovered. Arbitrage is the business of major institutions not retail traders.