How Prevalent and Profitable are Latency Arbitrage Opportunities on U.S. Stock Exchanges?

Wah, Elaine

doi:10.2139/ssrn.2729109

Cited by 9 publications

(7 citation statements)

References 18 publications

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“…We find that inefficiencies due to the physical fragmentation of the market are widespread, totaling over $160M USD in realized opportunity cost and 2,872,734 dislocations of magnitude > $0.01 and duration > 545 µs. These figures correspond well with those reported in other bodies of work [23,26]. Additionally, we found that the average trade that occurred during a dislocation moved approximately 5% more value than the average trade that occurred when the NBBO and DBBO were synchronized (see Table I row 10).…”

Section: Discussionsupporting

confidence: 90%

“…A study by the TABB Group of trade execution quality on midpoint orders in ATSs also noted the existence of latency between the SIP and direct data feeds, as well as the existence of intra-direct feed latency, due to differences in exchange and ATS software and other technical capabilities [25]. Wah [26] calculated the potential arbitrage opportunities generated by latency arbitrage on the S&P 500 in 2016 using data from the SEC's MIDAS platform [27]. Wah's study is of particular interest as it is the only other study of which we are aware that has used comprehensive data.…”

Section: B Empirical Studies Of Market Dislocationsmentioning

confidence: 99%

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Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30

et al. 2020

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Using the most comprehensive source of commercially available data on the US National Market System, we analyze all quotes and trades associated with Dow 30 stocks in calendar year 2016 from the vantage point of a single and fixed frame of reference. We find that inefficiencies created in part by the fragmentation of the equity marketplace are relatively common and persist for longer than what physical constraints may suggest. Information feeds reported different prices for the same equity more than 120 million times, with almost 64 million dislocation segments featuring meaningfully longer duration and higher magnitude. During this period, roughly 22% of all trades occurred while the SIP and aggregated direct feeds were dislocated. The current market configuration resulted in a realized opportunity cost totaling over $160 million, a conservative estimate that does not take into account intra-day offsetting events. * Corresponding authors: Brian Tivnan (btivnan@mitre.org) and Christopher Danforth (chris.danforth@uvm.edu).

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Section: Discussionsupporting

confidence: 90%

Section: B Empirical Studies Of Market Dislocationsmentioning

confidence: 99%

Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30

et al. 2020

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“…In the real world, however, this is unlikely to be achievable in practice; particularly in liquid markets, where 1/λ 1ms and falling rapidly. 5 In Fig. 4b, we see that total discounted surplus of traders increases as interarrival time increases.…”

Section: B Arrival Rate and Latency: An Upper Bound On Arbitragementioning

confidence: 82%

“…In 2012, aggregated annual profits from latency arbitrage was estimated at $21bn [4]. Potential profits from latency arbitrage opportunities in S&P500 symbols during 2014 was estimated at $3.03bn [5]. HFT profits (all strategies, not just latency arbitrage) for 2013 across all US share trading was estimated at $1.25bn [2].…”

Section: Introductionmentioning

confidence: 99%

Agent-Based Model Exploration of Latency Arbitrage in Fragmented Financial Markets

Matthew

Cartlidge

2018

2018 IEEE Symposium Series on Computational Intelligence (SSCI)

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Computerisation of the financial markets has precipitated an arms-race for ever-faster trading. In combination, regulatory reform to encourage competition has resulted in market fragmentation, such that a single financial instrument can now be traded across multiple venues. This has led to the proliferation of high-frequency trading (HFT), and the ability to engage in latency arbitrage (taking advantage of accessing and acting upon price information before it is received by others). The impact of HFT and the consequences of latency arbitrage is a contentious issue. In 2013, Wah and Wellman used an agent-based model to study latency arbitrage in a fragmented market. They showed: (a) market efficiency is negatively affected by the actions of a latency arbitrageur; and (b) introducing a discrete-time call auction (DCA) eliminates latency arbitrage opportunities and improves efficiency. Here, we explore and extend Wah and Wellman's model, and demonstrate that results are sensitive to the bid-shading parameter used for zero-intelligence (ZIC) trading agents. To overcome this, we introduce the more realistic, minimally intelligent trading algorithm, ZIP. Using ZIP, we reach contrary conclusions: (a) fragmented markets benefit from latency arbitrage; and (b) DCAs do not improve efficiency. We present these results as evidence that the debate on latency arbitrage in financial markets is far from definitively settled, and suggest that ABM simulation-a form of decentralised collective computational intelligence-is a productive method for understanding and engineering financial systems.

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“…Presumably the billions HFT firms invest annually in technology and infrastructure (Adler, 2012) represent a lower bound on gross trading profit. across U.S. stock exchanges, with total potential yearly profit in 2014 exceeding $3 billion (Wah, 2016). In this study, we model a specific type of latency arbitrage (also termed slow-market arbitrage (Lewis, 2014)) in which disparities arise from the fragmentation of securities markets across multiple exchanges.…”

Section: Introductionmentioning

confidence: 99%

Latency arbitrage in fragmented markets: A strategic agent-based analysis

Wah¹,

Wellman

2017

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Abstract.We study the effect of latency arbitrage on allocative efficiency and liquidity in fragmented financial markets. We employ a simple model of latency arbitrage in which a single security is traded on two exchanges, with price quotes available to regular traders only after some delay. An infinitely fast arbitrageur reaps profits when the two markets diverge due to this latency in cross-market communication. Using an agent-based approach, we simulate interactions between high-frequency and zero-intelligence trading agents. From simulation data over a large space of strategy combinations, we estimate game models and compute strategic equilibria in a variety of market environments. We then evaluate allocative efficiency and market liquidity in equilibrium, and we find that market fragmentation and the presence of a latency arbitrageur reduces total surplus and negatively impacts liquidity. By replacing continuous-time markets with periodic call markets, we eliminate latency arbitrage opportunities and achieve further efficiency gains through the aggregation of orders over short time periods.

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How Prevalent and Profitable are Latency Arbitrage Opportunities on U.S. Stock Exchanges?

Cited by 9 publications

References 18 publications

Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30

Fragmentation and inefficiencies in US equity markets: Evidence from the Dow 30

Agent-Based Model Exploration of Latency Arbitrage in Fragmented Financial Markets

Latency arbitrage in fragmented markets: A strategic agent-based analysis

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