Latency Arbitrage revisited

Some of you may recall a white paper that we wrote a few months back titled “Latency Arbitrage” :–_Latency_Arbitrage_–_December_4__2009.pdf 

In this paper, we detailed the effects of having two separate quotation systems.  The fast system which the HFT’s use is constructed with high speed, co-located computers that have direct access to data feeds supplied by the exchanges.  The slow system that most investors rely on is run by CTS.  The difference in speed can be measured in milliseconds but the amount of money lost can be measured in billions of dollars.  HFT proponents, like the guy who runs an HFT shop over a hardware store in Red Bank, NJ, criticized our paper and said that this arbitrage wasn’t that big of deal.  Well, we were happy to see that Traders Magazine has finally caught on to the latency arbitrage story.  They published a very good article yesterday where they analyze the speed differential in the different sets of quotes.

 The article states that “direct data feed users get their market information before everyone else…those who can afford direct feeds get a distinct trading advantage.” They also quote an HFT trader as saying  “by using his own data feeds, co-locating his handlers and processing it himself, he avoids distance delays and saves between one and three milliseconds. This allows him plenty of time to execute a trade and beat the competition-a perfectly fair strategy in his book.”  We beg to differ as you already may know.  Unless this time differential is fixed, the HFT’s will continue to pick off institutional and retail orders as if they were “shooting ducks in a barrel of honey”.