They have FPGA devices that will put out a quote for about a microsecond and then, since they know they are about to place a trade and withdrawal the quote at the same time, they do it. The order is hit before it has a chance to react. Its just logic . Nasdaq has this dumb thing where you can pay twice as much for 2 microseconds. They are just exploiting the anxiety of people who profit from latency arbitrage .
DOJ and SEC looking into ecxhange fees
- Thread starter ajacobson
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that is true, https://pubsonline.informs.org/doi/abs/10.1287/opre.2013.1165 , the value of going from 2 microseconds to 1 microsecond is quite a bit more than going from 4 microseconds to 2 microseconds
Abstract
Modern electronic markets have been characterized by a relentless drive toward faster decision making. Significant technological investments have led to dramatic improvements in latency, the delay between a trading decision and the resulting trade execution. We describe a theoretical model for the quantitative valuation of latency. Our model measures the trading frictions created by the presence of latency, by considering the optimal execution problem of a representative investor. Via a dynamic programming analysis, our model provides a closed-form expression for the cost of latency in terms of well-known parameters of the underlying asset. We implement our model by estimating the latency cost incurred by trading on a human time scale. Examining NYSE common stocks from 1995 to 2005 shows that median latency cost across our sample roughly tripled during this time period. Furthermore, using the same data set, we compute a measure of implied latency and conclude that the median implied latency decreased by approximately two orders of magnitude. Empirically calibrated, our model suggests that the reduction in cost achieved by going from trading on a human time scale to a low latency time scale is comparable with other execution costs faced by the most cost efficient institutional investors, and it is consistent with the rents that are extracted by ultra-low latency agents, such as providers of automated execution services or high frequency traders
Abstract
Modern electronic markets have been characterized by a relentless drive toward faster decision making. Significant technological investments have led to dramatic improvements in latency, the delay between a trading decision and the resulting trade execution. We describe a theoretical model for the quantitative valuation of latency. Our model measures the trading frictions created by the presence of latency, by considering the optimal execution problem of a representative investor. Via a dynamic programming analysis, our model provides a closed-form expression for the cost of latency in terms of well-known parameters of the underlying asset. We implement our model by estimating the latency cost incurred by trading on a human time scale. Examining NYSE common stocks from 1995 to 2005 shows that median latency cost across our sample roughly tripled during this time period. Furthermore, using the same data set, we compute a measure of implied latency and conclude that the median implied latency decreased by approximately two orders of magnitude. Empirically calibrated, our model suggests that the reduction in cost achieved by going from trading on a human time scale to a low latency time scale is comparable with other execution costs faced by the most cost efficient institutional investors, and it is consistent with the rents that are extracted by ultra-low latency agents, such as providers of automated execution services or high frequency traders
From https://iextrading.com/docs/A Comparison of Execution Quality across U.S. Stock Exchanges.pdf
This is what I was talking about a few posts up @qlai
Stale quote arbitrage:
Trading at a favorable price against a resting order in the brief windowafter an NBBO change but before the market center has received and/or processed the NBBOchange. For example, immediately after witnessing a down-tick, selling stock against a midpointpegged buy order at the stale higher midpoint price on a trading venue that has yet to receive theinformation of the stock’s down-tick.However, changes in the NBBO often appear as a multi-step process: venues at the inside maydesert the NBB one by one, for example, until it finally ticks downward. Other market participantsmay observe this shuffling and may probabilistically predict price changes before these movementsactually occur. This enables them to submit liquidity-taking orders at soon-to-be-stale prices beforeany venue (even one with a speed bump) can process the still-pending price change, as in crumblingquote arbitrage which is defined below
This is what I was talking about a few posts up @qlai
Stale quote arbitrage:
Trading at a favorable price against a resting order in the brief windowafter an NBBO change but before the market center has received and/or processed the NBBOchange. For example, immediately after witnessing a down-tick, selling stock against a midpointpegged buy order at the stale higher midpoint price on a trading venue that has yet to receive theinformation of the stock’s down-tick.However, changes in the NBBO often appear as a multi-step process: venues at the inside maydesert the NBB one by one, for example, until it finally ticks downward. Other market participantsmay observe this shuffling and may probabilistically predict price changes before these movementsactually occur. This enables them to submit liquidity-taking orders at soon-to-be-stale prices beforeany venue (even one with a speed bump) can process the still-pending price change, as in crumblingquote arbitrage which is defined below
No possibility of chicken and egg problem ? if the D-limit proposal is accepted then orders on IEX can set the nbbo so that will increase volume ? they dont charge anything for data so they arent really selling anything but seems like trying to collect fees thru executions. What percentage of your trading is market orders vs limit orders, volume-wise ?
Believe what you want dude, but I know what I know. from the article:
"In other words, on average,immediately after receiving an execution on one of the standard maker-taker exchanges, a trader is half a cent worse off per share than they would have been had their order been executed on IEX, BX,or BYX. "
but its off-topic for this thread anyway
Believe what you want dude, but I know what I know. from the article:
"In other words, on average,immediately after receiving an execution on one of the standard maker-taker exchanges, a trader is half a cent worse off per share than they would have been had their order been executed on IEX, BX,or BYX. "
but its off-topic for this thread anyway
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