3 ms·

I trade options spreads on orders of 2-week to month holding periods. So HFT isn't my specialty. But I'm trying to understand how latency arbitrage work, please

I trade options spreads on orders of 2-week to month holding periods. So HFT isn't my specialty. But I'm trying to understand how latency arbitrage work, please let me know if this sounds about right. (assuming all quotes at top of book is 100-lot). at t = 0 ns IWM quotes with NBBO of 120.10/120.15 BATS quotes IWM at spread of 120.10/120.15 ARCA quotes IWM at spread of 120.10/120.16 at t = 1 ns Someone lowers their offer on ARCA, improving the spread on ARCA to 120.10/120.12* Someone hikes their bid on BATS, improving the spread on BATS to 120.13*/120.16 Now according RegNMS, that improved ARCA offer should cross with the improved BATS bid and make a trade at 100 lot of IWM at 120.13. However, SIP lags by X ns; so either ARCA nor BATS route their customer's order externally for best price before X ns. at t = a ns where a < X (where x is the SIP latency) HFT co-located to BATS and ARCA detects this improved in price. HFT bot takes the BATS bid, short IWM at 120.13, (position: -100 IWM; acct-cash: $12013) HFT bot takes the ARCA offer, buys back IWM at 120.12, (position: 0 IWM; acct-cash: $1) $1 revenue, and you do this a much of times a day and profit?

harmegido 11y ago
I'd also point out that it can be more simple than that - what you've described is 100% arbitrage. However, perhaps someone simply buys several levels (sweeps) the BATS book. Assuming they didn't also take out ARCA and IWM and everywhere else, it then becomes a race to buy at those exchanges. Sure that example won't give a risk-free profit, but getting good edge like that thousands of times a day will average out to a nearly guaranteed winning day.
crazypyro 11y ago
I believe they also front-run (I think this is the correct term) big orders. So if HFT bot at BATS sees someone buying all of the lower priced shares of IWM, the HFT bot tries to buy the shares of IWM at other exchanges that are less than the shares left at BATS and before the other exchanges can update prices from the BATS sale. They have this information about the large order microseconds before the non-HFT firms.
- kasey_junk 11y ago
  This is completely incorrect on at least 2 counts. First of they did that it wouldn't be front running, which requires both seeing your order before it hits the exchange and a fiduciary duty to you. Second the hft doesn't buy up existing shares from someone else on the other exchange they change the price of (or cancel entirely) the shares they themselves are offering on the other exchange.

harmegido 11y ago

I'd also point out that it can be more simple than that - what you've described is 100% arbitrage. However, perhaps someone simply buys several levels (sweeps) the BATS book. Assuming they didn't also take out ARCA and IWM and everywhere else, it then becomes a race to buy at those exchanges. Sure that example won't give a risk-free profit, but getting good edge like that thousands of times a day will average out to a nearly guaranteed winning day.

crazypyro 11y ago

I believe they also front-run (I think this is the correct term) big orders. So if HFT bot at BATS sees someone buying all of the lower priced shares of IWM, the HFT bot tries to buy the shares of IWM at other exchanges that are less than the shares left at BATS and before the other exchanges can update prices from the BATS sale. They have this information about the large order microseconds before the non-HFT firms.

kasey_junk 11y ago
This is completely incorrect on at least 2 counts. First of they did that it wouldn't be front running, which requires both seeing your order before it hits the exchange and a fiduciary duty to you. Second the hft doesn't buy up existing shares from someone else on the other exchange they change the price of (or cancel entirely) the shares they themselves are offering on the other exchange.