3 ms·

How can shares of a particular security have two different prices on two exchanges without a horde of very smart people rushing in to arbitrage?

tptacek 16y ago
I can't see how they can.
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- yummyfajitas 16y ago
  Near as I can tell, fees will be high enough so as to make the arbitrage unprofitable. I believe the mechanism going on here is this: Big Traders offer to buy at $10.00 on Light Pool. Their offer sits there, and gets filled slowly over time. Then, for whatever reason the price moves, and a bunch of speed traders try to sell on INET/ARCA/BATS at $9.99 (perhaps in anticipation of the market moving down to $9.90). Due to the high fees, they don't place those orders on Light Pool. The market crosses for a little while, no trades occur, and Big Traders get the opportunity to pull their $10.00 order from light pool. However, the article wasn't clear enough for me to be certain.
- asmithmd1 16y ago
  Whenever you see a stock price it is always the price where the stock last changed hands. If the stock is lightly traded then the last trade may have been for as few as 100 shares. So what is the price if you want to buy or sell 200,000 shares of that stock? I am sure it is not the last quoted price. They are setting-up a market where slower and bigger trades can take place
andrew1 16y ago
Well, here's a situation where it can't happen: Exchange A: Price you can BUY ACME Co. = $34.50 Exchange B: Price you can BUY ACME Co. = $34.45 Exchange B: Price you can SELL ACME Co. = $34.40 Exchange A: Price you can SELL ACME Co. = $34.35
- tastybites 16y ago
  Sure, but what would the people paying more be getting? Less volatility? More assurance that their price is closer to long term averages? How is that possible? Is this possible because the market maker ensures some kind of buffer from the HFT shops in exchange for a bigger spread? I'm not in this field so I ask from ignorance.
  - yummyfajitas 16y ago
    You can't pay more - it's illegal (see RegNMS). You must buy on exchange B before buying on exchange A.
    - andrew1 16y ago
      There are markets outside of the US though, where it would be possible to buy on the more expensive exchange.
  - andrew1 16y ago
    I think you're generally right that people would normally choose the better prices. A few hypothetical reasons why someone might not could be: once fees/commissions are included the exchange with the worse price could actually be cheaper; an exchange might offer a rebate based on volume so trading on the more expensive exchange could help someone gain a larger rebate; if you wanted to trade a large quantity immediately in one order, and your quantity was greater than the quantity available at the best price, then you'd need to eat into the order book, and the resulting average price might be cheaper on the more expensive exchange; you might be banned from the cheaper exchange and so would have to trade on the more expensive one.

tptacek 16y ago

I can't see how they can.

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yummyfajitas 16y ago
Near as I can tell, fees will be high enough so as to make the arbitrage unprofitable. I believe the mechanism going on here is this: Big Traders offer to buy at $10.00 on Light Pool. Their offer sits there, and gets filled slowly over time. Then, for whatever reason the price moves, and a bunch of speed traders try to sell on INET/ARCA/BATS at $9.99 (perhaps in anticipation of the market moving down to $9.90). Due to the high fees, they don't place those orders on Light Pool. The market crosses for a little while, no trades occur, and Big Traders get the opportunity to pull their $10.00 order from light pool. However, the article wasn't clear enough for me to be certain.
asmithmd1 16y ago
Whenever you see a stock price it is always the price where the stock last changed hands. If the stock is lightly traded then the last trade may have been for as few as 100 shares. So what is the price if you want to buy or sell 200,000 shares of that stock? I am sure it is not the last quoted price. They are setting-up a market where slower and bigger trades can take place

andrew1 16y ago

Well, here's a situation where it can't happen: Exchange A: Price you can BUY ACME Co. = $34.50 Exchange B: Price you can BUY ACME Co. = $34.45 Exchange B: Price you can SELL ACME Co. = $34.40 Exchange A: Price you can SELL ACME Co. = $34.35

tastybites 16y ago
Sure, but what would the people paying more be getting? Less volatility? More assurance that their price is closer to long term averages? How is that possible? Is this possible because the market maker ensures some kind of buffer from the HFT shops in exchange for a bigger spread? I'm not in this field so I ask from ignorance.
- yummyfajitas 16y ago
  You can't pay more - it's illegal (see RegNMS). You must buy on exchange B before buying on exchange A.
  - andrew1 16y ago
    There are markets outside of the US though, where it would be possible to buy on the more expensive exchange.
- andrew1 16y ago
  I think you're generally right that people would normally choose the better prices. A few hypothetical reasons why someone might not could be: once fees/commissions are included the exchange with the worse price could actually be cheaper; an exchange might offer a rebate based on volume so trading on the more expensive exchange could help someone gain a larger rebate; if you wanted to trade a large quantity immediately in one order, and your quantity was greater than the quantity available at the best price, then you'd need to eat into the order book, and the resulting average price might be cheaper on the more expensive exchange; you might be banned from the cheaper exchange and so would have to trade on the more expensive one.