4 ms·

I'm a total trading noob. Can you explain why a low latency is worth so much? And how these traders "exploit" that advantage to make a profit?

by h4kor 2y ago

sgarland 2y ago
Reaction time to events, be it news, securities movements, etc. If you’re early, you can open positions before large movement has taken place; you can also close those positions precisely when you want. Sometimes this may be making pennies (x N shares), other times it may be quite substantial.
re-thc 2y ago
A delay could impact the price. Say you wanted it at $5.00 but it becomes $5.01 by the time your bid comes in you either miss out or pay more. These traders do it at high frequency. Imagine $0.01 x millions at a time.
smabie 2y ago
What would you do if you knew the price of something 1 day before everyone else? How would you make money off that?
lotsofpulp 2y ago
In any market, a seller or buyer willing to close the transaction quicker is a benefit for the opposing seller or buyer. Quicker can be on the scale of years to milliseconds, depending on what is being exchanged and amongst whom.
washedup 2y ago
This is extremely simplifying the nuance, but imagine there are two traders who want to buy what a single trader is willing to sell at a given price? Well, the first one to get to the exchange and "lift the offer" will get the price, while the second trader will have to pay a higher price.
ioblomov 2y ago
High-frequency trading is essentially a low-margin, high-volume play that exploits small price differences for profit. The most obvious example would be arbitraging the same security on different exchanges (buying low on one and selling pennies higher on another). Similarly, algorithmic models could exploit price volatility for individual securities on the same exchange. Under such conditions, fractions of a second can determine whether a given trade is a winning or losing one.
toast0 2y ago
Most exchanges prioritize their order book by price, then time. If you're a market maker, you (usually) want your orders to be selected. A common market making strategy is to issue a buy order a bit lower than the last executed price and a sell order a bit higher than the last executed price with the assumption that there's a lot of random and small price motion up and down. If you can consistently process order fills and update/replace your orders in the book faster than the other traders, you'll get more of the trading volume, and other traders will have to compete with you on price. For some stocks where the minimum price increment is large relative to share price, most market making traders will converge on the same buy and sell prices, so latency is it. There's also value in responding to filled orders in one venue at other venues. Many stocks have a 'home' exchange, but trade at many exchanges, if there's a significant price movement at one exchange, other venues will quickly follow, but if you can follow quicker than most, you can execute against the now mispriced orders on the book, etc.

I'm a total trading noob. Can you explain why a low latency is worth so much? And how these traders "exploit" that advantage to make a profit?

by h4kor 2y ago

I'm a total trading noob. Can you explain why a low latency is worth so much? And how these traders "exploit" that advantage to make a profit?

sgarland 2y ago

Reaction time to events, be it news, securities movements, etc. If you’re early, you can open positions before large movement has taken place; you can also close those positions precisely when you want. Sometimes this may be making pennies (x N shares), other times it may be quite substantial.

re-thc 2y ago

A delay could impact the price. Say you wanted it at $5.00 but it becomes $5.01 by the time your bid comes in you either miss out or pay more. These traders do it at high frequency. Imagine $0.01 x millions at a time.

smabie 2y ago

What would you do if you knew the price of something 1 day before everyone else? How would you make money off that?

lotsofpulp 2y ago

In any market, a seller or buyer willing to close the transaction quicker is a benefit for the opposing seller or buyer. Quicker can be on the scale of years to milliseconds, depending on what is being exchanged and amongst whom.

washedup 2y ago

This is extremely simplifying the nuance, but imagine there are two traders who want to buy what a single trader is willing to sell at a given price? Well, the first one to get to the exchange and "lift the offer" will get the price, while the second trader will have to pay a higher price.

ioblomov 2y ago

High-frequency trading is essentially a low-margin, high-volume play that exploits small price differences for profit. The most obvious example would be arbitraging the same security on different exchanges (buying low on one and selling pennies higher on another). Similarly, algorithmic models could exploit price volatility for individual securities on the same exchange. Under such conditions, fractions of a second can determine whether a given trade is a winning or losing one.

toast0 2y ago

Most exchanges prioritize their order book by price, then time. If you're a market maker, you (usually) want your orders to be selected. A common market making strategy is to issue a buy order a bit lower than the last executed price and a sell order a bit higher than the last executed price with the assumption that there's a lot of random and small price motion up and down. If you can consistently process order fills and update/replace your orders in the book faster than the other traders, you'll get more of the trading volume, and other traders will have to compete with you on price. For some stocks where the minimum price increment is large relative to share price, most market making traders will converge on the same buy and sell prices, so latency is it. There's also value in responding to filled orders in one venue at other venues. Many stocks have a 'home' exchange, but trade at many exchanges, if there's a significant price movement at one exchange, other venues will quickly follow, but if you can follow quicker than most, you can execute against the now mispriced orders on the book, etc.