Re:U.S. stock markets are rigged, says author Michael Lewis
by kasey_junk on Monday March 31, 2014 @08:06AM
(#7500878)
What you describe as "useless" latency arbitrage sounds like the mechanisms for a very efficient market to me.
As a buyer of an ETF or as a market participant looking for trading venues I needn't spend lots of resources ensuring that the prices are in sync. Those costs have been born by the specialists in those arbitrage opportunities and it is a very cut throat efficient system.
Re:U.S. stock markets are rigged, says author Michael Lewis
by cma on Monday March 31, 2014 @09:35PM
(#7505610)
Take out the arbitragers and all the other participants as a whole keep more money. Spreads may increase, but one party to the transactions always earns the spread and the other loses it, netting out to zero, rather than compensating latency arbitragers (and paying to generate waste heat in their datacenters) which nets out to less than zero.
There is some value to keeping things liquid, but that value isn't tied at all to the amount of money that arbitragers get compensated. Consider that whether the latency is 1ms or 5ms, the fastest arbitrager wins. But to bring things down to 1ms from 5ms may require 10X more expense and waste, lowering the compensation to the arbitrager. In a competitive enough environment they simply burn up all of the spreads into waste heat and redundant fiber infrastructure.
mutual fund X places two market orders to buy and take out the current offers, one on A and one on B. Its order on A executes at $100, taking out the liquidity and making the new best offer there $100.01
HFT firm Y sees this execution and cancels their offer of $100 on exchange B and replaces it with one at $100.01 all before the order that was placed on B arrives.
This is a market fragmentation issue, Reg NMS tries to address this but doesn't really work at these timescales, because you only have to comply based on the current quotes you are getting from the exchanges, which could be many milliseconds behind (and if your system is slow to process the quotes and makes more money as a result, you won't be getting a task from your boss to speed it up).
http://en.wikipedia.org/wiki/Regulation_NMS
There are many other types of useless latency arbitrage that don't depend on market fragmentation, like trading on the difference in price between ETFs (basically a basket of stocks usually trying to match something like the makeup of the entire S&P) and the underlying individual stocks. Each time the underlyings change, the ETF price changes (within reason, risk hedging activity etc. could make the ETF temporarily get out of sync, but that is just another latency arbitrage oppurtunity). Whoever is faster wins.
It's pointless, there are datacenters full of servers running wait loops on incoming data via DMA so that they don't have to pay the latency price of a system call and context switch to the kernel. Basically burning up part of that mutual fund's money into waste heat.