A note on the relationship between high-frequency trading and latency arbitrage
Authored by Viktor Manahov
Date Published: 2016
DOI: 10.1016/j.irfa.2016.06.014
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Abstract
We develop three artificial stock markets populated with two types of
market participants - HFT scalpers and aggressive high frequency traders
(HFTrs). We simulate real-life trading at the millisecond interval by
applying Strongly Typed Genetic Programming (STGP) to real-time data
from Cisco Systems, Intel and Microsoft. We observe that HFT scalpers
are able to calculate NASDAQ NBBO (National Best Bid and Offer) at least
1.5 ms ahead of the NASDAQ SIP (Security Information Processor), resulting in a large number of latency arbitrage opportunities. We also
demonstrate that market efficiency is negatively affected by the latency
arbitrage activity of HFT scalpers, with no countervailing benefit in
volatility or any other measured variable. To improve market quality, and eliminate the socially wasteful arms race for speed, we propose
batch auctions in every 70 ms of trading. (C) 2016 Published by Elsevier
Inc.
Tags
Market
Liquidity