Journal
JOURNAL OF FINANCIAL MARKETS
Volume 45, Issue -, Pages 37-60Publisher
ELSEVIER
DOI: 10.1016/j.finmar.2019.06.003
Keywords
Latency arbitrage; High-frequency trading; SIP; Market structure
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Using new data from the two U.S. securities information processors (SIPs) between August 6, 2015 and June 30, 2016, we examine claims that high-frequency trading (HFT) firms use direct feeds to exploit traders who rely on SIP prices. Across $3.7 trillion of trades in the Dow Jones 30, the SIPs report quote updates from exchanges 1,128 mu s after they occur. However, the SIP-reported National Best Bid and Offer (NBBO) matches the NBBO calculated without reporting latencies in 97% of all SIP-priced trades. Liquidity-taking orders gain on average $0.0002/share when priced at the SIP-reported NBBO rather than the instantaneous NBBO, but aggregate gross profits are just $14.4 million. These findings indicate that direct feed arbitrage is not a meaningful source of HFT profits, nor can it explain the arms race for trading speed. (C) 2019 Elsevier B.V. All rights reserved.
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