I think this, more than any other source, illustrates what is meant by latency arbitrage, or "what HFT firms do".
Long story short, In the chart, the red and black squares are "fast", while the blue squares are "slow".
When a trade happens on an exchange there is an opportunity for HFT firms to look for mispricings on the exchanges with blue squares due to the HFT firm knowing what happened even before the blue squared exchange does.
The reason the HFT firms have advance knowledge is that they build their own networks consisting of microwave or fibre lines that are faster than the SIP(blue square pricing source).
it's not always there and its certainly the type of trade that quickly converges into a winner take all event, but this is latency arbitrage in a nutshell.
What the diagram is missing is the 40 dark pools in the US, almost all of which use the SIP to some degree, which only exacerbates the problem.
TL/DR distributed systems are tough, even more so when the people controlling the money have a vested interest in making it so.
https://qht.co/item?id=9638748
I think this, more than any other source, illustrates what is meant by latency arbitrage, or "what HFT firms do".
Long story short, In the chart, the red and black squares are "fast", while the blue squares are "slow".
When a trade happens on an exchange there is an opportunity for HFT firms to look for mispricings on the exchanges with blue squares due to the HFT firm knowing what happened even before the blue squared exchange does.
The reason the HFT firms have advance knowledge is that they build their own networks consisting of microwave or fibre lines that are faster than the SIP(blue square pricing source).
it's not always there and its certainly the type of trade that quickly converges into a winner take all event, but this is latency arbitrage in a nutshell.
What the diagram is missing is the 40 dark pools in the US, almost all of which use the SIP to some degree, which only exacerbates the problem.
TL/DR distributed systems are tough, even more so when the people controlling the money have a vested interest in making it so.