Quantifying the high-frequency trading “arms race” (BIS)
A research paper from the BIS
Abstract
We use stock exchange message data to quantify the negative aspect of high-frequency trading, known as “latency arbitrage.”
The key difference between message data and widely-familiar limit order book data is that message data contain attempts to trade or cancel that fail. This allows the researcher to observe both winners and losers in a race, whereas in limit order book data you cannot see the losers, so you cannot directly see the races.
We find that latency-arbitrage races are very frequent (about one per minute per symbol for FTSE 100 stocks), extremely fast (the modal race lasts 5 to 10 millionths of a second), and account for a remarkably large portion of overall trading volume (about 20%). Race participation is concentrated, with the top 6 firms accounting for over 80% of all race wins and losses.
Citation
BIS working paper No.955 Matteo Aquilina, Eric Budish and Peter O’Neill