“Two recent studies of latency arbitrage suggest the stock-market structure needs a remodel if it’s ever going to stop billions of dollars going from unwitting investors into the pockets of high-speed trading firms,” Rob Curran reports for Fortune.
“‘Latency’ refers to the time it takes for a stock quote to get from an exchange’s server to a trader’s screen. This varies from exchange to exchange and from trading computer to computer. Latency arbitrageurs take advantage of these inconsistencies,” Curran reports. “It’s well known that some high-frequency computer geeks at firms like Getco LLC take advantage of latency, just as it’s well known that some Blackjack-playing computer geeks count cards in Las Vegas casinos. But it’s never been clear how much this type of trading costs the little guy on Wall Street.”
“Terrence Hendershott, a professor at the Haas business school at the University of California at Berkeley, wanted to find out,” Curran reports. “According to his study, in one day (May 9), playing one stock (Apple (AAPL)), Hendershott walked away with almost $377,000 in theoretical profits by picking off quotes on various exchanges that were fractions of a second out of date. Extrapolate that number to reflect the thousands of stocks trading electronically in the U.S., and it’s clear that high-frequency traders are making billions of dollars a year on a simple quirk in the electronic stock market.”
Read more in the full article here.
[Thanks to MacDailyNews Reader “Edward W.” for the heads up.]