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13 · Latency and speed races

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Markets, lesson 13

Latency and speed races

Where the microseconds go, and why firms race for them.

You know price-time priority and the opening auction, and you've quoted prices that traders who know first can pick off.

Part 1. A race to a stale price

You're offering 500 GULL at 101. Elsewhere the price just jumped to 103, so your 101 is now a gift. You send a cancel. A faster trader sends a buy at 101. Whichever reaches the exchange first wins. Run the race.

Your cancel against their buyLive

Under price-time priority the exchange serves whichever message arrives first, so a 1 µs lead (a millionth of a second) counts as much as a whole second. The faster side doesn't win every race, but it wins most, and second place gets nothing. So firms keep paying for faster links.

Stale quote and sniping

A stale quote is a resting price the news has made wrong. Sniping, or latency arbitrage, is racing to trade against stale quotes before their owners can cancel them.

Your turn

Both of you react within about 10 µs, and their link is 1 µs faster. If jumps like this happen a thousand times a year, who wins most races?

First in line is served first, however small the lead. With a 1 µs edge and a 1 µs wobble each way, they win about three races in four, as the lab showed.

Part 2. Where the microseconds go

Keep going with Pro

You've done the first part. Pro opens the rest of this lesson, and every other one.

Still to come
  1. Where the microseconds go
  2. The average hides the worst
  3. Who pays for the race
  4. Batch the clock
  5. A worked problem
  6. The same thing, for real
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Next lessonFast data structuresWhy trading code keeps prices as whole numbers and memory close by. Start lesson 14

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