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Out of sync: latency arbitrage on European markets
Lisa Kaminski
LMU Munich, Germany
This study examines the economics of latency arbitrage on fragmented European equity markets using nanosecond-level message data. I identify and trace the lifecycle of 277,654 stale quotes on thirteen regulated exchanges for a sample of 624 equities. Findings reveal that latency arbitrage is neither instantaneous nor frictionless, as only 54 percent of arbitrage opportunities are exploited by High-Frequency Traders (HFTs). Thus, market makers are not always adversely selected when quoting in fragmented markets. Throughout the sample period, HFTs generate substantial profits of 1.4 million Euro at cost borne by liquidity providers. Heterogeneous market structures are the main determinant of empirically observable stale quote sniping patterns while HFTs rely on nonlinear variable combinations to facilitate final sniping decisions.
