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10

An interesting starting point is The Cost of Latency by Moallemi and Saglam. After setting up a simple order execution problem --- in which a trader must chose between a market order and a limit order and guarantee execution over a fixed interval $[0,T]$, they proceed to derive a (complex) close form solution for the optimal strategy and evaluate the impact ...

8

There are typically two important metrics: Order to Accept. This measures the round-trip time it takes your application to send an order to the exchange and get an accept, cancel, or execute back. Think of it as the minimum amount of time required for you to ask the market to do something and know whether it's been done. This plays an important role when ...

7

If this question is about matching engine latency then there are plenty of resources on the web. The short answer is that across various exchanges the latency is currently in range from hundreds of milliseconds to hundreds of microseconds. To name a few (as of 2010): NASDAQ: 250 us Australia Stock Exchange: 300 us Hong Kong Stock Exchange: 9 ms AFAIK ...

5

Jordan (@jordan.baucke) in his answer suggests that most latency arbitrages are actually market making strategies, as opposed to classical price arbitrage. While I generally agree, I can think of two exceptions: Equity price arbitrage in fragmented markets (See the fragulator for more on this). In this environment, negative spreads can arise and the ...

3

You're specifically interested in latency arbitrage (see, for instance, this old WSJ article). This strategy is strictly about being faster than everyone else. You can imagine any number of instances when this would matter (see this discussion of popular algos). For instance, if you can detect another algorithm trading (this is known as a "sniffer"), ...

3

You may want to look at STAC research, http://www.latencystats.com/ and other sites that you can find by searching for "latency" and "market data" I have no affiliation with those two links, however I am a principal in a company that measures and compares latency from exchanges.

3

If I understand correctly the TCP roundtrip time can be used as a posteriori proxi for the order entry gateway delay. So assuming the roundtrip time is composed of gate delay and independent other delays $RTT_g(t) = dT_g(t) + d_g(t)$ with assumed $Cov(dT_g,d_g)=0$ and $Cov(d_i,d_j)=0$. Minimizing the this combination of gate delay and other delays is ...

2

First the kind of strategy you plan to implement is of importance: If it is scaling (arbitraging spread crosses: buy at one ask one one venue that is cheaper than one bid in another venue), the kind of approach you plan to use is rational. Nevertheless you should take into account: the fact that the latency is somehow not deterministic, use a Poisson ...

2

Market making (to collect a liquidity rebate)? Flash trading (when the order is displayed to internal market participants prior to being distributed to the wider market)? *1 I think more generally strategies that implement pure latency arbitrage are related to transaction market making (providing liquidity within markets or securities) rather than price ...

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