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How rigged are stock markets? Evidence from microsecond timestamps

Robert P. Bartlett and Justin McCrary

Journal of Financial Markets, 2019, vol. 45, issue C, 37-60

Abstract: Using new data from the two U.S. securities information processors (SIPs) between August 6, 2015 and June 30, 2016, we examine claims that high-frequency trading (HFT) firms use direct feeds to exploit traders who rely on SIP prices. Across $3.7 trillion of trades in the Dow Jones 30, the SIPs report quote updates from exchanges 1,128 μs after they occur. However, the SIP-reported National Best Bid and Offer (NBBO) matches the NBBO calculated without reporting latencies in 97% of all SIP-priced trades. Liquidity-taking orders gain on average $0.0002/share when priced at the SIP-reported NBBO rather than the instantaneous NBBO, but aggregate gross profits are just $14.4 million. These findings indicate that direct feed arbitrage is not a meaningful source of HFT profits, nor can it explain the arms race for trading speed.

Keywords: Latency arbitrage; High-frequency trading; SIP; Market structure (search for similar items in EconPapers)
JEL-codes: G10 G15 G18 G23 G28 K22 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:45:y:2019:i:c:p:37-60

DOI: 10.1016/j.finmar.2019.06.003

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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