hard · Market Microstructure
An exchange releases a quote update simultaneously to 1,000 co-located HFT subscribers. All 1,000 firms send orders targeting the stale quote within 10 microseconds. The available liquidity at the stale price is 500 shares total.
Under strict price-time priority, what determines how many firms fill and what share of those 500 shares each receives, and what does this imply for the economics of the latency race?
- All 1,000 firms fill proportionally (0.5 shares each) because the exchange pro-rates fills when orders arrive simultaneously.
- Only the firm(s) whose orders arrive first at the matching engine fill; they receive up to 500 shares in arrival order. Firms arriving later find the liquidity exhausted. This implies that the marginal value of sub-microsecond latency improvements is very high — winning the race by even 1 microsecond means the difference between filling and not filling.
- The 500 shares are allocated to the 10 fastest firms (50 shares each) by the exchange's co-location SLA, regardless of exact arrival time.
- All 1,000 firms fill 0.5 shares each because Reg NMS requires equal access among co-located subscribers.
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