hard · Market Microstructure
Exchange A's co-location facility offers a round-trip latency of 15 microseconds. Exchange B offers 80 microseconds. A market maker's quote on Exchange B becomes stale when Exchange A's price moves.
What is the maximum time window during which the market maker on B has not yet received the signal to update before an HFT co-located on A can snipe the stale quote, and what is the market maker's most effective microstructure defense?
- 65-microsecond window; the market maker should widen the spread on Exchange B permanently to compensate for the latency disadvantage.
- 65-microsecond window; the market maker should also co-locate at Exchange A to receive the price signal in 15 µs and cancel-replace the Exchange B quote before the HFT can snipe it.
- 80-microsecond window; the market maker must receive the signal in 80 µs, so latency parity with Exchange A is impossible.
- 15-microsecond window; because the HFT on A fires in 15 µs, the market maker on B has 65 µs of safety before the order arrives.
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