easy · Market Microstructure
An HFT firm's co-located server receives a direct data feed update 250 microseconds before the SIP publishes the same quote. During this window the stock's best ask drops from 50.10 to 50.05.
What is the primary risk this latency gap creates for a slow market maker still quoting at 50.10?
- The slow market maker faces inventory risk because it holds too many shares
- The slow market maker's stale ask of 50.10 will be sniped by the HFT, who can buy at 50.05 elsewhere and sell to the market maker at 50.10, locking in a 5-cent profit
- The slow market maker loses queue priority at the best bid because of the SIP delay
- The HFT faces adverse selection from the slow market maker's superior information
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