hard · Market Microstructure hft
A market participant receives price updates via the Securities Information Processor (SIP) with an average latency of 1,000 microseconds (1 ms). A co-located HFT firm receives the same update via a direct exchange data feed with a latency of 50 microseconds.
What is the stale-quote window during which the HFT can trade against the slow participant's quotes, and what is the approximate adverse-selection cost to a slow liquidity provider if the stock moves 2 basis points per millisecond on average?
- Stale-quote window = 950 microseconds; adverse-selection cost approximately 1.9 basis points per filled order.
- Stale-quote window = 50 microseconds; adverse-selection cost approximately 0.1 basis points per filled order.
- Stale-quote window = 1,050 microseconds; adverse-selection cost approximately 2.1 basis points per filled order.
- Stale-quote window = 950 microseconds; adverse-selection cost is zero because the HFT must also cross the spread.
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