On Market Design and Latency Arbitrage

TL;DR

The paper identifies how current stock market designs enable latency arbitrage due to traders' limited ability to specify execution preferences, and proposes a new order type allowing traders to synchronize executions and prevent arbitrage.

Contribution

It introduces a novel order type that enables traders to specify execution times, effectively preventing latency arbitrage even for ultra-fast traders.

Findings

The new order type effectively prevents latency arbitrage.

Synchronization of order executions across exchanges is achievable.

High-frequency traders can no longer exploit latency differences.

Abstract

We argue that contemporary stock market designs are, due to traders' inability to fully express their preferences over the execution times of their orders, prone to latency arbitrage. In turn, we propose a new order type which allows traders to specify the time at which their orders are executed after reaching the exchange. Using this order type, traders can synchronize order executions across different exchanges, such that high-frequency traders, even if they operate at the speed of light, can no-longer engage in latency arbitrage.