Define “Latency Arbitrage” and How It Exploits Changes in the Top of the Book.
Latency arbitrage is a high-frequency trading strategy where firms exploit minuscule time differences in the speed at which price quotes arrive from different exchanges. A latency arbitrageur sees a change in the top of the book on one exchange slightly before others.
They can then execute a trade on the slow exchange, knowing they can immediately offset it on the fast exchange for a risk-free profit. This activity can contribute to slippage for slower retail orders.
