The implications of extraordinary speed in contemporary financial markets trading

Viktor Manahov

Abstract

It is well known that high-frequency traders frequently use low-latency trading algorithms to submit and cancel orders at superhuman speeds. Our study demonstrates that high-frequency traders cancel many trading orders within 20 milliseconds of submission, engaging in anticipatory trading and creating arbitrage opportunities in the E-mini S&P 500 and the SPDR S&P 500 ETF Trust, which enables them to earn significant profits after transaction costs. Moreover, market participants lacking latency and sophisticated trading algorithms will likely encounter higher execution costs. As a practical policy measure, we propose implementing batch auctions, which will mitigate queuing risk for high-frequency traders and yield beneficial consequences for market quality.