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is a latency arbitrage ea illegal?



in short stated, latency arbitrage refers back to the practice of obtaining threat-loose profits in a exchange because of receiving records approximately the market before other market individuals (the “latency” within the “latency arbitrage” term). it sure sounds unfair.

i am no longer a lawyer and consequently am no longer qualified to mention whether latency arbitrage with expert advisor trading is, or have to be, illegal.

however, right here’s an thrilling article from cfa institute on the practice, which article attempts to make a difference among “predatory” and “passive” high frequency trading (hft ea) firms, of which those who take advantage of latency arbitrage are taken into consideration “predatory”:

the extra contentious debate revolves round so-called predatory hft techniques, even though the difference among passive and predatory hft is hardly ever made explicit. by ignoring this difference, critics of hft frequently weaken their arguments via permitting the opposite aspect of the talk to cite market fine upgrades that are actually related to a completely distinctive set of (passive) hft strategies.

the most philosophically troubling hft strategy may be very just like the longstanding hassle of front-strolling, and is called latency arbitrage. whilst the traditional practice of front-running sees the broker change beforehand of his or her client and is unlawful, latency arbitrage sees predominant buyers take advantage of quicker connections to exchanges, relative to different market participants, and isn't illegal. however, the exercise is typically taken into consideration to be in opposition to the spirit of honest markets and commonly manifests itself as ghost liquidity and rate slippage, that are primary issues to institutional investors.

to illustrate latency arbitrage or in other words, currency arbitrage, don't forget an investor that splits a block change and sends two buy orders to exchanges a and b where b is geographically further far from the trader. the trade reaches alternate a in, say, 1 millisecond and executes, even as it takes 2 milliseconds to reach change b, located within the subsequent town. but, the co-placed hft servers at alternate a receive notification of the primary change 0.5 milliseconds after the alternate happens, leaving them with half of a millisecond to behave on this statistics earlier than the second one exchange reaches alternate b. how should they take advantage of this?
they will simply announce your order go with the flow as “toxic” and ban you from “abusing” their liquidity pool. if finished on an ecn/dma broker and if your order waft counts as a massive percentage of broking’s entire extent, the dealer will forestall operating with you because in any other case they may have issues with the bank/ecn.

so while it’s a two-side struggle of hobbies (banks don’t need to lose money to some algotrader sitting in his condo with a laptop, and you need to make primarily risk-free profits),