Using Low Latency to Capture Futures and Options Arbitrage

Summary

The document considers what to trade with an imagined near-zero-latency program. It argues that speed within one data center is less decisive than the speed of communication between venues, so faster code alone does not confer a general trading advantage. Information transport and market location can matter more than local processing time.

For a hypothetical system with no latency, the suggested target is short-lived arbitrage within a data center. One example is trading related futures and options when their prices violate put-call parity or a related pricing relationship. Such opportunities may be captured by the fastest participant. The response is conceptual rather than an empirical study: it gives no measured returns, implementation details, or analysis of transaction costs, fees, and execution risk. The example also depends on the relevant instruments and pricing relationship being available and mispriced at the same time.

Key ideas

• Low latency within one data center may matter less than fast communication between data centers.
• A hypothetical zero-latency system could target fleeting arbitrage among instruments traded at the same venue.
• Futures and options on those futures can offer arbitrage opportunities when put-call parity is violated.
• The document offers a conceptual example without evidence on profitability or practical execution constraints.

Tags

# If I am very fast (less than 10 microseconds latency) what would be the first strategy to execute?


# If I am very fast (less than 10 microseconds latency) what would be the first strategy to execute?












Let's assume I found the holy grail of low-latency trading (which I didn't). For educational purposes, what would be the first strategy I would direct my trading code?

## Answer by Dan (score 3, accepted)

https://quant.stackexchange.com/a/15087

Being very fast within a single datacenter is not as valuable as having the fastest line between two datacenters. So being able to write a very fast program wouldn't be the holy grail of trading anyway (it would be to instantaneously transport information between e.g. NJ and Chicago using quantum entanglement or something.)

That said, if you found an imaginary way to write a program that has zero latency, I would point it toward capturing arbitrage opportunities available within a single datacenter. One example is that on exchanges that list both futures and options on those futures, pure arbitrage opportunities can be available to whoever is fastest to capture them (i.e. violations of put-call parity and variations on that).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.