Abstract
Modern equity markets have both fast traders such as dealers, market makers, and high frequency traders and slow traders such as retail clients. We model and show empirically that latency differences allow fast liquidity suppliers to pick off slow liquidity demanders at prices inferior to the NBBO. This trading strategy is highly profitable for the fast traders. We estimate that the fast traders earn more than $233 million per year at the expense of the slow traders. Investigating the decrease in NYSE latency on 10 March 2010, we also show that when this market became faster, execution quality improved markedly for fast liquidity demanders, but improved only minimally for slow liquidity demanders.
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