Beastie Boys SabotageArbitrage is back, that is, if it ever really went away. Rob Curran recently wrote a piece in the Wall Street Journal’s MarketBeat blog on how the 10-15 millisecond gap between the National Best Bid and Offer (NBBO) and the pricing algorithms in most dark pools of liquidity is making money for technologically advanced traders using latency arbitrage. Basically if you can calculate the NBBO a handful of milliseconds before the market does, you know where the market will be before it gets there. Easy money, and not violating any current laws.

In fact, the current economic downturn ensures that this strategy will remain valid for years to come, since many of the sources of liquidity are experiencing budget freezes and will inevitably experience new regulatory distractions as the recovery begins. This locks them into current (comparatively slow) latencies for several years. Meanwhile, many of the smaller, more nimble hedge funds and private equity firms are aggressively investing in high-volume, ultra-low-latency infrastructure that measure decision making, order routing and order execution in 10s of microseconds or less.

This is just another validation of the “value of a millisecond” made popular by the Tabb Group in a report last year. As the government slowly shuts down the exclusive night club formerly known as Wall Street, it’s good to know that someone out there is still fighting for their right to party.

Larry Neumann

Mr. Neumann is responsible for all aspects of strategic, corporate, product and vertical marketing. Before Solace, Mr. Neumann held executive marketing positions with TIBCO and Oracle, and co-founded an internet software company called inCommon which was acquired by TIBCO. During his tenure at TIBCO, Mr. Neumann played a key role in planning company strategic direction relating to target markets and candidate acquisitions.