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The HFT "Treasure Map" - Presenting The Rigged Stock Market's Full "Latency Abritrage" In One Chart

Last week, when poring through the SEC's complaint over ITG's criminal frontrunning of client order flow in a "experiment" prop trading group within its Posit dark pool known as "Project Omega", we clearly laid out the "criminal fraud" that allowed the original dark pool to make money without any risk, and explained why HFT's never lose money.

Only, in this particular case, the fraud was so egregious, even the SEC had to step in and slam ITG with the biggest fine on record for a private Wall Street exchange (at least until the fine about to be levied at Credit Suisse's own dark pool, the biggest in the US, Crossfiner is revealed).

The reality is that most HFTs do not engage in such brazen criminal activity - most act within the confines of the law. And yet, as Virtu has shown year after year, they never lose money. How can the two coexist?

Simple: the answer is that in the aftermath of Reg NMS, and the terminal capture of regulators by those who benefit from market fragmentation, regulators blessed a two-tier market, one in which HFTs can frontrun non-HFT order flow and not be worried one bit about the consequences.

The technical term for this gross aberration of market fairness and efficiency is latency arbitrage, and it is best shown on the following annotated "map"

, laying out the embedded, and regulator blessed, latencies between the three big New Jersey exchange centers: Mahwah (NYSE), Secaucus (BATS), and Carteret (Nasdaq) for everyone but the top tier - the High Frequency Traders, whose only advantage is having the millions to spend both in one-time collocation setup as well as recurring microwave/laser fees to obtain faster data access which then allows them to frontrun everyone else and generate massive returns on their investment. Returns that are due only to done thing: frontrunning.


What the map clearly shows is the unprecedented timing advantage HFTs have not only over the Securities Information Processor (SIP), which is used by virtually all non-HFT participants, who pay millions for real time feeds.

"These delays not only violate regulations, but disadvantage 2.5 million subscribers who pay $500M/yr for "real-time" quotes"

— Eric Scott Hunsader (@nanexllc)

... but even direct data feeds. As Hunsader notes, "the question is no longer does your dark pool price on the SIP or direct? It's: Does your dark pool use lasers, 40gbe and FPGA, because according to the map, you are simply wasting money on Direct Feeds unless you get the Laser/40gbe/FPGA options."

Which also explains why, as Zero Hedge first showed in March, the latest addition to the microwave tower by Route 17 next to the Mahwah (f/k/a/ New York) Stock Exchange, was precisely an Anova AOptix Intellimax laser, designed to make all formerly state of the art Microwave connections, obsolete.


Surprisingly, weeks after our post, the laser was quietly taken down, which we can only attribute to the vocal outcry (and perhaps threats) of all those HFT clients who had spent hundreds of millions on microwave fees, only to see their investment sink overnight.

We patiently await the laser to come back, in the meantime, here are, in conclusion, some questions for Congress to contemplate as they watch every last retail investor leave the fully documented rigged market, in which every order is merely a catalyst for HFTs to report yet another flawless trading quarter thanks to billions of frontrun orders.

Questions for Congress to ask once they grasp the significance of the timing map I published today

— Eric Scott Hunsader (@nanexllc)