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How Rigged Are Stock Markets? Evidence from Microsecond Timestamps

71 Pages Posted: 21 Jul 2016 Last revised: 2 Aug 2017

Robert P. Bartlett III

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Justin McCrary

University of California, Berkeley; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2017

Abstract

Using new data from the two Securities Information Processors (SIPs), we examine claims that HFT firms use direct feeds to exploit traders who rely on SIP prices. Across $3 trillion of trades, the SIPs report quote updates from exchanges 1,130 microseconds after they occur. However, the SIP-reported NBBO matches the NBBO calculated without reporting latencies in 97% of all SIP-priced trades. Liquidity-taking orders gain on average $0.0002/share when priced at the SIP-reported NBBO rather than the instantaneous NBBO, but aggregate gross profits are just $11.6 million. These findings indicate that direct feed arbitrage is not a meaningful source of HFT profits.

Statement of Financial Disclosure and Conflict of Interest: Neither author has any financial interest or affiliation (including research funding) with any commercial organization that has a financial interest in the findings of this paper. The authors are grateful to the University of California, Berkeley School of Law, for providing general faculty research support.

Keywords: latency arbitrage, high-frequency trading, SIP, market structure

JEL Classification: G10, G15, G18, G23, G28, K22

Suggested Citation

Bartlett, Robert P. and McCrary, Justin, How Rigged Are Stock Markets? Evidence from Microsecond Timestamps (May 1, 2017). UC Berkeley Public Law Research Paper No. 2812123. Available at SSRN: https://ssrn.com/abstract=2812123 or http://dx.doi.org/10.2139/ssrn.2812123

Robert Bartlett (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-642-6646 (Phone)

University of California, Berkeley - Berkeley Center for Law, Business and the Economy

UC Berkeley School of Law
Berkeley, CA 94720

Justin McCrary

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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