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Communication Strategies for Low-Latency Trading

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  • Mina Karzand
  • Lav R. Varshney

Abstract

The possibility of latency arbitrage in financial markets has led to the deployment of high-speed communication links between distant financial centers. These links are noisy and so there is a need for coding. In this paper, we develop a gametheoretic model of trading behavior where two traders compete to capture latency arbitrage opportunities using binary signalling. Different coding schemes are strategies that trade off between reliability and latency. When one trader has a better channel, the second trader should not compete. With statistically identical channels, we find there are two different regimes of channel noise for which: there is a unique Nash equilibrium yielding ties; and there are two Nash equilibria with different winners.

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  • Mina Karzand & Lav R. Varshney, 2015. "Communication Strategies for Low-Latency Trading," Papers 1504.07227, arXiv.org.
    • Handle: RePEc:arx:papers:1504.07227
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    References listed on IDEAS

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    2. Donald MacKenzie & Daniel Beunza & Yuval Millo & Juan Pablo Pardo-Guerra, 2012. "Drilling Through The Allegheny Mountains," Journal of Cultural Economy, Taylor & Francis Journals, vol. 5(3), pages 279-296, February.
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