I haven't read Flash Boys since it came out, but I'm pretty sure it doesn't actually inaccurately describe how latency arbitrage works the way you just did, it just blurs together similar concepts enough to create confusion about the details, which results in outrage.
The key part that you're missing is that latency arbitrage works only when there are multiple exchanges, and there is only one exchange in your example. Your example suggests that HFTs somehow see the buy order before it reaches the NYSE, but that is not possible. In reality it would be something like this:
- Buyer wants to buy 100,000 shares at $100, but no single stock exchange (there are 13 in the US I believe, soon to be 14) has that many shares available at that price.
- But there are 50,000 shares each available at NYSE and NASDAQ each, so they send orders to each.
- Their NYSE order arrives first, and the trade happens at $100 for all 50,000 shares
- The HFT notices, and seeing that demand is high for the stock, increases their price on NASDAQ to $100.01 for those remaining 50,000 shares.
- The buyer's order on NASDAQ does not trade, because the $100 is no longer available
The "information leakage" is from public information only - that a trade happened on another exchange.
Note also that no part of this example discusses the HFT buying a certain price, then selling back immediately at a higher price.
Sorry I can't edit, I reformatted the bullets below:
- Buyer wants to buy 100,000 shares at $100, but no single stock exchange (there are 13 in the US I believe, soon to be 14) has that many shares available at that price.
- But there are 50,000 shares each available at NYSE and NASDAQ each, so they send orders to each.
- Their NYSE order arrives first, and the trade happens at $100 for all 50,000 shares
- The HFT notices, and seeing that demand is high for the stock, increases their price on NASDAQ to $100.01 for those remaining 50,000 shares.
- The buyer's order on NASDAQ does not trade, because the $100 is no longer available
The key part that you're missing is that latency arbitrage works only when there are multiple exchanges, and there is only one exchange in your example. Your example suggests that HFTs somehow see the buy order before it reaches the NYSE, but that is not possible. In reality it would be something like this:
- Buyer wants to buy 100,000 shares at $100, but no single stock exchange (there are 13 in the US I believe, soon to be 14) has that many shares available at that price. - But there are 50,000 shares each available at NYSE and NASDAQ each, so they send orders to each. - Their NYSE order arrives first, and the trade happens at $100 for all 50,000 shares - The HFT notices, and seeing that demand is high for the stock, increases their price on NASDAQ to $100.01 for those remaining 50,000 shares. - The buyer's order on NASDAQ does not trade, because the $100 is no longer available
The "information leakage" is from public information only - that a trade happened on another exchange.
Note also that no part of this example discusses the HFT buying a certain price, then selling back immediately at a higher price.