Latency arbitrage is the practice of buying or selling an trading instrument slightly ahead of other market participants, by taking advantage of small delays in price dissemination. So Measuring the Latency between Exchanges makes sense when comes to Inter Commodities Hedging or Inter-Country Latency arbitrage.

Latency arbitrage typically requires advanced trading infrastructure, low-latency connections, and high-speed algorithms, as the price discrepancies exist for only fractions of a second.

 
The Round trip latency can be calculated with a simple ping test between co-location servers(placed at two different exchanges). The details of the latency is provided below with respected to Indian Exchanges and ranked based on the Marketcap and liquidity of the exchanges. This data is generally useful for HFT players who are willing to go with Latency arbitrage trades between global exchanges.

World Exchanges: Their Connectivity Latency with Indian Exchanges.

Chicago CME ( 192 – 220 ms Mumbai )

Dubai DGCX ( 24 – 45 ms Mumbai )

For Ultra low latency Inter Country Co locations & Proximities connectivity on above mention round Trip no.

How Does Latency Arbitrage Work?

Executing Trades: The trader buys the asset at the lower price on one exchange and sells it at the higher price on the other exchange almost instantaneously, locking in a profit.

Market Data Feed Disparities: Different exchanges update their price data at slightly different speeds due to variations in technology, geographic distance, or network latency. Some exchanges might have faster feeds than others.

Identifying Price Discrepancy: Traders monitor the faster feed and detect a price discrepancy between two exchanges.

Example of Latency Arbitrage

Scenario:

• Stock: ABC Corporation
• Exchanges:
  • Exchange A (faster market data feed)
  • Exchange B (slower market data feed)

Step-by-Step Process:

1. Initial Prices:
   • Exchange A updates its price for ABC to $100.50 based on new information (e.g., a sudden surge in demand).
   • Exchange B still shows the older price of $100.00 due to latency in updating.
2. Trader Spots Discrepancy:
   • The trader’s system, using a faster connection to Exchange A, detects the price difference between the two exchanges in real-time.
3. Execution:
   • The trader places a buy order for ABC at $100.00 on Exchange B.
   • Simultaneously, they place a sell order for ABC at $100.50 on Exchange A.
4. Profit:
   • For every share traded, the trader earns $0.50.
   • If the trader executes this for 10,000 shares, the profit is $5,000 (ignoring fees and costs).

Key Points:

• The opportunity exists only until Exchange B updates its price to match Exchange A, often within milliseconds.
• The success of latency arbitrage depends on having faster technology and better access to data than other market participants.

Challenges and Risks

• Competition: Many HFT firms compete in this space, reducing opportunities.
• Technological Costs: Maintaining ultra-low-latency systems is expensive.
• Regulation: Some regulators view latency arbitrage as a potentially unfair practice and have implemented measures to reduce its effectiveness, such as introducing random delays (e.g., IEX’s “speed bump”).
• Execution Risk: If the trade is not executed before the price discrepancy is corrected, losses may occur.

Latency arbitrage demonstrates how speed and technology can turn minuscule price differences into significant profits when scaled effectively.