How Rigged Are Stock Markets? Evidence from Microsecond Timestamps

Using new data from the two U.S. securities information processors (SIPs) between August 6, 2015 and June 30, 2016, we examine claims that high-frequency trading (HFT) firms use direct feeds to exploit traders who rely on SIP prices. Across $3.7 trillion of trades in the Dow Jones 30, the SIPs report quote updates from exchanges 1,128 μs after they occur. However, the SIP-reported National Best Bid and Offer (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 $14.4 million. These findings indicate that direct feed arbitrage is not a meaningful source of HFT profits, nor can it explain the arms race for trading speed.