2. Consider a market where shares for the fictional company ABC Ltd are traded on two exchanges (Exchange A and Exchange B) and where an investment fund may purchase these shares via one or both of two brokers (Broker A and Broker B). The communications latency between the brokers and the exchanges are given as follows: Broker A to Exchange A: 200 msec Broker A to Exchange B: 60 msec Broker B to Exchange A: 300 msec Broker B to Exchange B: 200 msec Assume that the exchanges are quoting prices for ABC Ltd as follows: Exchange A: Best Bid = 150 shares @ 530p, Best Ask = 150 shares @ 540p Exchange B: Best Bid = 100 shares @ 500p, Best Ask = 80 shares @ 520p A Low Latency Trader (LLT) operates co-located servers at both exchanges, which can communicate with each other. The relevant latencies are: LLT (server 1) to Exchange A: 150 nsec LLT (server 2) to Exchange B: 150 nsec LLT (server 1) to LLT (server 2): 200 msec (a) Assume an investment fund instructs Broker B to buy 200 shares of ABC Ltd 1) What are the new depths of the best bids and best asks at both exchanges after the order has been processed? [3 marks) (11) Can the LLT use low latency to profit from the described order? Give a numeric inequality that must hold if the LLT is to make a profit and therefore proves your statement (assume execution times are negligible). [3 marks] (111) Private confirmations of receipt and execution are sent. Who sends this information, and to whom? At what time does each recipient receive the information (relative to the time at which the broker sends its first order, and assume execution times are zero)? [3 marks] (iv) Name three pieces of information given in the confirmation of execution (not including the fact the trade has been executed). [3 marks] (b) Assume the two LLT servers run identical code (since in general they cannot know whether a broker's first order will arrive first at Exchange A or Exchange B). Give a detailed description of what the server code would do, and how, including all assumptions you make. Assume the server code will only act when it calculates that it is likely to make a profit. Include a detailed description of timing measurements and calculations. Your answer should be carefully structured to make it as easy as possible to understand, stating clearly, and concisely, what the server will do in what order. You may include pseudo-code and bullet points if you wish. An ideal answer will also consider factors that might frustrate the objectives of the server code, and possible counter-measures, and will not exceed 1,200 words. 2. Consider a market where shares for the fictional company ABC Ltd are traded on two exchanges (Exchange A and Exchange B) and where an investment fund may purchase these shares via one or both of two brokers (Broker A and Broker B). The communications latency between the brokers and the exchanges are given as follows: Broker A to Exchange A: 200 msec Broker A to Exchange B: 60 msec Broker B to Exchange A: 300 msec Broker B to Exchange B: 200 msec Assume that the exchanges are quoting prices for ABC Ltd as follows: Exchange A: Best Bid = 150 shares @ 530p, Best Ask = 150 shares @ 540p Exchange B: Best Bid = 100 shares @ 500p, Best Ask = 80 shares @ 520p A Low Latency Trader (LLT) operates co-located servers at both exchanges, which can communicate with each other. The relevant latencies are: LLT (server 1) to Exchange A: 150 nsec LLT (server 2) to Exchange B: 150 nsec LLT (server 1) to LLT (server 2): 200 msec (a) Assume an investment fund instructs Broker B to buy 200 shares of ABC Ltd 1) What are the new depths of the best bids and best asks at both exchanges after the order has been processed? [3 marks) (11) Can the LLT use low latency to profit from the described order? Give a numeric inequality that must hold if the LLT is to make a profit and therefore proves your statement (assume execution times are negligible). [3 marks] (111) Private confirmations of receipt and execution are sent. Who sends this information, and to whom? At what time does each recipient receive the information (relative to the time at which the broker sends its first order, and assume execution times are zero)? [3 marks] (iv) Name three pieces of information given in the confirmation of execution (not including the fact the trade has been executed). [3 marks] (b) Assume the two LLT servers run identical code (since in general they cannot know whether a broker's first order will arrive first at Exchange A or Exchange B). Give a detailed description of what the server code would do, and how, including all assumptions you make. Assume the server code will only act when it calculates that it is likely to make a profit. Include a detailed description of timing measurements and calculations. Your answer should be carefully structured to make it as easy as possible to understand, stating clearly, and concisely, what the server will do in what order. You may include pseudo-code and bullet points if you wish. An ideal answer will also consider factors that might frustrate the objectives of the server code, and possible counter-measures, and will not exceed 1
