Late last week the NY Times printed an article on how Goldman and others are using what they’re calling “high-frequency trading” to get ahead of the market and generate profits.
This is not new news to folks on Wall St, nor is it illegal. As opposed to “front running” scandals of the past where trading firms would use inside information to profit from coming news, all of these advantages are achieved after information has been made public. They just get to see it before everyone else by having faster infrastructure, even if it is only a few milliseconds, or microseconds faster. This is like an astronomer getting a better view of planetary objects by having a better telescope. You dramatically increase your likelihood of discovering something good up there if you get a telescope as good as the US government scientists.
Recently, Ralph Frankel, Solace’s CTO of financial services, had an article published on this topic in Securities Industry News. If you’re interested in this topic, it goes into much more depth about how latency arbitrage in high-frequency trading actually works.