Pulling your quotes before you get run over

Question

You have a 50{,}05 offer resting for 2{,}000 shares while fair value is 50.00. A fast signal (a related future ticks up sharply) says fair value has just jumped to 50.30. In the 50 milliseconds it takes you to cancel, an informed trader lifts your offer. What did the slow cancel cost you? If this happens 20 times a day, why is fading quotes fast a core part of the edge?

Accepted Answer

Cost of the one stale fill. You sold 2{,}000 shares at 50.05, but true value is now 50.30: (50.30 - 50.05) 	imes 2{,}000 = 0.25 	imes 2{,}000 = \500 	ext{ loss.} Your original 5-cent edge over the old fair (50.00) was obliterated, the fair value moved 25 cents against you in the blink between the signal and your cancel. You got picked off on a stale quote. Why speed is edge. If this pick-off happens 20 times per day: 20 	imes \500 = \10{,}000 	ext{ per day} \approx \2.5	ext{M per year of bleed.} Every millisecond you shave off your reaction time cuts the window in which informed traders…

Pulling your quotes before you get run over

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