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Hackers Find New Way To Cheat On Wall Street
GMGruman writes "The high-speed trading exchanges that conduct the business of buying and selling stocks and mutual funds are so fast that hackers can introduce delays of a few microseconds completely unnoticed by today's network monitoring technology — and manipulate prices in the process to reap millions of dollars to the detriment of everyone else, InfoWorld's Bill Snyder reports. This kind of activity creates new reason to distrust Wall Street and shows how the computer networks we all rely on for conducting business and moving information are ripe for undetectable hacking."
Trades only take effect every 5 seconds. Wouldn't that stop this sort of abuse?
I work in this business, and trust me - we count nanoseconds. We would notice if "hackers" were introducing delays.
So they are going to steal from the HFT's that are already performing a salami attack on the broader market, I'm not sure I see a problem here....
There are 4 boxes to use in the defense of liberty: soap, ballot, jury, ammo. Use in that order. Starting now.
but unsurprising
How is this really any different from bread-and-butter high-frequency trading? Firms spend millions to put their servers physically closer to the trading computers to edge out everybody else by a few milliseconds. Boo hoo, now some "hacker" almost put them back on a level playing field with almost everybody else. It's all financially meaningless, totally legal theft.
That's chump change on Wall St. Compared to the kind of stuff Goldman Sachs pulls on a regular basis, I'm not too worried about high-frequency traders getting scammed. What's very clear is that none of it has much of anything to do with actual sound investing.
I am officially gone from
The high-speed trading exchanges that conduct the business of buying and selling stocks and mutual funds are so fast that hackers can introduce delays of a few microseconds [...] and manipulate prices in the process to reap millions of dollars to the detriment of everyone else
And this is different from automated high-speed trading HOW?
This kind of activity creates new reason to distrust Wall Street
Aw, c'mon! What's wrong with all the old reasons?!?
That's not a news article, it's an advertisement.
High-frequency trading networks, which complete stock market transactions in microseconds, are vulnerable to manipulation by hackers who can inject tiny amounts of latency into them. By doing so, they can subtly change the course of trading and pocket profits of millions of dollars in just a few seconds, says Rony Kay, a former IBM research fellow and founder of a cPacket Networks, a Silicon Valley firm that develops chips and technologies for network monitoring and traffic analysis.
(emphasis mine)
A man who claims companies are losing millions due to network latency sells tools to monitor network latency? A reliable source, I'm sure.
That's what we hear, anyway, whenever anyone proposes that maybe ever-higher-speed trading isn't such a great idea.
It's a load of crap, of course. Yes, liquidity is good. No, restricting trades to, say, one per second -- which is still faster than any trading ever took place during the centuries of stock trading before computer trading became common -- would not bring our economy to a screeching halt. In fact, it would probably encourage economic growth by encouraging actual investing instead of the giant casino that the stock market has become.
Of course, in a casino, the house always wins, and since in the case the house also owns the House and the Senate too, this is never going to happen. Sigh.
The correlation between ignorance of statistics and using "correlation is not causation" as an argument is close to 1.
There are several products on the market that are employed by the Exchanges and their large customers to track all of this.
This is a marketing paper for what appears to be an interesting product.
Existing vendors already capture, log, analyze (in realtime), traffic across multiple probes and provide real-time alerting along with monitoring, measurement, etc. These products are all leading edge and are changing rapidly. They've solved many problems with proprietary schemes of various sorts. Not the least of which was time synchronization at the nanosecond level.
For very simple public information, just look at latencystats.com. Keep in mind, more detailed info and analysis is going on behind the scenes.
Firstly, it's not undetectable, since you just detected it. Secondly, it doesn't affect everybody, just the HFT people. Most of us don't have much sympathy for them, so we wouldn't consider it a problem.
Scanning for this behavior is going to be challenging, as HFTers will want to detect this particular misbehavior while hiding their own misbehavior.
Not that this wasn't entirely predictable.
There have been a series of articles about this problem on the Market Ticker (Karl Denninger). Read his blog for a couple weeks and you will have nothing but contempt for our financial system -- especially the large banks and our government "regulators". It needs a thorough purging of indictments and prosecutions in order to achieve anything close to reliable for investment.
Unfortunately, every other possible avenue for investment seems to be on just as shaky ground. It is one of those times when I am glad I am not rich (I have less to lose).
The reality of Wall Street ripping off the consumer is not far from reality. I work "in the industry" as well (and have, for 10 years), and I've seen and been witness to all kinds of shams and problems that Wall Street is culpable for.
Let's just leave it simply, the average investor doesn't know *anything* about investing. They don't know stocks, bonds, they don't know diversification, they don't know how to change allocations before retirement age for 401ks, etc. But the sad thing is, Wall Street doesn't either. They may know the P/E ratios of firms, the current stock price, and lots of fancy math, but the reality is that a lot of money made on Wall Street isn't in active trading, it's in knowing their customers and playing on that information, and topping it all off with fees. For example, Goldman advises its customers, and the clients lose out, and Goldman wins -- See here. This isn't uncommon.
The simplest secret about Wall Street is that the average investor can forgo using a trading firm, and just invest in an index fund instead (like the S&P). Those funds have very low fees, and require zero understanding about Wall Street. They go up as the economy gets better, they go down as it doesn't. And less than 20% of firms out there can *BEAT* the S&P, meaning that 80% actually do worse. In addition, they charge higher fees. So if you throw your money into the index fund, you don't have to know anything, and you do just as well as 80%+ of the firms out there, and keep the fees they'd charge you to just meet the same ROR in your pocket.
Sadly, you'll never hear about this on the Street, because it would ruin their whole scam. The only thing you need to know is that 5-10 years before retirement age, pull out of indexes and put into guaranteed products so you don't get thrashed on your retirement day, and you'll be a happy camper.
With the amount of influence Wall Street has in our government, in our economy, it's about due time we start getting them the hell out of the way so that we can do better as a country. I know it sounds cheesy, but it's true.
The price is always right if someone else is paying.
The type of attack they are talking about here requires physical access of some sort. good luck pulling that off in the HFT's location.
In The Grifters and at least one episode of Hustle.
What do you think Hedge funds do.. They use computer algorithms to trade, not sound
investment strategies. Wall Street is a place where big banks and hedge funds siphon off of
peoples retirement plans these days..
Nor is it exactly new. After the last strange dip in the stock exchange a lot of research was done into this, and it basically comes down to inserting bullshit data into the stream so that competitors have to process the data while the injector does not.
http://www.theatlantic.com/technology/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/
Where genius and insanity become confused true wisdom is found
Back in my day Wall Streeters got money the old fashioned way, they bribed politicians to funnel taxpayer money into the firms while simultaneously getting the politicians to look the other way when banks committed crimes....whats that you say? They are still doing that? Well I guess somethings never change.
Now get off my lawn.....Whats that you say? The bank has illegally foreclosed on my property despite not actually being in debt to them and it's legally THEIR lawn now, and I'M the one that has to get off of it? Well, it's a good thing I have support from my local polit....ah fuck it.
Monstar L
Liquidity IS good, and in the end, I don't see how this is doing anything but provide more of it.
If the hackers are netting themselves a bunch of money by out-trading the other high-frequency-traders... good for them. It's not my money they're taking, because I've got better places to put my money than trying to out-arbitrage the arbitrageurs. But both of them, the Evil Hackers and the White Hat Ginormous Wall Street Bank, are both making sure that when I do sell my stocks, I've always got somebody to sell it to.
The arbitrage means that maybe I'm losing .01% off the transaction. If that's Big Money in aggregate, it's still only a tiny fraction of the mount of money on the line. It's money I couldn't ever get my hands on.
So I don't really much care who wins here. Let 'em fight it out.
Setting a fixed time moves the goal to whomever can shave their systems closest to that fixed time.
Set a fixed time ... plus a random fragment of a second. That way no one knows exactly WHEN the trade will go through. But it's still close enough for humans choosing to trade.
The key here is to reduce the ability of software to "cheat" but still allow humans to trade.
And this is different from Goldman's flash trading program in that these crooks don't wear suits?
So much trading is done by program these days - in the big sell off of stock in the banking crisis, if you bought Ford at $0.89 per share OR Dow at ~ $5 per share you'd be sitting pretty right now.
Curse the holidays! If I hadn't been spending money on gifts and travel I could have made a killing!
A feeling of having made the same mistake before: Deja Foobar
just ban this kind of trading already. The easy way to do it is set a minimum timeframe you're required to hold onto stock before selling.
Hi! I make Firefox Plug-ins. Check 'em out @ https://addons.mozilla.org/en-US/firefox/addon/youtube-mp3-podcaster/
If they're allowed "advantages" or whatever, the profits they make have to come from somewhere. I'd rather a system to prevents such and allows more of the profits to go to the smaller investor.
It's not just the major banks that are in HFT. Quite a few of them are literally just guys who said "hey, why the heck can't I just rent a rack, buy some servers, and write some code?". I've met numerous guys who have done this, some as offshoots from banks, some from market making, some rather more green.
Many of the HFT firms don't even see themselves as financial firms, but rather tech firms. Latency is everything, so their conversations are about technology rather than finance.
Quoting from the article:
"substantial risk of creating unfair trading, if used by the wrong people"
Of course, Goldman Sachs and other Wall Street trading houses regularly front-run client orders, delaying them a bit
while they get in ahead of the wave. They're still regarded as "the right people" to run our financial system.
Ergo, the same people who own the holding company which owns all the climate exchanges (Climate Exchange PLC) also is the same bunch who owns the InterContental Exchange (ICE) and all its subsidiaries, plus the DTCC, plus Markit Group (which prices all those thousands of categories of pesky credit derivatives [otherwise, they'd be worthless!], and ELX Futures, etc., etc., etc. I think we all get the picture by now.
Scott Adams (creator of Dilbert) wrote about this just a few weeks ago: http://www.dilbert.com/blog/entry/?EntryID=541.
Stock trading is a scam!
d'oh! Why did I not realize this years ago?!?!
</sarcasm>
WALSTIB!
For investments available to the average investor OR products available to sophisticated investors which are known to "quickly and significantly" influence the value of products available to the Average Joe:
Instead all bids should be firm for a certain period of time - say, 30 seconds, and the trade should be delayed as long as the price keeps going up and the market would stay open to allow those trades to complete.
If the seller needs to sell by a specific time, then anyone bidding in the last 30 seconds will have the right to match the high bid, with the shares going to either the "earliest" bidder who was willing to pay the final price or divided up among all of the "winning" bidders in a predictable, well-defined way.
In any case, the "market price" wouldn't be defined until the trade completed.
For products available only to sophisticated investors which don't quickly and significantly affect the value of products you or I might buy, there shouldn't be any "protect the naive investor" rules, just rules to prevent outright fraud.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
I didn't even know they were dating.
Goldman Sacks does it everyday with government approval
For way, WAY too long this world, and this country, have followed the cheaper-is-better model. And its not just from one incident, everyone seems to want things done the cheapest. Well, you get a cheaply made home or a power drill cobbled together from harvested parts, and you're probably not going to get the most reliable tool. If you build computer systems cheap, and you make those computers do a whole lot of probably not very well encrypted, and really simply patterned things, far faster than a human could ever model, and then give this system control of basically all the worlds floating wealth, stuffs gonna start going wrong. It used to not matter, back when things would just fall on people. But now that same ethic is losing money. With any luck, we'll learn the lesson and start building things to last again. Just my two cents rant.
If the hackers are netting themselves a bunch of money by out-trading the other high-frequency-traders... good for them. It's not my money they're taking...
That's what I thought, too -- until Fall '08 hit, and I found out that if one of the big players lose to these guys, the government bails them out (at which point it *is* my money they're taking), revealing as a sham this whole idea that the big guys nobly make risky bets. No, if you're going to be bailed out on the downside, you weren't taking a risk to begin with -- ever.
In theory, you're right -- but let's bring back the concept of "failing when you're wrong" to Wall Street before blithely dismissing the harm these guys can cause.
And seriously -- is the tiny bit of extra liquidity REALLY worth the billions these guys sink into HFT?
Information theory is life. The rest is just the KL divergence.
Of course, in a casino, the house always wins
Not true.
In Ontario, Canada, where the casinos are owned & run by Ontario Lottery and Gaming Corporation (a corporation owned by the government), they managed to LOSE MONEY.
Sad. The usual complaint is that how many of the poor & dim-witted waste their money at casinos.
The story is organic fertilizer. If anything, the problem isn't hackers... the market is now an autonomous exercise in artificial intelligence, and for the most part, beyond human understanding. Don't get me wrong, we can understand parts, and even how some of those parts interact, we simply have no way of comprehending the aggregate and its immense degree of complexity. We have systems milking the tiniest fluctuations in the system sifting out whispers of profit in a hurricane of transactional data. These systems interact with the existing trade ecology and the data dance just keeps growing new harmonics of feedback. Something as ham-fisted as screwing with signal timing would show up like setting off a nuke in nunnery.>/p>
In fact, the only effective way to hack the system would be to black box the entire system (good luck building that model on anything smaller than a big box at Lawrence Livermore), and messing with a tiny group of nodes in a financially interesting place. You'd need the same kinds of computers network resources as the one's doing the trading, and the model analysis would take tens of thousands of person hours and many millions of dollars. Unless you had some certainty of snatching many billions of dollars (before the existing environment simply networked around you and picked your financial carcass clean in the instant of time it takes the neurotransmitters to cross the synapses in your brain), your time would be better spent selling your IP to Wallstreet and cashing at a significantly lower levels of risk.
Of course there are adrenaline junkies who might do it for the risk, or the street cred among hackers... good luck on that, and you might want to purchase that chastity belt now so your stay at Club Fed doesn't include unwanted fraternizing. If you're at all interested in the current state of the networks that carry money check out this months WIRED article on AI, its truly enlightening. Oh, and for those who think they could walk away from hacking the financial network, just remember the people you're playing with... you'd be lucky not to end up an inventory of parts at a Mumbai transplant hospital.
It wasn't the HFT they got hammered on. It was other investment strategies, ones with a lot less transparency. Worse, they were much longer term: we're still figuring out who owns all those bad debts.
As far as I can tell, the HFT is harmless. Though I'm sure they'll find a way to prove me wrong on that.
... moving from continuous trading to iterated auctions merely replaces one problem by another: While now you want to act first, in the auction, you want to act last. In any case, he who gets to know the bids of the others sooner and can place his own bids faster will have an advantage. The only solution would be to keep the bids secret - but who do you want to entrust with this job? And how would you keep the bids secret before they enter the system? After all, your bank or online broker has to check your orders to verify e.g. if the bid is covered by your account etc.
ignatius
Fake liquidity created by machinery that is crocking the prices using irrational algorithms is not good.
Being screwed in 5 nanoseconds is not preferable to getting a fair price after 2 days of waiting.
Magazines are dying. They're desperate. When you see this story in the Wall Street Journal, let me know. When the source is InfoWorld, ComputerWorld and any other World, I'm not going to even bother reading the article.
If I used a sig over again, would anyone notice?
Don't limit it to Average Joe trading vehicles.
The exotic derivatives that are traded up in the billionaire boys' club can easily result in the decimation of financial institutions on which the public depends for the solidity of all finance.
This last time it cost us $700 billion and we still took a doubling of unemployment, and 90% of Average Joes still don't have the first clue what a "credit-default swap" really is.
Make every trade as though it's humans doing business with humans. Then you'll have a fair market.
Financial institutes have known delays in data to be problematic. That why they have Endace probes etc.
Endace can measure down to 7.5 nano seconds. I'm sure if a "hacker" starts injecting packets to make a "several microsecond (one microsecond = 1000 nanoseconds) delay, it wont slip under the radar.
I know a lot about this too.
Whatever you think about high-frequency trading, this article seems silly both by the absence of any facts (people "may" do this, "can" do that) and the push to one vendor's product. Yes please, how are you exactly going to insert packets between me and nasdaq? nyse? Do you know how these networks are configured? Or is this just made up? Even if I could delay a competitor by a single microsecond, how exactly would I make money? And how many thousands of years would it take to make "millions" profit by doing so? Or is this part just made up? Do you know anything about which latencies are relevent to trading and which are not? A nano-second, is this relevant? A millisecond? A second? Any fact-based clue at all?
And the article scares about microseconds impact while approvingly quoting MIT researchers talking about speed of light issues in the 10s or more of MILLI-seconds. To talk about how high-frequency traders benefit from knowing speed of light constraints in locating data centers appropriately (and vis-a-vis an international route not less) is, in 2011, as relevant urging high frequency traders to learn about these new-fangled things called "computers". 10ms is 4 orders of magnitude more than 1us - kind of different, huh?
You want a more realistic exploit, made up from mere speculation, but far far far more likely and credible while remaining junk: If "hackers" could introduce a bug into the linux kernel which punishes other peoples' orders (and Wall St runs on Linux, 99%, so you are good there), and they had a billion dollars of capital, and they could get away with it for a year, they COULD (I say, COULD, read this as "are now making" only if you are illiterate) make several thousands of dollars!
TFA failed to describe what that 'side-channel attach' is. But it was full of bitching about how tough is to measure latencies in network transmissions. Well, any competent network engineer knows that.
So what is author is going to cry about next? Tcp FIN_WAIT2 state?
I wonder if the mortgage company would take the options in a barter arrangement. Okay, maybe not; sell the options elsewhere - money is known for getting around inefficiencies in the barter system
I listen to both RIAA and non-RIAA stuff if I like the music, tangential business/politics nonwithstanding.
Liquidity IS good, and in the end, I don't see how this is doing anything but provide more of it.
It's simple, really. If they make a profit, they take money out of the system. Since the system doesn't generate money, that money is missing somewhere else. Or in other words: Someone else has to pay it. If you think that someone is the other high-speed traders, I have a bridge that you might be interested in.
Assorted stuff I do sometimes: Lemuria.org
If you consider the fact that Vanguard which specializes in index funds manages 1.4 trillion in assets & is one of the biggest mutual fund companies, I think people have already heard about this.
I've read this before on Slashdot months or years ago. Dupe.
Do what is right. You will please some and astonish the rest. --Mark Twain
...we have "hackers" allegedly skimming off of transactions being made by people who are effectively gambling with other people's money/ livelihoods, is that it? So thieves stealing from other thieves, more or less? Oh, that's right, it affects the entire national economy, good when it's you making the millions, bad when it's someone NOT you. Of course, now I see.
Thpppt! I call B.S. on the entire process. Make 'em gamble in Vegas, where they belong. Collapsing entire national economies due to the transferral/ wagering of overpriced pieces of paper and an expectation of "getting lucky" desperately needs some effective checks and balances built into the system. The ones supposedly in there now AREN'T working. Even worse that they're doing it electronically.
You do realize that a big buyer for massive computers is the "investment" "industry" so the can perform faster and faster trades-- apparently to the point where the network transaction speed is enough to screw up their scheme. The solution will be to update the computers to work around such problems and probably firms developing machines to mess with the others-- a cyberwar game going on in addition to the existing super computer games going on already...
Naturally, parent is correct; and the game needs to be able to be regulated and policed. What we have now is a casino instead of a capital market where they can drive 300mph and the cops are on rusty bicycles. The dirivatives needs to DIE! its a scam market and it contributes nothing significant to the greater society; furthermore, its YOUNG and hasn't been around in its present incarnations for that long.
Democracy Now! - uncensored, anti-establishment news
Once a company publicly issues shares and sells them into the stock market. Couldn't they theoretically, now that they have the money more or less just ignore the share and let the traders gamble with each other over press releases and quarterly reports?
Once a share is in the wild, it's value might be measured based on the performance of the company that issued it, but there is in fact no REAL value to the share, it's strictly perceived value. It's not like you can use it as legal tender. You'd have to find someone else to gamble on the share and hope the company who issued it publishes interesting enough stories.. I mean releases that someone else would want to gamble on the company doing something else that's interesting. But, even if the value of the share plummeted into a pile of burning ash, the company still has the cash they got from selling the share in the first place. That's why when you go public, you hire a group of professional gamblers to "stabilize" the share... or more effectively, attempt to get as much money from the shares as possible by exploiting demand at it's high points.
So, what's really happening is that the government sponsored casinos (known as the stock markets) are simply working the same was Vegas does and attempting to get better at catching cheaters that might scare away the other gamblers.
What I don't understand is, why doesn't someone just start up a gambling service online that doesn't require interfacing with the government. You can trade virtual shares and the gambling service can issue them and profit from them. Then people can track them and trade them through those services.
I'm not a market genius, but if I understand it correctly, the "Share price" is not actually the value of the share. It's just the price the share sold for last time. The real value of the share should either be either the price the next purchaser is willing to pay for the share or the price the next seller is willing to sell the share for. There doesn't appear to be any actual direct correlation between the value of a share and the value of the company. Often, the share is simply only as valuable as the press the company is receiving.
The summary is missing the words "could possibly". There is no evidence that this has ever happened or any suggestion that there is a security hole that would let them do this in the first place.
Also the original source is wrong about monitoring. One of the reasons to pay $10k+ a year for 1u is that the bandwidth and latency to the trading platform is extremely low, there are multiple systems in place which monitor both sides of the exchange and validate each other’s stats, this is a fairly significant portion of the system - knowing how long ago news was released and how long it will take to make a trade based on that news is what makes HFT effective, monitoring is not an afterthought but is pretty much the core of the applications. In addition simply because of how HFT works when the “hackers” started gaming the system the other systems would stop trading until a human restarted them which would significantly limit the ability to exploit a security hole.
"the process to reap millions of dollars to the detriment of everyone else"
Isn't that what "playing" the market is all about? Buying low and selling high for maximum profit, which benefits one person and one person only. I believe the original idea behind stocks was to provide a company funds so that they had money with which to grow and then the income generated by that growth would be distributed amongst those who believed in it... a bit of an "investment" in the traditional sense. There wouldn't be as much of a need for real-time trading because who needs that unless they are hoping to get the absolute most profit. And where does that profit come from? What kind of affect does it have on the companies whose stock is fluctuating?
Someone mod this up... it was the most essential bit of the article and parent got the quote right!
I've worked in a company that makes online trading software, and this kind of abuse is as old as stock exchanges,
also without high speed networks. It's called "front running":
1 - Customer sees stock offer X at nice price of, say $ 90.
2 - Customer ask broker: "Buy X for me at the *current best* price"
3 - Broker quickly buys X at $90 for *himself*, the next best offer for X on the exchange is now $95.
4 - Broker then sells *own* X to Customer for the current best market offer of $95
>>> And steals $5 profit without taking any risk.
De prevent this the Customer should do two things:
A - Always specify the price at which you want to buy.
B - Check the counterparty you are buying from.
If you notice that your 'nice price' is often gone just after you have placed your order, something is wrong...
no doubt his company can sell us the bit of technology to provide the antidote...
By far the biggest unregulated trading industry is FOREX and it's rife with abuse by the big end of town. "Stop-hunting" is the name of the game particularly favored by industry (bank etc) traders at London and New York open. You have a well worked out trade underway and they simply spike the price to take your stop-loss out and shoot you down. The timing and the precision of the spike-strike identifies it as gamesmanship stop-hunting by these creeps. They compete with each other. Not only does it cause unwarranted losses, it distorts the unregulated FOREX market completely. You not only have to contend with technicals and fundamentals plus news, you also have to widen your stops beyond comfort tpo avoid their surgical strikes. Because the industry is totally unregulated they can do it with impunity. Brokers and industry insiders won't discuss it. It's just one of the FOREX industry's dirty little secrets for cheating the individual.
I find this story to be one of scare mongering that simply wouldn't pass muster for most exchanges.
I've worked with some of the machines on stock exchange trading floors to deal with problems from trading delays. The guys who support these machines in a daily basis know every nuance of the systems from a load perspective. They know these machines far better than almost any server admin I've worked with.
Quite simply put, if there was a delay approaching 100 ms it was actively watched for and flagged. At 200 ms people were talking vocally about the issue, at 300 ms people were shouting, if something worked it's way up to 400 ms the room was screaming. To put it quite literally there are teams of people that do nothing but /very/ actively watch for slight delays in trades as those delays can cost millions of dollars per fraction of second.
This concern is why almost every stock exchange in the world is surrounded by office buildings that are dominated by data centers, just to physically shorten the distance to the exchange.
Incidentally my involvement came from setting up server monitoring software to look for delays like these. We then automated certain types of responses (if x consumes 15% of CPU than we do Y kind of thing). To put it quite literally, a delay such as what is proposed in the article would only ever happen once - and be taken as a glitch or the affected (and magically unfixable hacked system) taken offline within 10 minutes when it could not be restored to normal operating parameters.
I call bunk, as the machines that do the trading are the most actively monitored and arguably best known by their administrator staffs in the world.
The money that they are taking is in the no-man's-land between buyer and seller. A sale happens only when the buyer agrees to buy for at least as much as the seller demands. The delta doesn't belong to either of them: both have made a commitment to buy/sell at a certain price that they are presumably satisfied with.
Since neither of them has a claim to the money, it could go anywhere. You could re-write the rules to split the difference, or some other algorithm, and eliminate the arbitrage opportunity, but it doesn't: the gap remains. The arbitrageurs have found a place where both buyer and seller are happy with the gap, and nobody misses the money that they're taking. They'd rather have it, of course, but they don't even know about it unless they play the arbitrage game themselves.
Which they can't really do if they're on either the buying or selling side. If they are, they can combine the arbitraging and buy/sell into one step, which just means plain old trading.
The article is clearly FUD produced by a software vendor for a network monitoring tool. It makes a huge assumption that the the matching system is completely FIFO and all you need to do to "win" is be the first one there. Simply delaying the competition is not enough to skim the money off the top.
Matching algorithms are not straight FIFO. Orders hitting the books or on the books are processed in batches and iterated over in various formulas for distributing the matched trades that include priority for market makers, allocation to quantity levels at the top of the price book, round robin allocation to all orders in a batch and allocation to hidden quantity orders which refresh only when the displayed quantity is exhausted. That is only a subset of the way trades are potentially allocated in a market besides "I got here first. I call DIBS!".
Exchanges are neither naive enough nor so simplistic that injection of minor latency against competitor's networks is physically possible or possible to isolate the delay to only impact others beside the imagined beneficiary. Combine this with the over simplification of trade matching the article assumes pure FIFO and the assumptive FUD becomes very apparent.
The Master (Angelo Rossitto) in Mad Max Beyond Thunderdome, "Not shit, energy!"
In the textbook, you're right.
But in reality, these people trade enough volume to make the markets. They don't take a gap that nobody misses. One simple trick is that they can manage to pick up best offers faster than regular market traders, who are then left with the "resale" from the high-frequency traders. They increase the gap in order to make their margin.
Assorted stuff I do sometimes: Lemuria.org