Ultrafast Trading

Nanosecond arbitrage.

An event happens. A bomb goes off in Iran. Oil prices suddenly spike. On exchanges...all over the world. So the ultrafast trader realizes that oil (and that can mean the actual commodity itself, or companies that do stuff with it, from Royal Dutch Shell to BP to Halliburton to the derivatives on oil) is reacting fast on the London Stock Exchange, where a barrel suddenly prints up about three British pounds to the dollar equivalent of $53.763. (And note that now there are currency differentials here as well.)

That same barrel is trading in Dubai for $53.769, and in the U.S. Mercantile Exchange for $53.773. So in the nanoseconds that live in-between trades, that ultrafast trader can immeidately buy in London and sell in the U.S. and make about a penny spread on, like...10 million barrels and/or the call options on them.

It's basically cross currency...cross exchange arbitrage that ultrafast trading catalyzes. It adds liquidity to the system...but it only works if you have expensive trading software, and "pipes" that connect directly to the exchanges on ultrafast fiber lines.