Delay filters and the speed bump

[Fairman]

Delay filters and the speed bump

Some liquidity providers and brokers use a deliberate delay on certain flows. The idea is to protect against latency arbitrage: traders with fast feeds who exploit stale prices.

A stale quote is one that has not updated to reflect a move elsewhere. A fast participant sees the new price and hits the old quote before it can refresh. The market maker loses.

Delay filters, sometimes called speed bumps, slow incoming orders for a few milliseconds. During that time, the quote refreshes. If the price moved, the order is rejected or filled at the new price.

For most retail traders, the delay is invisible. For scalpers with fast setups, it is felt as slightly worse fills, mostly on entries that coincide with sharp moves.

The distinction between latency arbitrage and legitimate scalping is not always made carefully. A strategy that trades on short-term momentum looks similar to an arbitrage one from the broker's side.

Some brokers apply the delay only to accounts flagged by behaviour. Others apply it to everyone. A few advertise that they do not use any.

Signs worth checking are fill delays that exceed the usual by a consistent margin, particularly on winning trades, and differences between demo and live behaviour.

Clear information from the broker's execution policy is the starting point. Test results from small live trades are the proof.

An informal experiment is possible with two accounts: one placed on a fast VPS and one on a typical home line. If the faster account sees consistently worse fills than the slower one on identical orders, the broker may be penalising speed. That result sounds backwards and does occur. It suggests the broker's filter targets fast arrivals specifically, which is useful to know before investing money in lower latency.

What does the distribution of fill delays look like, and does it differ between trades that moved quickly and those that did not?