Crypto Bots Feast on Your Typos

Sometimes an asset will trade at one price on one trading venue, and another price on another venue. If you notice this discrepancy, you can buy the asset at the lower price in one place, sell it at the higher price in the other place, and make an instant guaranteed profit. But if you notice this discrepancy there’s a pretty good chance that someone else will too. I mean, it’s free money, why wouldn’t other people notice? And so then a pretty important question in market structure is: How do you decide who gets the free money?

There is a straightforward canonical answer that is used in most financial exchanges, which is that whoever gets to the exchange first gets the free money. These days, people complain endlessly about this method of allocating the free money, because it seems unfair (people with fast computers who pay to rent space next to the exchange have an advantage over the little guy, etc.) or because it encourages a socially wasteful arms race (people keep building microwave towers to get their signals to exchanges faster, etc.). Sometimes they suggest other methods for allocating the free money, for instance randomly or pro rata among people who notice the free money within a certain amount of time, etc.