Latency Arbitrage - How to start

Basic and advanced lead-lag strategies.

In the previous article, we looked at how to properly do DCA (Dollar-Cost-Averaging) by quantifying different approaches and seeing how they impact returns, variance and downside variance.

In this article, we are gonna look at one of my favorite HFT trades: Lead Lag Arbitrage or Latency Arbitrage.

Now while it is called an arbitrage it really isn’t, in the same way statistical arbitrage isn’t actual arbitrage. (Quants love to slap the word arbitrage on things, it sounds cool!)

Now while it isn’t a real arbitrage it can, just like statistical arbitrage, bring incredibly consistent and high sharpe returns.

We are gonna be exploring the literature on this topic, going from simple to advanced approaches.

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Table of Content

1. The Lead-Lag Effect

2. Linear Regression

3. Causality

4. Graph Theory

5. Dynamic Time Warping (DTW)

6. Further Resources

7. Final Remarks