Slow-market arbitrage: Traders can use fast connections to take advantage of different data speeds at different exchanges. Since not all exchanges operate at the same speed, there are often price differences among them, especially in foreign markets. Slow market arbitrage, however, has turned into a bit of an arms race, with hedge funds spending millions for high-speed connections that will provide an edge measured in milliseconds.
Dark-pool arbitrage: HFT firms can use this type of arbitrage to take advantage of the differences in price between exchanges and dark pools, or private exchanges that aren’t available to public investors. Because dark pools don’t immediately publish prices in their dark pool, there’s often a difference in price that can be exploited by high-frequency traders.
Rebate arbitrage: High-frequency traders take advantage of different exchange rules involving rebates. Some exchanges provide buyers with a rebate while charging sellers a fee; some give the rebate to sellers and charge a fee to buyers. HFT firms exploit the system by purchasing one stock from a stock exchange that offers a rebate to buyers and then quickly selling it -- at the same price -- to another exchange that offers a rebate to sellers. Although the rebate amounts are typically quite small, tiny profits can turn into much larger ones when very large blocks of stocks are involved.
