Latency, when every nanosecond counts!

Unless you have delved into how trading networks operate, it is unlikely that you will have come across the term low latency execution. This is especially important in this day and age, with a significant increase in high-frequency trading. In addition, the introduction of trading bots, artificial intelligence, and other automated trading services means that speed is even more critical. During the modern-day trading environment, every nanosecond or microsecond counts!

 

How does latency relate to trading?

 

In simple terms, latency is the time between your instructions being placed and executed - relating specifically to the computer network. As you might have guessed, lower latency executions mean your trade is passed and received very quickly. You may come across the term low latency execution when looking at different trading platforms. However, while brokers will often describe their trading services as low latency, there is no standard measure across the investment industry.

 

Is latency really a big problem for traders?

 

As we touched on above, we live in a world of automated trading, which means that literally, every nanosecond counts. In fast-moving markets, traders may be reluctant to place limit orders, which can leave them open to potentially significant losses in a low latency environment. While we often discuss the more traditional elements of trading, such as research, timing, etc., lower latency execution is something you should consider if you choose to become a short-term/day trader. Trade execution speed is crucial!

 

What are the main factors impacting latency?

 

As a broker looking to provide a low latency trade execution-only dealing platform, there are several factors to consider. These include:-

 

Hardware

 

Even the best, fastest and most efficient computers can be outdated in just a few months. In a world where literally every nanosecond counts, it is vital to regularly maintain and update hardware.

 

Ping tests

 

You may have encountered the term "ping tests" when checking your broadband speed at home or in the office. This is simply a process where a tracer is sent between two serversto see how long it takes for instructions to be sent and received.

 

Hosting package

 

It is important not to mix computer hardware with hosting services as these are two very different market areas. Of course, the more efficient your server is, the quicker the instructions will be sent, but there is one other issue to consider!

 

Location of the server

 

We live in a world where information is sent thousands of miles in a split second with constant improvements in network technology. However, the physical location of a broker’sserver is also something to consider. 

 

The further your server is away from the stock exchange servers, the more significant the impact of latency (in this case physical distance). While we are talking literally split-seconds, it can be costly. Consequently, many high-frequency trading brokers will locate their servers in the same data centres as the stock exchange servers. Simple but highly effective!

 

Arbitrage situations

 

Short-term/day traders tend to be very straightforward in their actions, buying an investment and then hopefully selling it for a profit. However, another area of the market is impacted to an even greater extent by the speed of trade execution. Arbitrage situations!

 

As many shares are traded on multiple stock markets around the world, from time to time, arbitrage positions will emerge. These are split-second, often minimal, anomalies in a share price on one or more exchange. Consequently, there may be the opportunity to buy and sell simultaneously on different exchanges to make a turn. 

 

These trades tend to be relatively large, looking for a relatively small percentage return. Due to increased efficiencies between markets, arbitrage positions are not as common as they once were. Nevertheless, history shows some people made a living trading mispriced equities.

 

Conclusion

 

Low latency execution-only services are the Holy Grail of the investment world, although they can come at a hefty price. Here at Global Investment Strategy UK, we continually invest in hardware, software and network efficiencies. Finding a balance between affordable trade execution and low latencyexecution services can be challenging. Still, it is a challenge we are constantly addressing.

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