Low Latency (capital Markets)

Low Latency (capital Markets)

Low latency is a topic within capital markets, where the proliferation of algorithmic trading requires firms to react to market events faster than the competition to increase profitability of trades. For example, when executing arbitrage strategies the opportunity to “arb” the market may only present itself for a few milliseconds before parity is achieved. To demonstrate the value that clients put on latency, a large global investment bank has stated that every millisecond lost results in $100m per annum in lost opportunity.

What is considered “low” is therefore relative but also a self-fulfilling prophecy. Many organisations are using the words “ultra low latency” to describe latencies of under 1 millisecond, but really what is considered low today will no doubt be considered unacceptable in a few years time.

Ultimately the speed of light "c" dictates the limit, a trading engine just 150km (93 miles) down the road from the exchange can never achieve better than 1ms return times to the exchange. This also assumes a vacuum, in practice there are several routers, switches and cable between the two and even if there was a dedicated cable, messages still travel slower down cable than in a vacuum. As a result most trading engines can be found physically close to the exchanges, some go as far as putting their engines in the same building to further reduce latency.

A crucial factor in determining the latency of a data channel is its throughput. Data rates are increasing exponentially which has a direct relation to the speed at which messages can be processed, and low-latency systems need not only to be able to get a message from A to B as quickly as possible but also to be able to do this for millions of messages per second. See comparison of latency and throughput for a more in-depth discussion.