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The leading knowledge platform for the financial technology industry

A-Team Insight Blogs

What is Your Latency IQ?

Capital markets firms have been implementing a number of different strategies for reducing latency – from increasing network bandwidth, to implementing low latency applications, to collocation – giving rise to the question: What’s next?

To get the best trade, firms realize their need for visibility into the entire chain of trade execution events in real time. Through intelligently analyzing order flow, identifying volume sensitivity, system processing time and liquidity venue response time, they have the ability to optimize performance and capitalize on market opportunities.

By monitoring and measuring latency in real time, trading operations and architects are armed with the tools to quickly pinpoint latency issues to enhance performance or take rapid corrective action. As both market data and transaction volumes grow, trade execution and market data flow systems are inherently affected by additional latency, subsequently adding pressure on architects to reduce it.

In the same way, traders use analytics to improve performance, trading operations practitioners use analytics to reduce latency. They question the technology’s ability to shave milliseconds and actually analyze performance of each point in a round-trip trade. Practitioners should be asking:

  • Are periods of volume spike affecting customer’s orders and if so can you react quickly to resolve it?
  • Did the newly installed low latency application perform as expected once it was deployed?
  • Can I measure latency for child orders?
  • When and where are latency bottlenecks occurring?
  • Did our latest application upgrade add or reduce latency?
  • Are we maintaining or improving the level of low latency already achieved?

With this type of insight, users will be empowered to continually manage their environments for latency improvements. Externally, new pools of liquidity have grown around the world. This spike adds complexity to the latency equation. Firms are seeking best price execution, thus making low latency performance for order routing necessary to gain optimal execution speed.

Tabb Group estimates that “if a broker’s electronic trading platform is five milliseconds behind the competition, it could lose at least 1% of its flow” equivalent to $4 million in revenues per millisecond

. In addition, 10 milliseconds of latency could result in a 10% drop in revenues, whereas if a “broker is 100 milliseconds slower than the fastest broker, it may as well shut down its FIX engine and become a floor broker.” Infrastructure management is critical in identifying the fastest path to a liquidity venue because speed to market can increase the likelihood of a better trading price and more revenue for the firm.

The new profit engine is electronic and can trade in microseconds to take advantage of latency arbitrage to profit from market inefficiencies. Firms with lower latency have the upper hand in this scenario and can exploit their competitive advantage to gain from price discrepancies.

In the same way a mechanic will use diagnostics to fine-tune today’s highly computerized cars to run at their top performance, IT can use latency monitoring solutions to fine-tune the performance of their market data and trade execution infrastructures. Latency dashboards along with reports and alerts are a fundamental part of latency management.

These latency tools can be used to establish a performance measurement baseline as passive probes capture, analyze and archive transaction data. By correlating the roundtrip response time and pinpointing exact latency measurements between each hop in the system you can identify latency candidates for optimization. With Latency Intelligence firms are able to report on:

  • Volumes and latency statistics by customer for the trading desk
  • Customers’ best execution for their trades in support of SLAs
  • Market latency sensitivity vs. volumes
  • Identity of liquidity venues’ response times

This derived latency intelligence improves the management of the business while making improvements more cost-effective. The age of electronic trading is here. But the winners will see this opportunity as a chance to provide more trade agility. The requirement for high-speed infrastructures is well known.

However, latency metrics can drive further improvements and peak performance sustainability, ultimately growing the business. The good news is that solutions are available today that can help you improve your latency intelligence so you keep a competitive advantage in the race for the best speed-based strategy.

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