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Viewpoints on Latency – Towards Zero Latency – June 2011

Trading firms continue to invest significant sums in low-latency technologies, with connectivity and co-location being a big focus, and a large proportion of IT budgets. Reducing propagation latency from the trading chain – by going with the fastest network provider and installing systems in co-location data centres – remains for many the simplest approach to remaining in the lead of the latency race, though in itself it’s not a universal panacea for business success.

Speaking at A-Team’s recent conference focused on “The Business & Technology of Low-Latency Trading,” John Jacobs, COO of Lime Brokerage, made the point that trading in the increasingly fragmented equities markets is not always about being the fastest. Brokerages are required to understand “what the customers are trying to do,” with respect to their trading strategies when determining co-lo and connectivity requirements. Simply leveraging those approaches and technologies gets a firm “part of the way there but it doesn’t take you the whole way there,” he said.

It is also Jacobs’ experience of late that trading firms are more carefully considering their investment in some technologies, weighing up their cost against the business benefits they bring. A case in point, he noted: Spread Networks’ dark fibre connectivity from the NYC metro area to Chicago. At a guaranteed 13.33 milliseconds roundtrip, it clocks in at more than a millisecond faster than alternative services. But its high “in your face” cost has caused some firms question whether they need that kind of advantage for their strategies.

Indeed, Jacobs suggested that firms operating in the high frequency trading business are beginning to segment themselves into two categories, one operating at the cutting edge, where they will spend “absolutely anything for speed” and a second, where trading strategies can be optimised to deal with a certain level of latency, and so technology investment is more measured.