Low Latency: Faster than Light

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Over the past 15 years (since the majority of securities exchanges became electronic), speed has become the weapon of choice for major financial institutions.

Five years ago, in the run up to the first major financial crisis of the century, significant marketing and media hype surrounded low, and now ultra-low latency. The industry has grown wiser and more mature on these topics, yet a range of misconceptions remain about what latency really means. Client testimonials and ‘latency busting’ projects across all asset classes are the basis through which this paper dispels such misconceptions, revealing a landscape of organisational latency requirements. It defines a clear methodology for measuring and accounting for latency, as well as reviewing the quality of existing latency tools, whilst evaluating and assessing the comparative effectiveness of latency reduction strategies.

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For each asset class and line of business two latency thresholds are identified:

  1. A low threshold, which must be reached to be considered a leading performer
  2. A high threshold, above which firms are exposed and clearly trailing the market

The three zones of latency posture are delineated by the two thresholds:

  1. Below the low threshold is the “opportunity zone”.
  2. In between the two thresholds lies the “safe zone”.
  3. Above the high threshold is the “danger zone”.

These thresholds may vary market by market and evolve across time. To keep up with the pace, a firm must divide the latency in its trading systems by two every three years. This may seem a gentle rate of progress but it actually means that the end-to-end processing time of electronic trades has been reduced by 94% over the past decade just to stay competitive; and all this with volumes that are increasing and trading decisions that are ever more sophisticated. Reducing latency is a continuous and iterative endeavour in which there are no shortcuts. The pursuit of lower latency is a cyclical process always beginning with measurement, followed by monitoring and improvements, finally returning to measurement to start another cycle.

Accounting for latency in the technology layers without the corresponding business context is of limited value. Any latency measurement and reduction strategy must cover both the business and technology levels. From a business perspective, the data collection should focus on trading outcomes, combined with volumes and order flow rates. Technical measurements should, in turn, concentrate on both end-to-end as well as step-by-step latencies.

Many approaches are available to reduce latency within a trading platform, each technique targeting a specific layer or component within the chain. Since each strategy carries its own challenges, compromises and price tag, it is paramount to have a prioritised and reasoned selection process to pick the most appropriate solution to a qualified business requirement. The application layer remains the place where most of the latency is generated. It is therefore the initial target for improving latency.

Infrastructure can give a competitive advantage; however ‘buy’ is now clearly winning over ‘build’. With current offerings, where the wire is shared among those who bought the service, there is an assurance that performance is similar across parties. Designed and built for purpose, infrastructure is advantageous but comes with high costs: design, deployment and maintenance. Ultra-low latency is achieved if the propagation delay is reduced to the minimum. Proximity hosting and co-location are on the rise as propagation can add double-digit milliseconds latency. Proximity hosting and colocation offer good trade-offs, explaining their growing popularity despite their relative high costs.

Published on: 27 Jan, 2012

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Low-Latency: Faster than Light – Table of Contents

  • 1.0 A Brief History of [Elapsed] Time
    • 1.1 What is Latency?
    • 1.1.1 Latency is End-to-End
    • 1.2 Where is Latency Created?
    • 1.3 Why do we Care? – The Impact of Latency on Electronic Trading
  • 2.0 Coping with the Need for Speed
    • 2.1 Equities, Futures and Options
    • 2.2 Fixed Income
    • 2.3 Foreign Exchange
  • 3.0 Measuring Latency
    • 3.1 What to Measure?
    • 3.2 How to Measure?
    • 3.3 Instrumentation
  • 4.0 Latency Reduction Strategies
    • 4.1 Reducing Latency in Applications
    • 4.2 Reducing Latency in the Infrastructure
    • 4.3 Reducing Latency at the Location
    • 4.4 Evaluation of Strategies to Reduce Latency