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 and companies are using the words “ultra low latency” to describe latencies of under 1 millisecond, but it is an evolving definition, with the amount of time considered "low" ever-shrinking.

There are many factors which impact on the time it takes a trading system to detect an opportunity and to successfully exploit that opportunity, including:

From a networking perspective, the speed of light "c" dictates one theoretical latency limit: a trading engine just 150 km (93 miles) down the road from the exchange can never achieve better than 1ms return times to the exchange before one even considers the internal latency of the exchange and the trading system. This theoretical limit assumes light is travelling in a straight line in a vacuum which in practise is unlikely to happen: Firstly achieving and maintaining a vacuum over a long distance is difficult and secondly, light cannot easily be beamed and received over long distances due to many factors, including the curvature of the earth, interference by particles in the air, etc. Light travelling within dark fibre cables does not travel at the speed of light - "c" - since there is no vacuum and the light is constantly reflected off the walls of the cable, lengthening the effective path travelled in comparison to the length of the cable and hence slowing it down . There are also in practice several routers, switches, other cable links and protocol changes between an exchange and a trading system. As a result, most low latency trading engines will be found physically close to the exchanges, even in the same building as the exchange (co-location) to further reduce latency.

To further reduce latency, new technologies are being employed. Wireless data transmission technology can offer speed advantages over the best cabling options, as signals can travel faster through air than fiber. Wireless transmission can also allow data to move in a straighter, more direct path than cabling routes.

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