One of the buzz terms in the European financial markets in 2008
is
"low latency". In the past year we have heard announcements
from most stock exchanges about upgraded
trading platforms, brokers differentiating their direct market
access programs on execution speed, and no shortage of "ultra low
latency" network providers promoting light-speed performance.
Banks want lower latency services, but few are able to measure
their own performance down to the level of granularity to test
these claims. Most are talking about eliminating milliseconds, with
a cadre of top firms concerned about microseconds. So how low is
"low enough" and where will it all end?
In the electronic trading world, performance is relative - as
long as one firm has an edge over the market, competitors will
strive to improve their positions, but whether this will continue
to the nanosecond mark remains to be seen.
In Europe some interesting trends are emerging, with a knock-on
impact on IT infrastructure. Firms spent the early 2000s
consolidating their trading infrastructures alongside wider IT
strategy, but the markets have followed the opposite trend. In a
post-
Mifid 2008, there are more venues in which to trade stocks,
which will probably result in a fragmentation of liquidity. There
are also an increasing number of market data sources, which firms
must ingest into their algorithmic order management systems.
In today's algo-trading environment, having a consolidated
system trading multiple markets simply won't cut it - firms need to
be able to react to regional price movements immediately in that
(and other) markets.
Some network providers are often requested to provide
lower-latency connectivity. Although there are still some
improvements that can be made from optimising network performance,
if firms are serious about removing latency, they need to tackle
the largest latency component - propagation delay, attributed to
the speed of light over fibre. The only way to eliminate this is to
physically move their servers across geographies to get closer to
the exchanges. Rather than moving offices, the best solution tends
to be shipping some servers to a secure third-party datacentre
located closer to a trading venue.
Proximity services
This trend is not likely to go into reverse, and, if anything,
the use of "proximity services" will create a new benchmark for
electronic trading performance. Even two years ago the prospect of
shaving five milliseconds between a bank and an exchange would not
have been compelling - now, owing to advanced trading systems and
in-house technology, a five millisecond delay is considered an
outage.
The European and Asian markets have some catching up to do for
exchanges to offer the ease of proximity access available in the
US. Many of the new entrants to the European low-latency market
have been US brokers and hedge funds, but the European institutions
and exchanges are catching up quickly. ●