It is better for investors to complete trades as close to real time as possible because they can buy shares at the price they want. In high volumes, even a small price fluctuation can make a substantial difference.
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Proximity to the exchange reduces latency. Every 200km reduction in fibre cuts one millisecond.
According to a survey carried out by COLT Telecom, 90% of IT professionals in the finance sector expect to invest in cutting the time to complete a trade. Many are now relocating some of their trading infrastructure nearer exchanges.
Ian Jack, head of financial services strategy at COLT, said it takes 12.7 milliseconds to send a message from London to Frankfurt over fibre. "The exchanges are reducing the time to complete trades but the time to send messages to the exchange has not changed for years. Now trades are completed so quickly this is a large proportion of the total."
He said there is a trend for investment firms to locate their IT infrastructure closer to exchanges. "We are seeing a lot of investment companies using third parties to host parts of their infrastructure nearer the exchanges they use."
He said this could include order management systems, data feed handlers and risk systems.
Stock exchanges have a competitive advantage if they can complete trades quicker. The London Stock Exchange will be able to complete a trade from start to finish in three milliseconds by the end of October.
David Lester, CIO at the exchange, said there is a team of developers working 24 hours a day to reduce the time taken to complete trades. He said the firm knows how to reduce it below one millisecond but has yet to devise business case to justify the investment.