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It is widely considered as critical to the performance of an algorithm, but what do we actually mean by latency? Dr Usman Malik, of algorithmic trading specialists P.E. Lynch LLP, explains the main sources of latency and suggests some practical steps for minimising its impact.
The L Word
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Dr Usman Malik |
One of the most talked about topics in algorithmic trading is latency. Press releases from telecom firms, data providers and software vendors are typically focused on themes such as ‘locate next to the exchange and reduce your latency to a millisecond or one million messages per second throughput’. While such figures sound impressive, it is misleading to suggest that any of these solutions will prove a panacea for all latency problems.
In engineering terms, the simple definition of latency is a time delay between the moment something is initiated and the moment its first effect begins. As there are many moving parts in algorithmic trading, this problem naturally arises in many stages of the process. What follows is a simple walkthrough of the main areas where this problem arises.
Project latency
While most latency problems are measured in milliseconds, this is one that can often be measured in years. From the first meeting to discuss what an investment bank wants as an algorithmic trading solution to the actual roll-out of that solution to its clients will typically take many years. Hence, ‘go live date’ is by far the most important latency statistic in algorithmic trading services. Your own project might be held up on issues such as, should we be using exchange or consolidated feeds?, but your competitors will not be worrying about such marginal technicalities and will instead be selling the service, creating a brand and capturing commission. One should always have this opportunity cost in mind when deliberating about marginal latency issues. ...