Steffen Gemuenden, CTO, RTS Realtime Systems
"The marginal gains where execution are concerned have now become so small that firms are putting other parts of their trade processes under the microscope to find precious fragments of time."
The focus on pure execution latency is changing as marginal gains shrink, forcing firms to examine their overall trade processes and concentrate on how they can improve efficiency at an infrastructural level, the latest annual Automated Trader survey of global trading trends found.
As the high frequency trading scene has become more crowded, more and more traders are applying HFT concepts and technology to a much wider range of purposes and time horizons, shifting the focus from pure execution latency to efficiency across the entire process.
Dependence on latency has fallen as a result, although this factor remains very much in the forefront of traders' minds, with latency awareness increasing especially amongst buy-side firms, the survey showed.
The Automated Trader global trends survey is the most detailed and comprehensive in the industry. This year's survey featured responses from more than 600 market participants.
The survey showed only 29% of the buy-side but 54% of the sell-side currently see their most common trading strategy as latency dependent. In other words, only 30% to 40% of the overall market is latency dependent.
Amongst the buy-side, small trading firms with a single trader are the least latency dependent (16%), while hedge funds and proprietary trading shops are the most dependent (35%). Traditional asset managers come in at 19%.
The most latency dependent amongst the sell-side are global investment banks at 59%.
The survey found that the apparent lack of focus from the buy-side may just be an indication that the sell-side has been effective at delivering value to customers in this area and, in the most part, is providing infrastructure and market access methods that meet customer needs.
"Latency imperatives are without doubt shifting. That doesn't mean that firms are giving up on the race to zero. On the contrary, latency is just as important as ever. But the focus has altered," said Steffen Gemuenden, CEO of RTS Realtime Systems.
"The marginal gains where execution are concerned have now become so small that firms are putting other parts of their trade processes under the microscope to find precious fragments of time, for instance by reducing decision latency."
Execution latency remains a key area of focus for most trading firms, but companies are increasingly developing strategies that could be successful even without latency advantages.
"Firms have taken steps to mitigate their latency exposures having either diversified into LFT styles and new, less crowded trades, or they have increased their investment in high performance latency infrastructure. Both seem to have happened," the survey report said.
"Indeed, the more the asset management firms become aware of low latency, the less they appear to like their HFT overlays, and the more they turn to performance measurement to control their exposures."
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