Low-Latency Trading: Progress--Past, Present, and Future
We are now past the first anniversary of the latest black September and we are still in business! In fact, quite the contrary, volumes are up, shape sizes down, and the proof is that, after a short interlude of potential meltdown, the markets are still with us and they will trade going up or down.
For the trading market it ...could be argued that the last 18 months have done us a service. 2006-2008 was the latency arms race. The learning curves across the market, from technology vendor to buy, sell-side and new liquidity providers were colossal as we all invented new business models on the fly. As we sit looking forward to 2010, it looks like rationalization has set in. We know who needs low latency, how it’s affected, and the remedial causes. So let’s see how we have arrived at today, what we now have and what we might usefully do with it next year and beyond.We have come through a phase of almost unprecedented hype in technology marketing around low latency. This has often been at the expense of understanding where the causes of latency are likely to exist, and the practical options to cure the symptoms—from tuning the engines to wholesale replacement of aging parts.
In this context the task is multi dimensional. One has to look across the spectrum of processes that make up the pre-trade life cycle and the supporting technologies at each phase, from receipt of market data and the firing of the starting gun, through intervening analyses and checks, to the trade instruction hitting the execution venue. Technically a variety of components interoperate to enable this, which is where the leading edge computer engineering skills exist. The Formula 1 racing analogy plays amazingly well, where fast is never fast enough. Here CAPEX (capital expenditure) is not an issue and only the best and latest components are used, if necessary custom made, and simulated on massive supercomputers by a singularly focused technical team working to get the car round the circuit fractions of a second faster than the nearest rival.
Read the full Low-Latency Trading Paper.