Every market has its naysayers, but critics claiming that the vital signs of the low-latency management industry are fading should retake the pulse of the market.
In a recent report, Datamonitor says that low-latency infrastructure for the financial markets is a fast-moving space that shows no sign of slowing down in the face of the greater crisis in the global banking and financial services industry. The report also points out that the current financial backdrop may actually spur investment, both to exploit increased volatility and to address shortcomings revealed in existing infrastructures through the sudden increases in volume.
Low-latency management is still an emerging market and, like all new markets, it has a growth path to maturity. As trading strategies evolved from telephone and paper orders to automated black boxes, elements such as execution speed and the need for high-performance infrastructures became critical. Add the ever increasing number of trading venues and the exponential growth of automated trading and you have a highly competitive environment where every millisecond counts.
Many solutions have been tapped to reduce latency and speed up execution time, including larger pipes, faster processors, low-latency applications and data feeds, direct-market access platforms and collocation. While all of these efforts prove valuable to increasing trading performance, latency still sneaks into these complex and multi-tiered environments, making latency management one of the biggest challenges in trade optimization.
The fact that latency needs to be continuously monitored and managed brought about the next stage in the evolution of the trading market: the adoption of solutions to monitor and analyze latency across entire trade execution and market data flow environments. The need for analytics and latency benchmarks has become apparent not only as a tool for latency management, but also as a way to access the information essential to optimizing trading strategies and fulfilling profitable orders.
To get the best trade, capital market firms need real-time latency visibility into the entire execution chain. Each execution and network transport point has to be monitored and visualized in real time so that latency problems can be identified and eliminated before impeding business performance. This competitive advantage is critical to identifying the fastest path to a venue because speed to market can increase the likelihood of a better price and ultimately lead to more revenue.
Trading environments by nature are dynamic and complex. But as applications and protocols are added and upgraded, latency tends to slip back in unnoticed. As the speed at which a firms trading races forward and automation technology continues to develop, it is a challenge for IT departments to keep up. Factors such as aging legacy systems, application upgrade requirements, protocol changes, and the complexity of trading environments add ongoing stress to latency management. Latency analytics give IT managers the visualization tools needed to pinpoint where and when latency occurs within the existing infrastructure.
With the large volume of orders that needs to be processed with microsecond execution, receiving accurate alerts and having the ability to reroute trades in real time allows capital market firms to effectively overcome execution slowdowns. By utilizing accurate snapshots of an environment, firms can easily measure and analyze execution and latency changes. Managers can use latency intelligence to predetermine venues, adapt trade routes in real time to overcome bottlenecks and optimize execution time, enhance customer service and dynamically improve execution during peak-period trading.
Here are a few examples of how latency analytics can be used:
- A large investment bank wants to understand how volume at the market open at an exchange is affected by latency. By taking latency snapshots of the same time period over a few days, the bank can compare order execution latency. This analysis is then used to better understand the effects on execution strategies.
- A leading liquidity venue uses latency analytics to monitor customer response time. Since a number of its clients are high-frequency hedge funds who issue orders within milliseconds, the venue needs to ensure that other customers sharing the same server are not affected by the activity. Real-time latency monitoring and alerting, combined with the venues server performance metrics, allow the flow to be directed to less congested execution routes, ensuring peak performance for all customers.
- A proprietary trading firm uses latency intelligence to modify the rules to enhance its complex event processing platform to send signals that preemptively avert or mitigate performance issues in trade execution.
- A global broker-dealer measures latency in real time by monitoring an algorithmic trade from the point at which new market data triggers an order, through its execution infrastructure, out to the exchange, to the return of the order acknowledgement. The firm further analyzes this trade data to provide insight into latency occurrences.
The most effective latency-reduction strategy requires the best intelligence. All firms involved in the trade life cycle--the buy side, sell side, and trading platforms--should use latency management to deliver optimized strategies that enable business growth, customer satisfaction and cost reduction.
This article can also be found at SecuritiesIndustry.com.
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