For traders who trade volatile markets, slippage is one of the biggest enemies. It’s when your order gets executed at a price that is farther away from your intended price. This could lead to unplanned losses for you. Fortunately, low-latency trading is one of the ways to combat this issue.
In the rest of this article, we’ll explain low-latency trading and its implications for traders.
What is Low Latency Trading?
For a trader, latency is the difference in time between when you place an order and when the order gets executed by your broker. It’s that delay between when you click “buy” or “sell” and when your broker executes that order. And in the fast-paced trading world, this delay could spell the difference between escaping a slippage or getting caught in its trap. If you’re a High-Frequency Trader, your entire strategy rests on latency.
With that in mind, low-latency trading is the execution of trades within milliseconds. It’s when the broker executes your order in time, before the slightest price change. The lower the latency, the faster your trade execution speeds. Many brokers understand how much latency can cost traders, which is why they display their trade execution times on their websites as shiny marketing tools.
Trade execution speeds aren’t the only one that are impacted by latency. Market data latency is another kind that traders must be aware of. Market delay latency is the delay between the time financial market data feeds(such as price quotes, trade volumes, or order book updates) is generated and when a trader’s system receives it. This latency is a crucial factor in trading because it determines how quickly a trader can access the most current information and make decisions based on it.
What is Ultra Low Latency?
Ultra-low latency refers to achieving an exceptionally minimal delay in the processing, transmission, and execution of data within a trading system. It is typically measured in microseconds (millionths of a second) or low single-digit milliseconds.
One of the significant differences between low-latency trading and ultra-low-latency trading is the degree of precision. Low latency trading focuses on reducing delays to milliseconds (1/1000th of a second). On the other hand, ultra-low latency trading pushes the boundaries further, targeting delays in microseconds (1/1,000,000th of a second) or low single-digit milliseconds.
What’s the Difference Between Low Latency and High-Frequency Trading?
High-frequency trading is an algorithmic trading approach where a large number of trades are executed in a very short time. This strategy aims to take advantage of the slightest change in price. Low-latency trading is simply the execution of trades by the broker in milliseconds. High-frequency trading relies on a low-latency environment.
In fact, High-Frequency Trading firms go to great lengths to reduce their trade execution latency as much as they can. They know that their profitability relies heavily on this.
What Affects Latency
Infrastructure and physical distance from the broker’s server are the significant factors that affect latency positively or negatively. How so?
Physical distance
The distance between your computer and your broker’s executing server affects your latency. If you’re geographically far from your broker’s server, your trades could take longer to execute, as your request takes longer to get to the server, and your response takes as long to get back to you. But if you’re close, your traders don’t have to travel as far.
Infrastructure
The speed of execution depends not only on the distance between your computer and the server but also on the efficiency of the machines involved. For instance, a slow computer could increase your latency. Also, if your broker’s network latency or your internet connection speed could add significant milliseconds to your execution time.
Other trading system architecture inefficiencies arise from the code your trading software was programmed in or the number of additional firewalls and “security restrictions” that your order must bypass before execution can pile up your latency.
How to Build a Low-Latency Trading System
Low-latency trading requires a highly optimized setup to ensure the fastest possible trade execution. Here’s how you can build a trading system that minimizes delays and maximizes efficiency:
1. Choose the Right Internet Connection
Your internet speed is a massive factor in building a low-latency trading system. Fiber-optic internet offers the fastest and most stable connection compared to cable or DSL. Also, you’ll find some internet service providers specializing in high-speed connections. These are the ones you want to do business with.
And yeah! Use an Ethernet cable instead of WiFi.
2. Use of a Trading VPS
A trading VPS is a remote server on which your trading platform is hosted. The benefit of subscribing to a trading VPS is that it places your trading platform on a remote server close to the exchange’s data centers, significantly reducing the time it takes for your orders to reach the market.
If you have a bigger budget, you can rent space in the same data center that houses your broker’s server. Institutional traders do this all the time.
3. Optimize Your Machine
Sometimes, you just have to optimize your trading computer. If the computer is slow, even with the right internet connection and the best trading VPS, you still get high latency.
Your software also plays a huge role in determining your latency. Lightweight trading platforms, such as MetaTrader, Ninja Trader, and your broker’s proprietary trading platform, can help significantly reduce your latency.
4. Choose a Broker with Fast Execution
Not all brokers are equal in terms of execution speed, so it’s important to choose one that offers low-latency infrastructure. Look for brokers with direct market access (DMA), as these allow you to execute trades directly with liquidity providers, bypassing intermediaries that can introduce delays.
Does Low Latency Really Matter?
If you’re a retail trader who doesn’t do a lot of news trading or you try to avoid volatile markets, you don’t need a low-latency trading environment. If you trade in volatile market conditions, however, we strongly recommend that you set up a low-latency trading environment, even if it’s just setting up a trading VPS.
Low-latency trading also matters to you if you’re an arbitrage trader. You want to take advantage of price discrepancies before they close up, which only happens infrequently. Your algorithm has to be able to spot these price differences and execute them at a moment’s notice.
As we already mentioned, low latency matters to you if you’re a high-frequency trader. Your algorithm relies on capitalizing on slight price changes, and this is precisely what a low-latency trading environment helps you to achieve.
Conclusion
Low-latency trading is a crucial aspect for traders who prioritize speed, accuracy, and efficiency in their strategies. While it may not be necessary for all types of traders, those engaged in high-frequency trading, scalping, or arbitrage can benefit significantly from a well-optimized low low-latency trading system.
While reducing latency can enhance your execution speed, it’s equally important to focus on maintaining a disciplined trading plan and managing risk effectively. Technology can provide an edge, but success in trading still hinges on knowledge, skill, and adaptability.
