In the world of modern trading, speed is everything. It matters that your trade is executed when you wish, rather than at a later time or price where the odds are less in your favor. This is where low-latency trading infrastructure comes into play.
Low-latency trading refers to the ability to execute trades at extremely high speeds with minimal delay. The goal is simple: reduce the time it takes for market data to be processed and orders to be executed.
Not every trader requires ultra-low latency, but if you’re a High-Frequency Trader (HFT), institutional trader, algorithmic trader, or a proprietary trading firm, your trading infrastructure must be built to optimize for low latency.
In the rest of this piece, you’ll learn what a low-latency trading infrastructure should contain and how to build one.
What is a Low Latency Trading Infrastructure?
A low-latency trading infrastructure is a system of trading components designed to execute a trade as quickly as possible. It involves optimizing every component to work at its most efficient optimal level so that the least amount of latency stands in the way of orders and executions.
The Key Components of a Low Latency Trading Infrastructure
Your low-latency trading infrastructure must contain the following:
1. The Network Architecture
The efficiency of a trading system heavily depends on network latency. The network latency in a system is the time it takes for data to travel between different points in that system. So, the goal here is to reduce the number of checkpoints your orders have to pass en route to execution. One of the ways to achieve this is Direct Market Access (DMA).
DMA is a method where traders bypass intermediaries (such as brokers) and send orders directly to an exchange’s order book. If you’re not using DMA, though, that means your order has to go through brokers. But do not worry; this is where Smart Order Routing (SOR) comes into play.
Smart Order Routing is an intelligent system that dynamically selects the best exchange or venue to execute an order based on price and execution speed. This way, your order doesn’t just “zombie” to the closest exchange server, even if there isn’t enough liquidity from there to execute your order. SOR Reduces latency by sending orders to the fastest and most liquid venue available at any given moment.
Of course, most of your network issues can be solved by co-location or server leasing. Colocation involves hosting trading servers inside exchange data centers. Orders placed inside a colocated server reach the exchange’s matching engine in microseconds instead of milliseconds. For instance, a firm using a colocation server in the NYSE data center in Mahwah, New Jersey, executes trades faster than one relying on a remote data center in another city.
Server leasing is the same thing as co-location, only that the firm doesn’t have to own the servers that are colocated with the exchange’s server. Instead, they get a lease from firms that already own those colocated servers.
2. The Hardware Architecture
Your trading hardware also plays a vital role in your low-latency trading system. In fact, the hardware and software components of a trading system are where latency begins. We’ll discuss software latency a little more soon. But for now, how do you optimize your hardware for low latency?
The first thing you need to do is to use an Ultra-Low Latency Network Card (NIC). FPGA (Field Programmable Gate Array)-based hardware-accelerated network cards process data directly on the hardware, bypassing software delays. The reason is that any instruction you pass to them is carried out directly on the hardware.
Of course, using PCIe-based SSDs for instantaneous read/write speeds is non-negotiable.
3. The Software Architecture
The software architecture also introduces latency into your trading system. That latency comes from the inefficiencies in the code written for the software, right from the Operating System to the trading platform itself.
If possible, use custom Linus OS distributions that are optimized for real-time data processing. Typical examples are Red Hat, CentOS, and Ubuntu Minimal.
Also, trading platforms written in C++, Rust, and Java tend to be faster than others because C++ and Rust allow developers to fine-tune code for maximum execution speed. Java is also suited for algorithmic trading, with optimized garbage collection techniques to prevent performance hiccups.
Kernel Bypass Techniques also help you to shave off some of the latency introduced in traditional network data processing when the OS kernel handles network packets. Technologies like Solarflare, OpenOnload, and DPDK (Data Plane Development Kit) bypass the OS kernel, reducing network latency.
How to Build a Low-Latency Trading Infrastructure
Building a low-latency trading system is a complex endeavor that requires meticulous attention to hardware, software, network architecture, and strategic planning. Here’s a highlight of the steps you’ll need to take:
1. Strategic Planning and Requirements Analysis
Your first hurdle is to define your trading objectives. Your trading strategy will contribute significantly to the low-latency trading infrastructure you end up with. Each strategy, from market making to statistical arbitrage and even trend following, has unique latency requirements and influences system design.
Next, you determine the financial markets (e.g., equities, forex, commodities), and specific exchanges with which the system will interact. Different markets may have varying infrastructure and latency considerations.
Your location’s regulatory landscape is also a major consideration. Familiarize yourself with the regulatory landscape governing electronic trading in your target markets. It is crucial to comply with regulations such as the Markets in Financial Instruments Directive II (MiFID II) in Europe or the Securities Exchange Commission (SEC) rules in the U.S.
2. Network Architecture Optimization
The network infrastructure forms the foundation of any low-latency trading system. And as far as the optimization of your network is concerned, ways to reduce latency are through Direct Market Access and Colocation services.
If possible, establish direct connections to exchanges. You can do this by obtaining membership or through service providers offering DMA solutions. Colocation services also significantly reduce physical latency, but they can be quite expensive.
3. Choose High-Performance Hardware
Start with your Network card. Use specialized NICs capable of handling high-speed data transmission with minimal delay. It gets even better if it features kernel bypass technologies to reduce operating system overhead.
Furthermore, invest in high-speed, low-latency RAM to facilitate rapid data access and processing and SSDs with high read/write speeds to ensure swift data retrieval and storage operations.
4. Software Optimization
Efficient software design and implementation are paramount in minimizing latency within a trading system. It starts with a well-thought-out choice of programming language. C++, for instance, is renowned for its performance and effectiveness in helping to resolve inefficient resource usage, making it ideal for latency-sensitive applications. Java offers robustness and portability in modern implementations, providing low-latency capabilities.
For your Operating System, choose streamlined versions of Linux, such as CentOS or UbuntuServer. These versions are optimized for real-time processing by minimizing background processes and system overhead.
5. Data Handling and Market Data Feeds
Here, you want to rely on Direct Market Data feeds, which provide real-time data with minimal delay. This way, you are in the front-row seat of any new piece of information, allowing you to make timely trading decisions.
6. Continuous Testing and Optimization
Achieving low latency is not a destination. It’s a process and a journey. As such, it is crucial to continue monitoring trading system performance to help you stay on top of latency figures. That’s why investing in tools and software that measure and analyze latency across different system components is essential. As the need arises, fine-tune system parameters, such as network configurations and processor settings, to achieve optimal performance.
How Trading VPS Helps to Minimize Latency While Saving Cost
Building a low-latency trading infrastructure is no small feat, and it is not a cheap investment. High-frequency trading firms have the deep pockets to afford this investment. But not all traders do. Thankfully, there are ways to achieve ultra-low latency trading without having a deep pocket. One way is to use a trading VPS.
A high-quality trading VPS helps you minimize latency by giving you the geographical advantage you may otherwise lack. Trading VPS providers have servers located near the broker’s servers, which reduces the physical distance data must travel, thereby decreasing transmission time. For instance, co-locating servers in major data centers like Equinix, where many brokers host their servers, can achieve execution times as low as 1 millisecond.
A trading VPS provides dedicated CPU, RAM, and storage resources, ensuring that trading applications operate without interference from other processes. This isolation leads to faster data processing and order execution.
As a result, you don’t need high-end personal equipment when you have the right trading VPS. You can also save on energy costs in this process.
