How to Build a Low-Latency Trading Infrastructure (in 6 Steps)

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, executions, and profits.

Achieving ultra-low latency infrastructure is a crucial factor for sophisticated trading firms aiming to improve trading performance and execution quality in today’s financial markets. This infrastructure encompasses network connectivity, hardware acceleration, optimized software, and strategic placement at trading venues to minimize round-trip time and reduce network hops.

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. Network latency is simply the time it takes for data to travel between points in your system. Your goal: reduce the number of checkpoints that orders have to pass through before execution.

Here are a few tips on how you can optimize your network architecture for low-latency trading strategies:

• Direct Market Access (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 (SOR) 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.
• Optimizing network connectivity involves minimizing physical distance to trading venues by colocating servers within the same data center as the exchange. This proximity reduces propagation delay since light travels through fiber at approximately 200,000 km/sec, adding about 5 milliseconds per 1,000 km of distance.
  
  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 another way to optimize network latency, which 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. FPGA-based NICs can reduce processing times to as low as 100–500 nanoseconds by bypassing the operating system entirely, providing a significant performance gain compared to traditional network cards.
• Of course, using PCIe-based SSDs for instantaneous read/write speeds is non-negotiable.
• Beyond NICs and storage, investing in high-speed, low-latency RAM is essential to facilitate rapid data access and processing. Ensuring that your system has sufficient RAM capacity and uses the fastest available memory modules minimizes bottlenecks during peak trading activity.
• Another key hardware optimization is the use of high-performance CPUs with multiple cores that can be dedicated to critical processing tasks. Assigning dedicated CPU cores to trading applications via techniques like CPU pinning reduces context switching and ensures consistent processing speeds.
• Employing specialized hardware accelerators such as FPGAs or GPUs can offload computationally intensive tasks from the CPU, further reducing latency. These accelerators can handle complex calculations, data filtering, and order placement logic at hardware speeds.
• Finally, maintaining a clean and efficient hardware environment—such as using high-quality, low-latency motherboards, cooling systems to prevent thermal throttling, and power supplies with stable output—ensures that hardware components operate at peak performance without unexpected slowdowns.

By combining these hardware strategies, trading firms can build a robust low-latency trading infrastructure that supports ultra-fast and reliable trade execution.

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.

Event-driven software architectures play a crucial role in market data processing by triggering code execution only when market data arrives, avoiding wasted CPU cycles and reducing latency. Efficient concurrency control and minimizing dynamic memory allocation further contribute to stable low latency systems, which is vital for consistent trade execution during volatile markets.

If possible, use custom Linus OS distributions that are optimized for real-time data processing. Typical examples are Red Hat, CentOS, and Ubuntu Minimal.

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 algorithmic 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.

Understanding latency metrics and continuously monitoring network congestion and jitter is a crucial factor in maintaining low latency execution. Real-time monitoring tools allow trading firms to detect and address performance degradation before it impacts trading operations.

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.

In addition to optimizing your software stack, choosing a trading platform that performs well in a low-latency environment is key. Thinkorswim, for instance, is a powerful trading platform that, when hosted on a Forex VPS, can deliver enhanced performance through faster execution speeds and uninterrupted connectivity

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.

Regular failover and resiliency testing of network routes and hardware components ensures stable, low-latency systems even during outages or congestion, which is essential for maintaining execution quality in volatile markets.

Challenges of Maintaining Low-Latency Trading Infrastructure

Maintaining a low-latency trading infrastructure is an ongoing challenge that requires constant vigilance and proactive management.

Several factors can impact the performance and reliability of your system, including network congestion, hardware limitations, and software inefficiencies.

1. Network Congestion

One of the primary challenges is minimizing latency spikes caused by network congestion or jitter, which can lead to unpredictable delays and missed trades. Even with optimized routing and high-speed connections, shared infrastructure and fluctuating traffic loads can introduce variability in data transmission times.

2. Hardware Degradation

Hardware degradation and outdated components also pose risks to maintaining consistent low latency. Over time, servers, network cards, and switches may experience wear or become obsolete, leading to increased processing delays. Regular hardware upgrades and preventive maintenance are essential to keep infrastructure performing at peak levels.

3. Software Complexity and Inefficiencies

Software complexity and inefficiencies can further contribute to latency issues. Poorly optimized code, excessive memory allocation, or inefficient event handling can slow down critical processing paths. Continuous software profiling and optimization help ensure that trading algorithms and systems run smoothly and swiftly.

4. Third-Party Delays

Additionally, reliance on third-party data providers or external trading platforms can introduce latency, especially if these services experience downtime or delays. Ensuring redundancy and failover capabilities in data feeds and connectivity helps mitigate these risks.

5. Environmental Factors

Environmental factors such as weather conditions can affect microwave or radio frequency links used in some low-latency networks, causing temporary disruptions. Monitoring and having alternative routes ready are vital to maintaining uninterrupted trading operations.

6. Compliance and Risk Management Procedures

Regulatory compliance and risk management procedures, while necessary, can add processing overhead that impacts latency. Balancing the need for speed with effective controls requires careful infrastructure design and ongoing tuning.

7. High Cost

Another significant challenge is the high cost associated with setting up and maintaining low-latency infrastructure. Specialized hardware, colocation services near major exchanges, and continuous upgrades demand substantial financial investment, which may be prohibitive for many firms. This cost factor often leads traders to seek alternative solutions like trading VPS services to achieve competitive latency without the heavy upfront expenses.

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 Virtual Private Server (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.

What are the Potential Future Trends in Low-Latency Trading?

The landscape of low-latency trading infrastructure is rapidly evolving, driven by technological advancements and the increasing demands of modern financial markets. Staying ahead means embracing innovations that not only reduce latency but also enhance scalability, reliability, and adaptability.

1. AI and Predictive Routing

Artificial Intelligence (AI) and machine learning are becoming integral to optimizing network performance. Predictive routing systems use real-time data and historical latency metrics to anticipate congestion and automatically reroute traffic through the fastest available paths. This proactive approach minimizes delays and ensures consistent low-latency access to market data and execution venues.

2. Edge Computing and Ultra-Local Hosting

Processing data closer to the source is another critical trend. Edge computing and ultra-local hosting reduce backhaul latency by performing computations near exchange data centers or even within the same facility. This proximity allows trading systems to react faster to market events, improving execution speed and reducing jitter during periods of high volatility.

3. Integration with Decentralized Exchanges (DEXs)

As decentralized finance (DeFi) gains traction, low-latency infrastructure will expand to support decentralized exchanges. Achieving ultra-low latency access to blockchain networks presents new challenges but also opportunities for traders to capitalize on arbitrage strategies and liquidity across emerging digital asset markets.

4. Sustainable and Energy-Efficient Infrastructure

With growing awareness of environmental impact, the future of low-latency trading infrastructure includes a focus on sustainability. Providers are exploring energy-efficient hardware, greener data centers, and optimized cooling solutions to reduce the carbon footprint without compromising performance.

5. Quantum Computing and 5G Networks

Emerging technologies like quantum computing promise to revolutionize data processing speeds, potentially enabling unprecedented ultra-low latency trading capabilities. Meanwhile, the rollout of 5G networks offers faster, more reliable wireless connectivity, which could further reduce latency in trading systems, especially for mobile and distributed trading setups.

6. Scalability and Modular Infrastructure

Modern low-latency systems are moving towards modular architectures that allow firms to scale infrastructure efficiently as trading volumes grow. This flexibility helps trading firms adapt quickly to market changes and deploy new strategies without extensive redevelopment or downtime.

By adopting these future trends, trading firms can maintain a competitive edge in increasingly fast and complex capital markets, ensuring their low-latency trading infrastructure meets the demands of tomorrow’s financial landscape.

Frequently Asked Questions (FAQ) About Low Latency Trading Infrastructure

Here are answers to some of the frequently asked questions about Low Latency Trading Infrastructure

Q1: What is low-latency trading infrastructure?

Low-latency trading infrastructure refers to a specialized system designed to minimize the time delay between sending a trading order and its execution. It includes optimized network connectivity, high-performance hardware, efficient software, and strategic server placement near exchanges to ensure ultra-fast trade execution.

Q2: What hardware is essential for low-latency trading?

Key hardware components include FPGA-based network interface cards (NICs) that bypass operating system delays, high-speed CPUs with dedicated cores, low-latency RAM, PCIe-based SSDs, and specialized accelerators like FPGAs or GPUs to offload computational tasks.

Q3: Can a trading VPS help achieve low latency?

Yes, a high-quality trading VPS located near broker servers can reduce physical distance and network latency, providing reliable, dedicated resources that improve order execution speed without the high costs of owning colocated hardware.

Q4: How do I choose the right provider for low latency trading infrastructure?

Look for providers with proven expertise in ultra-low latency solutions, global data center presence near major exchanges, advanced monitoring and support services, customizable infrastructure options, and compliance with relevant regulatory standards.

Q5: Is ultra-low latency necessary for all traders?

While ultra-low latency is critical for high-frequency trading firms and algorithmic traders, other traders may not require the same level of speed. The need depends on trading strategies and the competitive environment of the markets involved.