Going for Latency Gold
By Matthew Lempriere
Like a sprinter racing for a gold medal, the traders’ ability to take advantage of latency is influenced not only by their skill as a trader, but also the tools they have at their disposal including hardware and software architecture, network topology and physical distance from execution venues, writes BT Radianz Services’ Matthew Lempriere .
With the 2012 Olympics in sight, all eyes will turn to London (especially those of the BT team, as the official communications partner of the Olympics and Paralympics), where we will watch world class athletes participate in tough and demanding events where a split second can make the difference between winning and losing. But what we should remember is that the competitive edge that an athlete gains over their rivals does not just come down to the individual themselves, but the infrastructure that they have around them; such as kit, training conditions and diet. A combination of these things will ultimately come together and be the key to beating the competition and winning gold.
The same is true in the world of electronic trading. The innovative brains behind the most cutting-edge instruments or complex trade strategies on today’s trading floors would be incapable of making their concepts become a reality without the modern technological infrastructure that is built around them. Where low latency was once an exclusive playground for arbitrage specialists and market makers, it has now become main-stream and is no longer confined to specialist trading systems, but is a requirement for all advanced trading strategies.
As well as coming into the mainstream, increasingly innovative trading strategies and their reliance on the latest, most advanced technology, such as algorithmic and quantitative trading, has pushed the issues of automation, latency and risk management technology further up the agenda. Latency is critical to take advantage of the swings in price and increase in order flow, and is grabbing board-level attention with senior latency-related positions being created within financial institutions to ensure that sustained focus is put on trading desks’ latency capabilities and for taking advantage of low latency to remain competitive. The rise of complex financial instruments has done much to propel reliance on technology further amongst both buy-side and sell-side organisations. This has happened to such an extent that the traditional division between the front and back office, in terms of their relative importance to the trade process, has been almost eradicated. Complex instruments, evolving investment vehicles, regulation and increased investor sophistication have caused the gap between the front and back office functions to narrow considerably. Technology, from the front office through to the back office, must move in tandem to enable the industry to be able to sustain growth and innovation.
In Europe, the trading landscape has undoubtedly changed in recent years with technological innovation and regulatory change – with initiatives such as the Markets in Financial Instruments Directive (MiFID) – providing the catalyst for a rise in alternative trading venues and off-exchange order books. These alternative trading venues have been responsible for growth in the number of trades made as large block orders that may be sliced into smaller bundles of trades to obscure them from the market. In Asia, we have a variety of different markets each with their own set of rules and regulations, so the technology must be able to react and interface with multiple venues. Both network and server technologies have had to provide the capacity for financial institutions to scale and take advantage of these increased volumes.