David Cheriton has once told “stupid latency”. The term latency always has hindered the trading. A network with low bandwidth can also be used to compete with the high bandwidth networks in trading. But a high latency network can never be matched with the low latency network. Let us understand this better. Say Boeing 747 is carrying 500 passengers and Boeing 737 is carrying 150 passengers. Can you say that the Boeing 747 will travel faster than Boeing 737? No. Both the planes travel at 500 kmpf. Thus they reach the destination at same time duration. But if there is a latency in any one plane, then it reaches little late than the other one. Latency is a very important factor in algorithmic trading.
How does a traditional trading system works?
A traditional trading system will be consisting of various parts that include a system that reads the data, a store house where the historical data are stored, a simple tool that will be analyzing the historical data, a system that will be routing the orders to the respective exchange and a system that will be submitting the trading inputs. The exchange will be sending the tick by tick data. The server is the one that will be mostly used for saving the data. And the server in other word is nothing but a desktop of an individual.
The actionable intelligence will take place only in the server and all the actions that take place in a trade will be sequential. The tools of the traders can process the data only after it receives it. The DMA has brought some drastic changes in the trading system. The data flows from broker to trader in the traditional trading, which was bettered by the DMA (Direct Market Access). The DMA has reduced a lot of time that is required for the flow of data from the exchange to the trader tools.
Why is low latency so important in trading?
Even in the automated trading systems the actions are sequential. The latency was further reduced in the trading occurrences and the order generations were reduced to have a better efficiency. This was made possible by reducing the orders to be in milliseconds and even lower sometimes. Also the risk management was implemented in the modern trading with no human interventions. And to answer the question about the importance of latency reduction, consider trading as a race. People who run faster will be the winner and other loses.
Similarly, people who trade faster will get more returns
and others will get less. Low latency will let you go for faster trading and more returns. Thus low latency is very important in case of algorithmic trading. In order to know better about the algorithmic trading, you can better go for an algorithmic trading system provided by some top algorithmic trading institutes all around the world. Choose the best institute so that you will get a better exposure to the world trade scenarios. please Like us at https://www.facebook.com/financetradingnew