Financial markets have become increasingly data-sensitive, and those who can access and take advantage of exact price points the fastest hold a competitive advantage.
As a result, most modern trading software has been designed to give traders and institutional firms the best layout for maximum performance.
Why low market latency is a major competitive edge
Latency refers to the time it takes for data to move from one computer to another.
In stock and CFD trading, latency is the time it takes for data to travel from a stockbroking firm to the execution venue, which consists of financial data centres and liquidity providers.
Therefore, market latency refers to the duration it takes for an order to travel from an investor’s trading software to the exchange and result in a trade execution.
The process is as follows:
- A trader places an order to buy or sell an asset through a broker interface. The order instruction is sent as a data packet to the broker’s server via the internet or a private network.
- The broker receives the data packet, processes the instructions and determines which financial institution to contact to get a live data feed. This could be an exchange like the London Stock Exchange or a bank like Barclays or HSBC.
- The institution at the endpoint performs the order and sends a confirmation to the broker.
- The broker sends the confirmation of the order execution to the trader, including the actual price at which the order was filled.
Trade executions occur so fast and only milliseconds separate a trader from when they place a trade to the moment they receive a notification of the order completion.
Since orders are filled on a first-come, first-served basis, delays in data transmission can lead to slippage and differences in order and execution price.
How next-generation software layouts minimise market latency
Modern trading software layouts provide multiple features that allow for low market latency. Here’s how they work:
1. Access to low-latency supported brokers
The shorter the distance between a broker’s data centre and the execution venue, the more time advantage a trader has in executing orders at the best prices.
This is why brokers host servers in the same location as liquidity providers, allowing for faster trade executions.
For example, major financial data centres like the LSE and NYSE are hosted in Equinix LD4 and Equinix NY4, respectively.
While retail traders cannot invest in co-location services like institutions, they can still benefit indirectly by using brokers like OANDA that route orders through servers located in the same data centres.
2. Availability of latency monitoring tools
Market latency can worsen due to factors outside of a broker’s control, such as network congestion, frequent network hops or hardware limitations.
Specific latency monitoring tools allow traders to:
- Measure the time it takes for an order to execute after being placed, also known as the round-trip time (RTT), using tools like Ping.
- Identify each network hop or extra step data takes as it moves from the trader’s terminal to the exchange. A useful tool here is Traceroute.
- Completely see the network path a data packet follows across the internet with tools like ThousandEyes.
3. Presence of advanced software and hardware features
Modern software and hardware layouts help traders reduce latency right from the trading setup. This is possible with features such as the following:
- High-performance RAM and CPUs with high clock speeds
- Virtual private services (VPS)
- Direct Market Access (DMA) accounts to bypass brokers and send orders directly to the exchanges
- Smart Order Routing (SOR) service to select the fastest network route for trade execution
- Ultra-Low Latency Network Card (NIC) to bypass software decays and process data directly on the hardware
- PCIe-based SSDs for instantaneous read/write speeds
4. High-frequency trading (HFT) algorithms and infrastructure
High-frequency trading represents the most latency-sensitive application of modern trading software, where firms execute thousands of orders per second and compete on advantages measured in microseconds.
HFT firms deploy purpose-built algorithmic systems that automate order placement, cancellation and routing far beyond the speed of human reaction, making the underlying software architecture itself a critical performance variable.
To operate at this level, HFT infrastructure relies on several specialised techniques:
- Co-location services
- FPGA (Field-Programmable Gate Array) processing
- Kernel bypass networking
- Tick-to-trade optimisation
HFT firms currently provide the majority of orderbook liquidity, according to FCA research into the role of high-frequency traders in FX markets.
While HFT infrastructure is largely the domain of institutional players, the techniques it has pioneered have gradually filtered into the tools and broker services available to professional retail traders.
Bottom line
Staying on top of trades with a proper avenue to enter and exit positions at favourable prices requires access to low market latency.
Modern trading software layouts featuring low-latency brokers and tools enable retail traders to monitor assets and execute trades more efficiently.
Feature image: Free to use from Unsplash
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