Latensanity

By: Ray Pellecchia

File Under: Miscellaneous

• 0 Comments
• Email Entry

"Latensanity" is a made-up word inspired by a headline in the September issue of Waters magazine on a column by Rob Daly, "Stop the Latency Insanity" (sorry, no link available). Excerpt:

The one universal law for trade execution seems to be that it can't be fast enough, cheap enough or easy enough. But please, people, get a grip -- there is only so much that physics can do with most firms' existing architecture. ...

Vendors and trading venues have begun liberally peppering their marketing materials with the prefix "micro" -- and in a few cases, "nano" -- but most firms won't be able to take advantage of sub-millisecond capabilities without a major investment in their infrastructure.

On the "insanity" angle, Rob reports that some direct-market-access clients have asked the CFTC for permission to remove their pre-trade risk filters in order to shave off a few more milliseconds. In today's volatile and highly automated markets, that strikes me as less than prudent.

I'm not a techie and though I know that NYSE Euronext is working on making our own trading platforms ever faster, I don't follow this issue that closely. But that was the first time I remember anyone raising the question of whether the industry's need for speed is approaching a point of diminishing returns. Rob concludes:

While reducing latency is an ever-present concern for firms, it must be addressed in a rational manner, balancing the potential return with its potential costs. Firms will likely see a greater return investing in better risk management or smart order routing technologies rather than spending resources on the expensive game of low-latency one-upmanship.

No sooner had I read the Waters column than I see in today's Financial Times, "Turquoise plays down the need for speed." Excerpts:

"The marginal benefits have reached diminishing returns," [Turquoise CEO Eli] Lederman yesterday told a European exchanges conference..."Speed absolutely does matter, it's just that it's beocoming commoditised. In itself it is no longer a differentiator." ...

Simon Brickles, chief executive of Plus Markets, a mainly small and mid-cap UK stocks exchange, said: "People are now looking at other issues, like what are the total costs of trading on a platform."

What do you think? I'd love to hear from folks in technology, trading, operations: are we approaching the point of diminishing returns on investing in reducing latency? And if so, what impact will that have on the business?