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The Low-Latency Race
Today’s latency standard is 65 microseconds, down from 6 milliseconds, according to TABB Group.
By
Melanie Rodier
May 13, 2008
The low latency race continues to accelerate. TABB Group recently pinned an estimated monetary value down to the millisecond: if an agency-broker's electronic trading platform is five milliseconds behind the competition, it could cost the firm up to $4 million, the London and New York-based firm said in a report written by senior consultant Willy Reporter.
Ten milliseconds of latency could potentially result in a 10% drop in revenues for a firm. With this in mind, "There is no milestone for low-latency. Institutions whose messages are slower will lose out. There is a consistent need for upgrades," TABB Group partner and head of global consulting Robert Iati said at last week's Accelerating Wall Street Event held by Wall Street & Technology magazine.
The number of messages the market receives has skyrocketed 6-fold in the last two years, he added.
As such, the competitiveness of the market is no longer measured in milliseconds, but in microseconds. And market professionals continue to revise their versions of speed, which can make the difference between multi-million dollar profits and losses.
"Today's latency standard is 65 microseconds, down from 6 milliseconds two years ago," Iati said.
In the meantime, 90% of brokers/dealers are currently using low latency data, compared to 75% of hedge funds and 17% of investment managers.
Iati related that 80% of trading firms are now looking for greater infrastructure improvements to reduce latency.
He also said most firms are now using a multi-core approach. "By 2010, half of all chips will be quad core," he said.
Shaving off the microseconds is costly for firms: Iati estimates that saving 5 microseconds costs a financial institution $200,000 per year. But for a trading firm, the cost of reducing latency can never be too high.
"No one is going to say, they're doing it, but let's not do it because it costs too much. It's just not going to happen," he said. "Although secondary firms might drop out."
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