The Latency Race Dichotomy
The Latency Race Dichotomy
By Adam Honoré - Research Director, Aite Group
Latency race is the grand oxymoron of electronic trading. Have you ever been in a race where everyone manages their own stopwatch and the winner is determined by gut feel? Further, vendors operate like a collection of supplement manufacturers. “Our research has shown we are the steroid you need to be the fastest in the race”. Firms that just want to buy and hold assets now feel they need to be in the race because not being in the race means they lose the race by default. The problem is none of those firms know what time they need to beat to be considered a serious competitor in the race.
Disparate efforts have been made to bring some sanity to the latency discussion. The Strategic Technical Analysis Center (STAC) was formed to provide independent validation of latency metrics for the vendor community. Individual liquidity venues have provided latency metrics to their members (though most not public). The Financial Information Forum (FIF) provides market data statistics for capacity and jitter planning. None of these efforts does much to help trading firms figure out where their qualifying time needs to be to compete in the race.
Regulators are pushing for some auditable race results. On June 11, 2010, the Commodities Futures Trading Commission (CFTC) published a proposed rule on co-location that includes latency measurement requirements. Page three says, “The provision relating to ‘‘Latency transparency’’ would ensure that general information concerning the longest, shortest, and average latencies for all connectivity options are separately detailed and readily available to the public on regulated trading markets’ Web sites.”
Good for them. I’m a believer in acquiring competitive advantage and have published findings that indicate retail investors lose money playing on an even field with institutional investors. Attempting to throttle technical innovation runs counter to the principles of the American Dream. Good ideas, coupled with the right tools to execute those ideas, should win. That said, there are too many secrets to this race. Transparency may not make the race participants equal, but it does make the race fair.
Kudos to NYSE Euronext for launching LatencyStats.com and dropping the gauntlet on their competitors to match their effort. They put thought into how they could keep themselves honest and partnered up with Corvil. Corvil isn’t the only decent latency monitoring solution in town, but they have a good reputation for what they do and it makes sense to pick one third-party. Market participants should be able to extend what NYSE Euronext provides to achieve a more accurate picture of their complete latency picture.
Having spoken to regulators at other agencies, I think both liquidity providers and market participants should expect rules related to latency transparency. Look at any high frequency conference list and you are likely to find a regulator or two there to get a grasp on the technology of electronic trading. They’re playing catch up right now, but they will play an officiating role in this race at some point. In LatencyStats.com, NYSE Euronext manages to set the tone for how the industry can lead by example.