Understanding and Addressing Low Latency in Quantitative Finance and Crypto Trading

Low latency is somewhat of a hype in the world of quantitative finance and cryptocurrency trading. Everyone strives for it, and it’s often used as a marketing buzzword. But what does it actually mean? Before explore the importance and implementation, let’s clarify what “low” means in this context: sub-millisecond. The lower the latency, the better it is for algorithmic trading and avoid slippage...

Also let's clarify, before to deep dive into this topic : I heard plenty of quants talking about HFT ? BUT WHAT IS EXACTLY HFT? Thousand of trades in 1 second or few trades a day?? Difficult to answer, as there is no specific definition or rate, so with basic connection, Python (or even C++) and servers (PING 2ms) let's talk about MID-Frenquency.

Why is Latency Crucial in Trading?

Latency is critical not only for High-Frequency Trading (HFT) but also for retail traders. Here's why:

• Reduces Slippage: Lower latency ensures that trades are executed at the intended price, minimizing slippage.
• Better Price Levels During High Volatility: Positions can be opened and closed more accurately during volatile market conditions.
• Efficient Handling of Increased Trading Volumes: A scalable low-latency infrastructure can manage higher volumes of trades effectively.
• Consistency in PnL: The profit and loss (PnL) in real trading scenarios closely match the results from testing environments.
• Coordination with ML Models: Machine Learning (ML) models that map returns need to align with the system's latency for accuracy.

However, achieving low latency isn't enough. Consistency in low latency is a more complex technological challenge. Moreover, low latency alone doesn’t guarantee profitability—if your trading model is flawed, you will still incur losses rapidly.

Key Aspects of Low Latency in Trading

A. Data Latency

Data latency refers to delays in market data delivery. Delays can occur between:

• Data vendors and quant platforms
• Exchanges and quant platforms

Accurate and real-time data is essential. It’s important to test the latency of different options before settling on one.

B. Order Execution Latency

Order execution latency is the time required for an order to be transmitted from a trading platform to the exchange, processed by the exchange, and executed. The FIX (Financial Information eXchange) protocol is commonly used to facilitate this process efficiently.

C. Network Latency

Network latency involves delays caused by:

• Internet connections
• The physical distance between a firm’s location and the exchange’s servers

This can be mitigated by using co-location services, which place a firm's servers in close proximity to the exchange’s servers, and by employing a minimum of 10Gb network connections.

D. Software Latency

Software latency is the processing time required by an algorithm. To reduce it, the code must be optimise for speed and efficiency. Utilizing programming languages like C++ or Rust can significantly enhance performance. One also important point for me is to knwo how to analyse and know what I have inside my libraries . My main reactions are like " I don't knwo any others libraries, so everyone should use it" but I am sure few "Crack's" recoded it.

E. Hardware Latency

Hardware latency is the delay induced by the physical components of a computer or server. Custom hardware tailored for trading, such as high-performance accelerators, can help achieve the desired speed.

Real-World Examples of Latency

To put this into perspective, let's look at the latency for placing trades on different platforms:

• Binance: Binance, one of the leading cryptocurrency exchanges, boasts an average order execution should bearound 1-2 milliseconds. In reality it is more 40ms for me and 200ms to place an order without any profestional account. I did my research also and it seems they are using AWS nodes now and not any more "THE Server in Tokyo". SO if any one have a professional account and have a low latency please let me know. This ultra-low latency is crucial for traders looking to capitalize on the highly volatile nature of cryptocurrencies.
• Pepperstone: Pepperstone, a popular forex and CFD broker, typically offers an execution latency of 50-100 milliseconds. While the same range than Binance, this latency is still competitive in the forex market where slippage and execution speed are critical.
• Interactive Brokers: Interactive Brokers, known for its comprehensive trading platform, has an execution latency that ranges from 200-400 milliseconds. This latency is sufficient for many retail and institutional traders, although HFT strategies may require lower latency.

The Future of Low Latency Trading

The pursuit of lower latency will continue to be a critical focus in quantitative finance and cryptocurrency trading. Innovations in hardware, software, and networking technology will drive this forward. However, traders and firms must balance the costs and benefits, ensuring that investments in low latency yield a competitive edge without compromising on model quality and consistency.

Opening the Debate

As we advance in achieving lower latencies, several questions arise:

1. Cost vs. Benefit: Is the investment in ultra-low latency justified by the potential returns? Personaly I have my servers close to AWS one.
2. Ethical Considerations: Does the race for the lowest latency create an uneven playing field in the market? Is it only for "Big Fishs" ?
3. Technological Evolution: How will emerging technologies like quantum computing impact low latency trading?
4. Regulatory Impacts: What regulations should be in place to ensure fair access to low latency infrastructure?

Your thoughts and perspectives on these questions are invaluable. Join the debate and share your insights on the future of low latency trading in quantitative finance and crypto.