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Latency & Colocation

Three types of latency
Transmission Latency- Convert data to bits
Propogation Latency- Movement of bits across a network [Greatest delay due to distance (ref: InfiniBand)]
Processing Latency- The application of data through middleware (feed handlers) to trading systems (algorithmic engines) [Second greatest delay due to infrastructure (ref: Exegy) and the largest unsettled issue]
Moving an order encapsulated in a FIX message from Point A to Point B faster than your competition creates an opportunity to maximize profit or minimize loss. Colocation is the result of a quest for zero latency which has moved execution management servers from the customers physical location to the closest possible physical proximity of an execution venues servers. The shorter the wire, the shorter the amount of time it takes to move a message from Point A to Point B.
These are no ordinary orders and they require no human intervention other than the initial instruction set. These are orders generated by machines that have complex event processors analyzing massive amounts of current and historical market data. Algorithms are formulas designed to recognize correlations or disparities in prices, volume or other statistics and the financial instruments involved. PhD’s have programmed the machines to take resulting data, formulate that data into orders and send the orders in barely noticeable quantities for execution. No trail of information leakage to give away a pattern.
Most customers and their traders are not all that concerned with latency as timing is not essential. Best execution is their concern. However, there are a class of traders that use short term alpha. The kind of alpha that lasts for nano to milliseconds for which the slightest delay is often the difference between profit and loss. Direct Market Access traders in high-frequency programs has the greatest demand and an estimated 60%+ share of the overall market volume.
Definitions
Zero latency is the speed of light = 186,000 miles per second
Nanoseconds = 1 billionth of a second
Microseconds = 1 millionth of a second
Milliseconds = 1 thousandth of a second
One foot of cable = 1 nanosecond latency
Statistics
NYSE Technologies Universal Trading Platform
5 milliseconds, 3 milliseconds for data, 1 millisecond TSE colocated
2 milliseconds for order and cancel acknowledgements
650 microseconds roundtrip executions for Nasdaq-listed issues
950 microseconds roundtrip executions for NYSE/ Arca-listed issues
Others
LSE: 10 milliseconds
BATS: 400 microseconds
OptionsIT Transatlantic: 34 milliseconds
Chi-X: 175 milliseconds, marketable IOC 350 microseconds
Nasdaq: 250 milliseconds
DirectEdge/29West: Persistent messaging 300-500 microseconds
Colocation
Colocation is the result of a quest for zero latency which has moved execution management servers from the customers physical location to a physical position within feet of the execution venue servers. The shorter the wire the shorter the amount of time it takes to move that message from Point A to Point B. Colocation is an answer for high use exchanges versus general purpose which may be better served by the use of a cloud or high speed T1.
NYSE Euronext is building the largest co-location facility. NYSE will use 20% for their own purposes with the rest being used by co-located customers.

Three types of latency

  • Transmission Latency- Convert data to bits
  • Propogation Latency- Movement of bits across a network [Greatest delay due to distance (ref: InfiniBand)]
  • Processing Latency- The application of data through middleware (feed handlers) to trading systems (algorithmic engines) [Second greatest delay due to infrastructure (ref: Exegy) and the largest unsettled issue]

Moving an order encapsulated in a FIX message from Point A to Point B faster than your competition creates an opportunity to maximize profit or minimize loss. Colocation is the result of a quest for zero latency which has moved execution management servers from the customers physical location to the closest possible physical proximity of an execution venues servers. The shorter the wire, the shorter the amount of time it takes to move a message from Point A to Point B.

These are no ordinary orders and they require no human intervention other than the initial instruction set. These are orders generated by machines that have complex event processors analyzing massive amounts of current and historical market data. Algorithms are formulas designed to recognize correlations or disparities in prices, volume or other statistics and the financial instruments involved. PhD’s have programmed the machines to take resulting data, formulate that data into orders and send the orders in barely noticeable quantities for execution. No trail of information leakage to give away a pattern.

Most customers and their traders are not all that concerned with latency as timing is not essential. Best execution is their concern. However, there are a class of traders that use short term alpha. The kind of alpha that lasts for nano to milliseconds for which the slightest delay is often the difference between profit and loss. Direct Market Access traders in high-frequency programs has the greatest demand and an estimated 60%+ share of the overall market volume.

Definitions

  • Zero latency is the speed of light = 186,000 miles per second
  • Nanoseconds = 1 billionth of a second
  • Microseconds = 1 millionth of a second
  • Milliseconds = 1 thousandth of a second
  • One foot of cable = 1 nanosecond latency

Statistics

NYSE Technologies Universal Trading Platform

  • 5 milliseconds, 3 milliseconds for data, 1 millisecond TSE colocated
  • 2 milliseconds for order and cancel acknowledgements
  • 650 microseconds roundtrip executions for Nasdaq-listed issues
  • 950 microseconds roundtrip executions for NYSE/ Arca-listed issues

Others

  • OptionsIT Transatlantic: 34 milliseconds
  • Chi-X: 175 milliseconds, marketable IOC 350 microseconds
  • Nasdaq: 250 milliseconds
  • LSE: 10 microseconds
  • BATS: 400 microseconds
  • DirectEdge/29West: Persistent messaging 300-500 microseconds

Colocation

Colocation is the result of a quest for zero latency which has moved execution management servers from the customers physical location to a physical position within feet of the execution venue servers. The shorter the wire the shorter the amount of time it takes to move that message from Point A to Point B. Colocation is an answer for high use exchanges versus general purpose which may be better served by the use of a cloud or high speed T1.

NYSE Euronext is building the largest co-location facility. NYSE will use 20% for their own purposes with the rest being used by co-located customers.

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