The scramble by exchanges, brokers and vendors to achieve ever lower network latency numbers is little more than a marketing exercise, according to Frédéric Ponzo, managing director of business and technology consultancy NET2S.
“I have been to numerous conferences where there were vendors, brokers or exchanges bragging about one or two milliseconds or microseconds. I have even heard people talking about picoseconds. That’s excessive marketing hype,” Ponzo told theTRADEnews.com. “Low latency on something as liquid as FX from start to finish is just short of 100 milliseconds. What constitutes low latency, allowing you to see off your competitors, is anything below 100 milliseconds, not picoseconds.”
The apparent misconception about what constitutes low latency is reflected in NET2S’s new study of end-to-end trading latency across several asset classes. The conducted used ‘real-world’ tests in the trading environments of top-tier investment banks in London to find out which parts of the trading chain were introducing latency, and how much.
The study also challenges the belief that a lot of latency resides at the network level. It found that networks contribute only 13% to the overall latency of the trading process, and messaging only 2%. The biggest sources of latency, the study found, are banks’ applications, such as order and execution management systems, which contribute 65% to overall latency, and firewalls, which account for 20%.
Given this, Ponzo believes that efforts to implement proximity hosting and other initiatives to reduce network latency would be better spent elsewhere. “If, for example, you’re moving your servers 10 kilometres closer to the exchange, it is going to make little difference,” he said. “You are going to spend tens of thousands if not hundreds of thousands of pounds, and you will reduce your latency by 50 microseconds. That’s a bit of a waste of time and effort.”
He added, “Proximity hosting has a positive impact. But proportionally the impact is not that big and pound-for-pound, it is probably not the best return on investment.”
To combat the biggest sources of latency, the buy-side needs to ask brokers for detailed information on all the steps and systems between the trader and the exchange, according to Ponzo. Traders must then examine how the process can be streamlined. But he adds that simply requesting a breakdown may be enough. “Asking the sell-side to provide that transparency will improve the results because if it is messy they will fix it before showing it to you,” he said.