Article: The Need for Speed | FX network latency10 July 2018 | Bill Hodgson
An important component of FX trading has always been trading with minimal latency - whether that was being the fastest to trade over the phone, the fastest to use and interpret pricing systems, or using the fastest technology to consume data, and trade with electronic platforms. Like any market with tight spreads, the FX market requires fast execution. In the past, speed was mainly associated with High Frequency Traders (HFT), but during recent years the majority of major institutions trading globally have focussed on achieving ultra low latency. It’s no longer just HFT, but all major FX Market Makers which need to be fast.
A Renewed Focus on Low Latency
Latency has always been a consideration for trading institutions but with new technology, ultra low latency is achieveable, with round trip times (for a few of the most advanced firms) in the region of 50-70 microseconds. Yes microseconds…..the market has moved on from measuring in milliseconds. (that's millionths of a second, not thousandths)
In terms of what is driving this focus, trading firms don’t want to get beaten on price by other, faster firms. Also Market Makers don’t want to publish stale prices and have to adopt long hold times. In particular, the FX Global Code has set out best practice for minimising "Last Look” (where Market Makers can reject the trade within a certain period of time). Lower latency removes the need for Last Look.
There is also the issue of growing amounts of market data, largely driven by increased availability and MiFID II. Firms need to consume and analyse this data, update models, positions and risk systems as quickly as possible. Not only does this reduce risk, it also makes their pricing more accurate.
I spoke with Avelacom, which works with a number of trading firms and is seeing a significant increase in demand for direct access to multiple trading venues - ECNs, Exchanges, and Liquidity Providers. That means trading with numerous datacentres globally. Because FX traders connect with multiple trading venues it is important that latency is minimised, and prices are accurate (otherwise they can be picked off on certain slower venues).
“Minimising latency enables you to consume market data and price much faster. That means your prices will be more accurate and there is less likelihood of getting beaten to the trade", said Alina Karpichenko, Global Marketing Manager at Avelacom.
The Growing Importance of Accessing Asia
The rise of Emerging Markets, and especially Asia, presents some major issues for trading institutions based in London or New York, but wanting to trade in Asia. Over the past year Avelacom has seen a threefold increase in enquiries from firms wanting low latency connectivity to Tokyo, Shanghai, Hong Kong and Singapore.
In terms of minimising latency its clients are looking for a combination of -
- The shortest fibre route
- Modern fibre networks (Dense Wavelength Division Multiplexing - based)
- Cisco and Arista switches
- Metamako FPGA-based switches
The ongoing investment in technology is obviously critical, but so is controlling the shortest fibre network. Avelacom owns its network across Russia, giving it a distinct advantage when connecting with Shanghai, Hong Kong and Tokyo.
Does your firm have such a network in place? If so are they seeing better pricing by beating slower communications from competitors? Let me know in the comments.