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Understanding the trends in global and local low latency network usage for the financial services industry.
Are low latency networks still crucial for competitiveness?
From 2000 – 2012, much of the need for low latency networks in the financial services and banking industries was driven by High Frequency Trading (HFT), which took an increasingly large share of all global financial trading. With HFT came the need to reduce the latency of the networks that connect trading firms with financial exchanges. Table 1 shows some key trading network latencies in 2012.
Table 1: Key trading latencies in 2012
|Low-frequency alpha trading||100s of a milliseconds|
|FX and FI market making||10s of milliseconds|
|Prime brokerage services||10s of milliseconds|
|Equities DMA services||Milliseconds|
|High-frequency alpha trading||Trading milliseconds|
Despite HFT’s 2013 slowdown in some regions in equities and futures markets, the “Low Latency Arms Race” nevertheless continues to heat up, with global exchanges and trading firms fighting to outdo each other in the race to zero latency trading.
Low latency trading in New York
New York was the centre of High Frequency Trading in equities (50% of all trades in 2012, down from 75% in 2009), and was also the epicenter of the recent downturn in profits from HFT. One brokerage analyst estimated that the collective profit of all American HFT firms fell from US$4.9 billion in 20091 to US$1.25 billion in 20122. Critics believed that with the downturn of profits from HFT in the period leading up to 2012 would come a reduction in HFT and other low latency trading in New York during 2013. This has not, however, been the case. As 2013 plays out, US-based HFT firms continue to rely on low latency and algorithmic trading, as they seek new revenue streams in emerging markets. American HFT firms have also started to move to new asset classes including commodities, fixed income, derivatives and ForEx.
"HFT has re-risen. American HFT firms are adopting new trading strategies that require low latency connections."
American HFT firms have also begun to use new trading strategies that leverage social media alerts. While these involve a lower frequency of trades than typical HFT, they nevertheless require very low latency connections.
In some cases, these connections leverage microwave technology rather than Fibre optics, which now offers latency of around 5.2milliseconds over the 1,200km distance between Wall Street and the Chicago Stock Exchange3.