Opening Cross: Low Latency: Competitive Differentiator or Lowly Functional Requirement?

It's not just about speed; it's what you do with it that counts.

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Accompanying this week’s printed issue of Inside Market Data——or, for those who prefer to consume IMD online, also available on our website——is the latest in our semi-regular series of special reports, this time on the topic of latency, which became a major competitive factor in financial markets over the past decade.

But spoiler alert: the Q&A discussion in the report isn’t just about the latest latency-reducing technologies. Instead, the contributors took more nuanced views, focusing on the historical impact of the latency arms race on best execution and budgets, and how firms unable to compete with the fastest players with resources to spend on technology can leverage latency investments to do more, smarter—not just faster.

This is not to say that the latency race is over—firstly because there are still plenty of firms for whom speed is an important factor in their trading strategies, whether on their traditional markets or as they expand their strategies into new asset classes, scenarios and geographical regions; and secondly because speed is essential to being able to pursue smarter trading strategies. Instead of relying solely on execution latency, this requires low processing latency for firms to run ridiculous amounts of calculations.

As a sign that latency remains high on the agenda, this week saw the unveiling of a new microwave data transmission route between Frankfurt and central London, operated by US-based microwave data network provider McKay Brothers. The route terminates at Interxion’s datacenter in central London, which believes its central location between the datacenter clusters of Slough and Basildon will give traders an advantage now that a direct wireless route is shaving latency off the journey to central London.

However, as for the future of low latency and its uses beyond point-to-point data flow and order routing, Tabb Group recently released a report highlighting the importance of Big Data tools in gaining some semblance of control over the massive volumes of information being captured and stored by financial firms—which is all very well if firms can actually find the data they need when they need it, say, for regulatory reporting, says report author Shagun Bali. The problem, she adds, is that firms are having a hard time achieving that, and may spend the next five years getting to grips with it.

With regulatory reporting requirements on the rise, this doesn’t bode well for  compliance. And it was a similar story among panelists at last week’s European Regulation Roadshow in Copenhagen, where panels urged attendees to ensure they fully understand their data and its uses, as well as the reporting burdens facing them under new European regulations. Panelists even said that the audience’s muted response to straw polls suggested many did not have a firm grasp of their own data and of the coming requirements, and warned that managed services or outsourced storage won’t help manage the regulatory data burden if you aren’t already in full control of your data.

In the world beyond latency, having control of data is also a necessity for being able to offer new services. For example, after seeing traffic to its new MarketWatch data website largely coming from mobile devices, the Dubai Gold & Commodities Exchange is planning to step up its mobile offering with dedicated smartphone apps designed to reach a wider audience in those users’ desired delivery model. For others, though, reaching a wider audience depends on partners, which is why online content marketplace Airex has launched a three-phase “AMP” partner program to increase the visibility of vendor partners and their content.

For the past decade, many treated low latency as their competitive differentiator. Now, though, as it becomes harder for most firms to compete on speed alone, it seems that we’re starting to see a return to content and services being the differentiating factor—as they should be—and speed being an underlying functional requirement in the same way as good data management and compliance.

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