What Is a Microsecond Worth?

At STAC Lab's Performance Summit last night in New York, I kept thinking about a scene from Mel Brooks’ “Spaceballs” film, when the evil empire's space cruiser decides to enter "ludicrous speed" in an attempt to overtake the heroes who are only traveling at light speed.

Has the industry hit ludicrous speeds yet? Sometimes in the latency arms race, it seems that way.

A representative from a network provider who attended the STAC conference explained that one recent deal hinged on whether the vendor could shave 27 microseconds off the client's connection time. Equipment vendors pitching their wares cited transmission and routing equipment functions in the microseconds, and latency-monitoring vendors are already comfortably discussing nanoseconds. In 18 months, we could be talking in picoseconds.

If you are the fastest then you have a license to print money, but how much are firms investing to be the fastest and how long can they hold that title?

Having the fastest connection between Point A and Point B is good when there is only one liquidity pool, as is the case in the futures markets, where traders can latency-arbitrage the market all day long.

But the issue now is how to mix fast and smart and be the best at both. When firms start trading in fungible instruments, such as cash equities and foreign exchange (FX), they have to layer in the latency of smart order routing (SOR) so they can track the best prices across multiple venues and route orders accordingly.

Finding the proper balance between these two variables will be the challenge going forward. Systems will need to be fast enough to hit the quote and smart enough to know the location of the best quote.

Has the industry mastered this alchemy yet?

Send me your thoughts at rob.daly@incisivemedia.com.