Max Bowie: Forget Lower Latency, Focus on Lower Costs

Low latency isn’t a strategy—it’s a technology that acts as an enabler of strategies. It makes you faster, not better. And over recent years, it has become the liquid courage of high-frequency traders, convinced that they get smoother and smarter with each swig of latency drained from the glass, and that they can pick up any cute trade hanging out on the order book.

But now, firms are examining the rising costs of achieving low latency, especially in light of the need to spend elsewhere, on items such as improving data governance—an area where 67 percent of investment managers have weak processes in place, according to a survey from benchmark data provider Rimes Technologies, conducted by London-based consultancy Investit. Hence, firms are more closely scrutinizing the role of latency—and how effective it is at delivering returns. “I’m a strong believer that speed doesn’t generate alpha—speed amplifies alpha. Is it worth $30 million dollars to save a few microseconds if that makes you fastest for a year?” said Peter Nabicht, CTO of Allston Trading, at Waters’ sibling publication Inside Market Data’s recent Chicago conference.

And as it becomes harder to improve headline speed, the industry will step up its focus on other areas related to latency, said Azul Systems CTO Gil Tene at the event, such as measuring and improving variability and predictability. Indeed, a whole industry has built up over the years around monitoring latency and jitter, with vendors dedicated to measuring every aspect of network and systems latency, throughput and performance—although, according to Peter Lankford, director of the Securities Technology Analysis Center, who presented at the recent Buy-Side Technology North American Summit, many firms aren’t happy with the results and lack confidence in their levels of time synchronization.

Winning ‘Formula’
The latency race is often compared to Formula One racing. So, to use that analogy, low latency is like having the fastest engine. But a race car also needs wheels, a steering wheel, suspension and aerodynamic design, as well as a team boss to decide race strategy, a pit crew to change tires—ever-more important since algorithms’ lifespans get shorter and must be replaced more frequently—not to mention a talented driver. Because grands prix aren’t just won in a drag race on the straightaway, they’re won through teamwork, racecraft, and—just as in trading—the ability to spot opportunities and enter and exit positions to haul yourself up the leader board.

“Speed doesn’t generate alpha—speed amplifies alpha. It doesn’t matter how fast I am if someone makes a better decision around quantifying the markets and trades 30 seconds before me.” —Peter Nabicht, Allston Trading