Max Bowie: The Future Isn’t Analytics or Latency, It’s ‘Analatencytics’

Ask any kid at the funfair: Speed is exciting, faster is better, and the fastest ride is worth paying extra for. Chances are, a seasoned financial trading technologist would say the same thing—at least, until last year, when firms that have made huge technology investments over the past decade to move from data latency of seconds to milliseconds, microseconds and nanoseconds, began to balk at the increasing costs of achieving further latency cuts.

The quandary is that every tiny increment is more expensive to derive now than 10, or even five, years ago, when your investment could buy a significant latency advantage for a meaningful timeframe. And the investment is no longer guaranteed to give sufficient advantage. You might be faster than the competition, but now only for a week or perhaps even days, rather than a month. And with all the other factors on which a successful low-latency strategy hinges, in the current environment, no executive feels comfortable making the case to spend money on something that is no longer guaranteed to deliver big returns, fast.

R.I.P. Latency? Not Yet
This doesn’t mean all talk of latency is off the table: Sibling publication Inside Market Data has recently reported on several interesting latency-reducing initiatives, such as the alliance between data and trading infrastructure supplier Fixnetix and Dutch network specialist Custom Connect to offer connectivity between NYSE Euronext and Eurex, using a microwave network that cuts latency by up to 40 percent over fiber. And appliance vendor Cape City Command has released a free Latency Evaluator to identify trade-routing improvements that clients can make to achieve faster and more efficient trade routing.

But for the most part, projects are no longer driven by latency alone, which is being reflected in the breadth of tools developed by suppliers. For example, Abu Dhabi-based ADS Securities is rolling out latency-monitoring technology from Corvil—not just to monitor latency between points for the most liquid asset classes, but to measure performance across the infrastructure for its new foreign-exchange (FX) trading platform—while San Francisco-based vendor 4th Story has built a tool that analyzes algorithmic execution performance against trade data benchmarks.

Another factor trying to put the brakes on latency is potential intervention by regulators scrutinizing latency and its enabling technologies following high-profile events such as the May 2010 Flash Crash and rogue algorithms like that which led to the near-collapse and sale of Knight Capital—potentially including the introduction of a “minimum latency” level—i.e. holding up fast orders, so as to not discriminate against slower traders. The concept of periodic auctions that capture orders but execute everybody’s trades at set time intervals isn’t new, but in the current environment, it begs the question of what effect this would have on technology innovation, much of which has been driven by the need for low-latency in recent years. Because, if you set an arbitrary latency “standard,” what incentive is there for firms to beat that time? And what incentive is there for vendors to invest large amounts on research and development to produce faster systems?

In the future, speed won’t win the race—but it will allow you to perform the other functions that will win the race.

Incentives
In fact, there should still be plenty of incentive. However, the focus will no longer be on trying to be fastest, but rather performing as many tasks within a hypothetical “minimum latency” time—because the more analysis and risk checks you can perform within that prescribed time, the better placed firms will be to not only execute a trade, but execute the right trade.

In short, the competitive aspect will shift from just achieving the best price and having the speed to capitalize on short-term price movements, to incorporating more fundamental analysis into trading decisions to capitalize on the most profitable and least risky short-term movements, where competitiveness hinges on what you do during that latency, regardless of whether it’s imposed by regulators, marketplaces or by components of the data and trading infrastructure that hit the physical limits of what they can achieve. In the future, speed won’t win the race—but it will allow you to perform the other functions that will win the race.