NAFIS Latency Panel: Stop and Think Before Spending on Speed

Firms whose trading strategies rely on speed must continue to invest in ways to reduce latency, even if tighter budgets make it harder to justify spend on new technologies, while non-latency-sensitive firms must assess whether their business model and budget warrants the continued pursuit of speed, according to panelists at the North American Financial Information Summit.

"I don't think we'll ever say ‘it's fast enough'," said Yuri Salkinder, director of electronic trading at Credit Suisse, though he warned that "any investment in technology has to be justified with a business case," such as being able to demonstrate a clear link between lower latency and improved fill ratios and better execution quality.

However, sometimes capturing the metrics to demonstrate that link can be as problematic as achieving lower latency itself. "It's a big job to measure something holistically. When we build something to measure latency on a network, that infrastructure can be just as big [as the network]," said Neal Secher, executive director at Morgan Stanley. "You can go all in with a big infrastructure investment that totally misses the mark... [because] it costs a couple of thousand dollars for a next-generation switch, versus a couple of months' development to perform development or optimize something in-house."

But once measurements are achieved, firms can identify where they need to invest. "You often find that someone has a few microseconds of internal latency, but the operating system kernel is not optimized, or they have an external network that adds a few hundred milliseconds," Salkinder adds.

Latency-sensitive firms must continue to strive to be fastest, even if other components of the overall market infrastructure cannot perform their function at the same speeds. "If you go to watch a football game where you get to pick your own seat, but you have to wait in line for the doors to open, do you want to be at the front or the back of that line?" said Chris Bartlett, partner at Nobilis Capital.

However, Bartlett also warned that other firms must seek levels of latency that are appropriate to their trading frequency and investment objectives, and are also in line with what their budget permits, so as not to blow their budget on something that quickly becomes obsolete. "Are we here to build technology or to trade?" he said. "We need to focus on getting alpha for clients... [because] most mid-size funds don't have the resources in-house to play the high-frequency trading game. For example, if you make an investment in low-latency fiber, then radio frequency data transmission comes along, you're behind the curve."