Latency in trading
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Not to be confused with latency in trading.
Latency in trading is the delay between an instruction being issued and its effect at the point of execution. It is measured in milliseconds or microseconds and is cumulative across every stage of the order path. Because it is a physical property of networks and hardware, it cannot be eliminated, only reduced.
Where latency arises
An order passes through several stages, each adding delay:
- Client-side processing — the time taken by the trader's own software or terminal to construct and transmit the order.
- Network transit — the time for data to travel between the client and the broker or venue, determined by distance and routing.
- Broker or gateway handling — internal checks, risk controls and queuing before onward transmission.
- Exchange matching — the time the venue's matching engine takes to accept and process the order.
Total latency is the sum of these components. A slow stage dominates the total, so reducing the largest component yields the greatest improvement.
Worked example
An order is sent from a client to a venue. The measured delays are:
The total is the figure that matters for execution timing; each component is measured separately because they are reduced by different means.
Why it matters
Latency affects the price at which an order is filled, because markets move during the delay. Strategies that react to short-term price changes are more sensitive to latency than long-term strategies. Venues and brokers publish latency figures, but the measurement method and the conditions under which they are obtained vary, so figures from different sources are not directly comparable.
Measurement and reduction
Latency is measured by timestamping an order at each stage and comparing the times. Common reductions include colocating servers near the venue, using direct market access rather than routing through multiple intermediaries, and optimising software to reduce processing time. The achievable minimum depends on the physical distance to the venue and the infrastructure in use, and therefore varies by location and provider.
Often confused with
- latency in trading
- Latency in trading is the elapsed time between an order being generated and its execution or acknowledgement by a trading venue, encompassing network, processing and matching delays.