Latency (Part I) – how it affects FX brokers and traders?

What is latency?

In technical term, latency is the time-lapsed or delay, measured between the time it takes for a request to travel from the sender to the receiver and for the receiver to respond to the request. Put simply, it is akin to the roundtrip of driving between Point A and Point B.

Why is latency important for brokers and traders?

FX and financial markets prices (FX, stocks, cryptocurrencies, commodities, CFDs, indices, futures, etc.) fluctuate in milliseconds and as a comparison, the blink of an eye takes a tenth of a second (100 milliseconds). These sub-second price movements decide the profitability of a trade.

Many traders just watch the prices on their screens move up and down, waiting for the right opportunity to enter or exit a position. When they click the mouse, the order gets routed into MT4 or cTrader to get filled and hope it ends up with a profit. Have you realized that sometimes the trade gets filled at a different price than the one you saw on the screen?

There are 2 parts to the trade cycle, price updates and order execution. When a trader sees a price on the screen and clicks on the button to buy/sell, the order message gets routed back to the broker’s server and executed at the clicked price. This trade is successfully executed at the clicked price assuming there is no latency to the network when the order is routed back to the broker’s server.

What happens when there is a latency?

In the event the order message that is routed back to the broker’s server is delayed, the price that the trader attempted to trade on would have moved away and the broker will not be able to fill the order. The same problem applies to API or high-frequency trading.

Besides delay in order execution, high latency also causes a serious effect on price updates resulting in traders to see “delayed” or “stale” prices that no longer reflect the actual market rate. Such trades will also be rejected by the broker and it will be considered missed opportunities for both the broker and the trader to complete a trade.

When traders trade on a high-latency platform, slippage occurs. This is a form of latency defining the price difference between expected trade execution and the price at which the trade fills. For example, market orders, an order type designed to fill at the next available price level, can be executed at prices far worse than what the trader expected due to the price change between the time the order was sent and the time it was received by the broker.

What causes latency?

Latency is usually caused by the distance between routers and network congestion. It can be found in brokerage servers, internet connectivity as well as software, hardware and broker’s network infrastructure.

Latency vs bandwidth vs throughput

Latency, bandwidth, and throughput are 3 mutually interdependent factors that affect trading experience. In order to reduce network latency, all 3 factors must be considered when you are designing the connectivity between you, your liquidity provider, market data provider and your customers. We can visualize the meaning of these terms by referencing it to a highway:

• Bandwidth determines how narrow or wide the information highway is. The narrower it is, the less traffic it is able to be handle causing network congestion when we try to push through too much data at once.

• Latency measures how fast the information travel from Point A to Point B and back within the highway.

• Throughput is the amount of traffic that can be handled by the highway over a given period of time.

Slow internet connection

It is a common problem in some emerging markets that broker websites suffer complications with the local ISPs (Internet Service Providers) that may reduce the speed of a user’s connection to the broker.

Soren Klausen, Sales Director at AlpFin, shared that in some Asia countries, the complexity of firewalls and ISP connections to user’s different devices (mobile vs desktop vs laptop) will render different user experience.

“We recently helped an FX broker improved its connectivity to clients in Asia with the #AlpLightning solution. The broker’s network latency improved significantly by 30% and packet losses down to near zero instances with 99% uptime, including volatile market conditions around NFPs and FOMCs. The improvement in network infrastructure ultimately resulted in triple-digit volume growth and better trading experience for the clients.”

The further your message has to travel, the longer it takes to get there, the higher the latency. This applies to trading, where your data travels through cables at the speed of light navigating across the world via different devices, routers and servers before it reaches its intended destination.

Packet loss – it’s not just about high-speed and latency!

Information transmitted via networks is broken down into data packets. Packet loss happens when the data packet fails to reach its intended destination. Packet losses are usually caused by:

• Bandwidth congestion

• Faulty networking cables/wires

• Faulty network hardware

• Software issues

• Poor wireless/wi-fi network

• Denial of Service (Dos) attacks

“From our experience, many brokers solely focus on the issue of latency but overlook the negative impacts associated with packet losses. Any incident of packet losses above 10% is considered severe when a business is dealing with transfer of high-value data such as stocks prices, FX trades or money transfers across the network. The loss of data will result in failed transactions or delays in price updates causing grief and significant monetary losses on traders, merchants or brokers,” Klausen explained.

Network visibility and control

Your vendor and IT team must have real-time access to both latency and packet losses to ensure that your network is performing at expected levels and alerted when things go wrong. It is found that network vendors do not usually allow your IT team to have full visibility of how the data is routed via its network and you will not be able to take remedial actions when there is serious latency or packet losses.

“We realized that having full visibility and control over network issues when they arise will allow our clients to minimize downtime, saving them millions of dollars in potential revenue losses annually and the pain of dealing with angry customers,” said Klausen.

How do you achieve low latency?

Many vendors claim how their products can result in faster connections but building a comprehensive, low-latency and robust trading network infrastructure requires deep technical expertise who understands the entire information and transaction cycle from your customer’s device to your company’s server.

At AlpFin, our mission is to help financial institutions and intermediaries design an ultra-low-latency, high performance and resilient network infrastructure that serves to meet your business requirements as you grow your business globally. The next part of this article will go deeper into the challenges of latency faced by financial intermediaries, cost of latency during peak network traffic and solutions to the problems you and your customers face.

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