In the Carrier/Telecom space, data-network latency has become a hot topic; mainly because of it’s effects on delivering converged voice and data services. The theme has recently come to the forefront due to the inevitable transition of mobile networks backhaul over to data/ethernet.
The equipment manufacturer industry has also taken notice and I believe one of the main factors of this nascent trend towards “Packet Optical Networking” is to mitigate Latency as much as possible in the network.
Over the last month I’ve been speaking with Network providers (as usual) and Financial institutions (not so usual) in my hometown of Frankfurt, Germany and London, UK. Securities Trading firms (or Departments) are now starting to demand “Latency” Service Level Agreements from their providers in addition to the usual measurements of reliability, resiliency and stability.
Why is this?? The answers might surprise you.
After a number of conversations with brokers and network professionals in these trading firms I have learned that there are two main reasons. The reasons have nothing to do with converged services, VoIP quality or bandwidth contention.
Testing the Market with “Micro-Trades”
Currently, the majority of all securities trades in the financial centers of Europe (and the US as far as I know) are electronic trades, done by massive computerized trading systems in even bigger data centers. These electronic transactions are fast, automatic easily executable and every brokerage house wants to attract as many of them as possible.
In the Securities Markets there are millions (billions?) of specific standing orders for the various securities. These standing orders are of two types; “Buy” orders or “Sell” orders and they have a currency value behind them. When a security reaches a certain value any “Buy” or “Sell” order that has been placed for that security, at that value, will execute. This automatic-order execution happens without delay and in some times has a trading delay guarantee. Think about the power of this level of automation on the world markets where billions of transactions are happening per second……..
The most conservative estimate I have heard is that close to 75% of all trades on the securities-trading systems worldwide at any given time are “Micro-Trades” (some estimates put them as high as 95%). These Micro-trades are designed to test the sensitivity of the automatic “Buy and Sell” orders in the markets and then withdraw the order if the sensitivity isn’t high enough (read: the security isn’t close to moving rapidly in one direction or another). If the “Micro-trade” finds the value at which the stock’s automatic orders will “kick-in” (either selling or buying orders) then the trade will trigger follow-on trades to take advantage of the movement of the security.
Latency as you can imagine plays a crucial part in this. There are millions of securities and billions of transactions so speed is everything. If there is too much network latency a Micro trade might miss it’s window of opportunity to take advantage of the sensitivity of the security. Even worse latency might trigger trades that shouldn’t be triggered in the first place potential causing financial losses.
Taking advantage of the Fraction
Another way in which low latency networks can assist is by allowing trading firms the speed to out-maneuver the markets ability to reconcile between different currencies.
In one conversation with a broker over lunch she explained to me that there is very heavy regulation surrounding this sort of activity but the basic idea is this:
Compare the prices of a single share on various markets around the planet. If there is a large enough discrepancy of the share price in relation to the relative currency values then the nimble can buy in one market and sell in another and take advantage of the “Fraction of a cent/pence/forint/etc.”
Obviously in order to be this nimble a trading house needs to have a network whose latency allows them to move faster than anyone else can reconcile.
I never cease to be amazed at how technologies manifest themselves in the marketplace. What do you think? I’d love to hear the comments below!
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