Latency Sensitivity in Trading Systems
Latency sensitivity refers to how critically a trading strategy, market participant, or system is affected by delays in processing market data or executing orders. Understanding latency sensitivity is crucial for designing appropriate trading infrastructure and evaluating execution quality.
Understanding latency sensitivity
Latency sensitivity varies significantly across different market participants and trading strategies. This variation creates a spectrum of requirements for trading infrastructure and connectivity solutions.
High latency sensitivity
High-frequency trading strategies typically exhibit extreme latency sensitivity, where microsecond or even nanosecond delays can significantly impact profitability. These include:
- Market making strategies
- Statistical arbitrage
- Cross-market arbitrage
- Electronic liquidity provision
For these participants, investments in low-latency trading networks and colocation services are essential operational requirements.
Medium latency sensitivity
Medium latency-sensitive participants include:
- Agency algorithmic traders
- Portfolio traders
- Some systematic trading strategies
These participants are concerned with latency but may tolerate millisecond-level responses without significant performance degradation.
Low latency sensitivity
Some market participants operate with lower latency sensitivity:
- Long-term investors
- Asset managers
- Manual traders
These participants focus more on price and size than execution speed.
Next generation time-series database
QuestDB is an open-source time-series database optimized for market and heavy industry data. Built from scratch in Java and C++, it offers high-throughput ingestion and fast SQL queries with time-series extensions.
Measuring latency sensitivity
Organizations assess latency sensitivity through several key metrics:
- Tick-to-trade latency impact
- Execution shortfall analysis
- Fill rates at different latency levels
- Market impact costs
Impact on trading infrastructure
Latency sensitivity directly influences technology decisions:
Risk considerations
Trading systems must balance latency sensitivity with risk controls:
- Pre-trade risk checks
- System safeguards
- Circuit breakers
- Cancel on disconnect mechanisms
These controls introduce additional latency but are essential for safe market operation.
Market structure implications
Latency sensitivity has shaped modern market structure:
- Development of alternative trading systems
- Investment in exchange matching engines
- Creation of specialized market data feeds
- Evolution of smart order routers
Understanding latency sensitivity helps market participants optimize their trading infrastructure and execution strategies while maintaining appropriate risk controls and regulatory compliance.