Are Broker-Dealers Missing Out on Opportunities Because of Latency?

For all the strategizing, expert advisors, and risk management throughout the investing landscape, latency remains one of the decisive factors when it comes to measuring the success of broker-dealers.

Futures markets are dynamic environments that are constantly moving, and traders are seeking to take action in matters of nanoseconds in order to capitalize on fleeting opportunities.

Low-latency trading is one of the single biggest factors in navigating a hyper-competitive landscape for broker-dealers, and emerging technologies may hold the key to more frictionless trading.

But just how important is achieving exceptionally low latency for broker-dealers today? And how can fine margins be extended further by innovative traders?

Light-Speed Trading

We only have to look at the current demand for low-latency trading in the United States for an indication of broker-dealers’ need for speed when it comes to accessing markets.

Broker-dealers have long sought to minimize the latency between themselves and the markets they seek to access.

In 2007, InformationWeek data suggested that it took seven milliseconds for data to travel between New York markets and Chicago-based servers for traders, while this gap extends to 35 milliseconds between the West and East coasts.

This prompted many broker-dealers and execution-services firms to pay hefty sums to place their servers inside the data centers for the likes of the NYSE and Nasdaq.

Today, as emerging technologies have helped to support low-latency trading, we’re seeing more firms adopting new and innovative solutions in a bid to bridge gaps and execute trades faster than ever before.

Pursuing Higher-Frequency Trading

If a broker-dealer fails to manage the latency of their trades, the price slippage that could occur over a delayed period may eat into profits or amplify losses, making low-latency trading an essential pursuit.

High-frequency trading (HFT) is a dominant force in the modern trading landscape and helps firms take advantage of minuscule shifts in market prices occurring within milliseconds.

By unlocking the potential of HFT, it’s possible for broker-dealers to not only experience low-latency trading in the United States but also enjoy superior access to global equity through HFT-focused prime services for brokers. With the help of the right tools, this can help traders take advantage of brief price shifts in international markets, increasing the level of opportunity available to users.

High-frequency trading is popular for its ability to provide broker-dealers with the opportunity to act on data-driven insights in a fraction of a second while making market predictions with high accuracy and adapting quickly to changing market conditions.

However, critics of HFT have noted that it can also offer an unfair advantage in accelerating the pace of trades, and the approach paves the way for market fragmentation, loss of transparency, and greater price volatility.

The high volume of broker-dealers utilizing the technology has also led to greater demand for even faster technologies to beat market averages.

Ultra-Low Latent Trading

Ultra-low latent (ULL) trading operates as a means of outpacing HFT frameworks and offers broker-dealers the opportunity to react faster to emerging opportunities within markets.

In tick-to-trade infrastructures, field-programmable gate arrays (FPGAs) have helped to deliver ULL trading for commodities and can accelerate the trading process mechanically through logic gates as opposed to traveling through different software instructions that can hinder the pace of trades.

Another facet of ULL trading is ticker plant hardware, which can improve processing speeds and processor counts to optimize the loading and ordering of data packets.

As ULL pushes slippage down to a matter of microseconds, all enhancements to hardware and software can be essential for broker-dealers, and the batter to make faster trades can run up far greater costs, making the quest for ultra-low latency an expensive one.

Finding Answers in AI

As the costs associated with closing margins in HFT and ULL continue to grow among ambitious and resourceful broker-dealers, we’re likely to see firms look increasingly to artificial intelligence to provide more budget-friendly solutions to low-latency trading.

AI has fostered a strong presence in the field of HFT, and firms have been racing to convert microsecond slippages to a matter of nanoseconds with the help of artificial intelligence.

With the help of artificial intelligence algorithms, broker-dealers can combine their HFT strategies with an autonomous value chain capable of significantly lowering execution timeframes. This is because AI can detect trading signals, create strategies, and automatically execute a trade to capitalize on an opportunity at a far more rapid rate than human traders.

With this in mind, the future of low-latency trading for broker-dealers is likely to be powered by AI and machine learning (ML).

With machine learning, it’s possible for broker-dealers to tap into vast levels of unstructured data to draw fundamental insights at a rate that would be too fast for humans to interpret.

This multifaceted approach can allow algorithms to interpret data using natural language processing (NLP) from comprehensive data sources throughout news items, social media, and even satellite imagery to identify opportunities before they’re shown within technical analysis to capitalize on before the wider market has even taken note.

The depth of this approach could be best described as deep learning, but its close proximity to ML will become increasingly apparent in the burgeoning generative AI landscape and the opportunities it presents broker-dealers.

Smarter Trading for Faster Results

Latency has long been a deciding factor in the performance of trading strategies and can be just as pivotal in securing sustainable profitability as the quality of technical and fundamental analysis carried out on markets and equities.

As the generative AI boom kicks into gear, we’ll see more broker-dealers attempt to secure more budget-friendly ML solutions that can discover opportunities faster than expensive ULL platforms can capitalize on them.

The emergence of AI will herald an era of smarter trading. Latency will still be a pivotal factor for institutions, but artificial intelligence is likely to go some way toward leveling the trading playing field.

In a nutshell, latency is an invisible force that shapes trading outcomes. From high-frequency trading and faster order execution to risk management, the impact of latency on traders is undeniable. Understanding the complexities of latency and trading with low-latency platforms can give traders a competitive edge and enhance their trading journey.

FYERS has successfully optimized technology infrastructure with low latency and leveraged advanced analytics, empowering traders to embrace the essence of success in the fast-paced world of trading.