Benchmarking Latency in Securities Trading - An in Depth View on Trading at Light Speed

Posted: 21 May 2008

Abstract

Latency is one of the major issues in today's trading business. Market participants have an increasing demand for low latency services as more trading decisions are taken by computer programs, i.e. algorithms. Milliseconds pose a competitive edge - both in the demand for as well as in the provision of execution services. For sophisticated investors and intermediaries, speed drives the profitability of their state of the art electronic trading strategies, for marketplace operators algorithmic trading is a major source of order flow. Consequently, the understanding of latency is important to all affected players alike - investors, intermediaries, marketplace operators and IT service providers. Although the relevance of latency has increased in the last few years, the industry still lacks a common understanding of the term itself. A standard methodology on latency measurement is not yet defined. Consequently, the significance of latency data that is currently published by market operators, consultancies or network providers may be limited. We have developed a latency measurement methodology. One key challenge was to define a benchmark which is crucial to produce easily comparable latency data. This issue is tackled by including all order actions during several trading days. We investigate latency on the case of all Xetra order actions during a ten day sample period (12 to 23 March 2007). Results illustrate that latency can be explained by four major driving factors. These are trading activity, time of day, and the distance between customer access- and market operator host computer.

Keywords: Latency measurement, algo trading, market microstructure, equity market, Xetra

Suggested Citation

Budimir, Miroslav and Schweickert, Uwe, Benchmarking Latency in Securities Trading - An in Depth View on Trading at Light Speed. Available at SSRN: https://ssrn.com/abstract=1134760

Miroslav Budimir

University of Giessen ( email )

Betriebswirtschaftslehre VII
Giessen, WY 35394
Germany

Uwe Schweickert (Contact Author)

Deutsche Börse AG ( email )

Neue Börsenstr. 1
60485 Frankfurt/Main, 60485
Germany

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