Tuesday, January 29, 2008

What do you mean by end-to-end latency?

Steve just sent this through:

Order execution dynamics in a global FX market

"Very nice overview. This is key: "First, you need to understand what you mean by end-to-end latency (it will be different for different types of organization)".

One of the key metrics for FX turns out to be time to cancel a trade - on EBS over 70% of $1M trades are cancelled. Nobody wants to talk about the games they are playing so it's a bit tricky to know what someone means when they say they want sub-millisecond execution."

An intuitive paper detailing the clustering, spread and timings of limit orders on EBS. It's argued that impatient traders can drop below current price for faster execution. Sitting above the price takes longer as one would imagine. There's also a correlation with order size, showing smaller volumes trade quicker. Volumes are based on 2006 data and are not particularly high.

What's missing though is the underlying need for fast price and market data. The logical implication is reduction in latency - and therefore the necessity for physical proximity. Perhaps it's time to replicate LINX idea for high performance trading applications?

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