(EXECUTION MATTERS is a Traders Magazine content series focused on the topics most important to traders and technologists in US equities and options markets. EXECUTION MATTERS is produced in collaboration with Lime Trading Corp.)
For a trader, the task sounds simple and straightforward enough – get your order executed before the other person in order to get the optimal price.
But where buzzing first is all that matters on the game show Jeopardy!, trading speed entails additional considerations beyond just clicking ‘buy’ or ‘sell’ first.
Traders Magazine spoke with Joe Signorelli, EVP and Global Head of Quantitative Trading Solutions at Trading Technologies, and Johan Sandblom, President and Head of Business Development at Lime Trading, to learn more.
How and why is latency important in trading?
Joe Signorelli: If you’re making markets or trading in the lower-latency space, co-location, speed and market microstructure are very important, because so many firms are co-located and they use that to make trades. If you’re not able to compete on that level, it’s really hard to make markets or provide execution algos. If you’re not fast enough, you’re going to get run over and just be part of the liquidity for faster groups.
Someone may ask, “We’re doing a two-hour VWAP, why should we care about speed and latency?” You should care because every slice of that trade is being watched carefully in the market. If you don’t have speed, you’re not going to be able to improve, no matter what the timeframe of your alpha is.
If you have an order sitting out there, and you’re not able to go in and out of the market with speed, your order is just going to be fuel for others who are faster. Speed has always been important for quantitative low latency, but now even traders who aren’t doing that are relying on execution groups to reduce slippage. If an execution group doesn’t have co-location and speed, there’s no value there.
Johan Sandblom: Latency is important because it affects execution quality. Thinking about how it affects queue positioning – if you and I both want to buy 100 shares of Microsoft right now and you are using the faster system, you’re going to get executed first and I’m going to sit in the queue. It’s like being in line behind you at the grocery store – I’m going to have to wait.
So while queue positioning isn’t necessarily something people think about much, it matters because it affects execution quality, which in turn affects the overall performance or alpha of a strategy. This is especially the case if you’re doing hundreds or thousands of trades daily.
What are the important components of low latency and having at least competitive trading speed?
Johan : I think a lot of folks out there don’t have a good understanding of what physical location means. For example, if you are in Secaucus (NJ), you have close access to the Cboe venues that are there, but if you’re sending orders from Secaucus to Nasdaq in Carteret, about 20 miles away, it’s going to take a couple hundred microseconds for the order to get there. So if you’re in Secaucus and I’m in Carteret and we’re both trading on Nasdaq, I’m going to beat you every single time.
It’s the same for NYSE in Mahwah, which is even further away. If you trade a lot on the NYSE, you should consider being in Mahwah physically to cut out the hundreds of microseconds that it can take for an order to get to Mahwah from a different exchange co-location center.
Another important component of low latency pertains to the (US Securities and Exchange Commission) market access rule, 15c3-5, which requires firms like us to do pre-market risk checks. But there are differences in how quickly brokers can do that check – some firms do it in the seconds, some in the hundreds of milliseconds, others in microseconds, even single digit microseconds. So if you’re an active trader for whom latency is important, you most likely want to work with a broker that has a check with very low latency, otherwise your orders will be held up.
It’s helpful for trading firms to measure and understand where their latency is coming from. This includes geography; what network components your broker uses; the number of hops the order takes from the client to the exchange; and simplicity of the technology. Eventually, I think we will see more transparency into fill rates and information leakage and things like that. But until then, if latency is important, clients should understand how to measure latency with their current broker and understand where the bottlenecks are.
Joe: It’s always important to be co-located at the exchanges, so your execution is fast, and the data you have coming in doesn’t need to go through extra hops or take time to travel. Even if it’s just milliseconds, it adds up.
And it’s important to consider the technology you’re running on. There’s two parts to trade processing: one part is the information from the exchanges getting to your servers, and the other part is what your server does internally to then generate the information back to the exchanges. Being co-located takes care of a lot of this, but it’s also important to be fast inside of the actual technology where the logic, the execution algos, are being run. It has to be commercial grade and also meet all regulatory guidelines within the exchanges.
Is latency becoming better understood in the marketplace?
Joe: It is. If you go back 10 years ago and you talked to big firms in the futures space, it really wasn’t well understood by management. But transaction cost analysis (TCA) is much better these days, and management is paying attention to these things because they know that the more they can reduce slippage, the more they reduce costs.
If you’re trading an equity portfolio, you may have millions of shares being executed, and latency is very important. The equities space has been leading on speed – most trading groups are extremely fast, and you can say the market is saturated. Futures isn’t quite there yet, but they’re getting there, and there’s an opportunity to grab market share with speed.
What does Lime Trading offer in terms of low latency and fast speed?
Johan: We provide infrastructure, technology, security, and reliability. We are in all three co-location centers – Carteret, Mahwah, and Secaucus. As members of all US equity exchanges, we have direct market access, which cuts down the hops. And we have dark fiber links for a mesh network between the different data centers.
On the trading technology side, we provide direct market access, we have smart order routing, and we have benchmark algos. We have simplified APIs for integration of trading and workflow and strategies via flexible integration such as FIX API, C++, Java, Python, C-sharp, and binary exchange protocols. For security and reliability, we are compliant with market access rule 15c3-5, and we have a low-latency pre-trade risk control with real-time risk and synchronization across all trading sites.
Crypto Industry Needs to Move Beyond the Hype
A new US administration initially brought a flurry of optimism for crypto but as that enthusiasm wanes the industry should refocus its efforts on building the trad-fi foundation that has rehabilitated crypto, says Michele Curtoni, head of strategy, SIX Digital Exchange
A wave of crypto fervour swept the market over the past few months as a new US administration signalled a regulatory environment more friendly to digital assets. That optimism is fading in the face of a number of ‘memecoin’ scandals and slower rollout of new policies.
Crypto is no stranger to waves of hype. It’s almost three years ago, when the market entered the doldrums after the last hype wave ended. The so-called crypto winter culminated with the collapse of FTX, which we now know was caused by a misuse of client funds due to lack of segregation and lax controls in custody.
Between then and now, the crypto industry has been quietly rehabilitating digital assets, rebuilding its image and its very foundation. Many digital assets firms hired from traditional finance, and they brought with them the institutional knowledge of a highly regulated business.
Even through the crypto winter, investors wanted exposure to digital assets but demanded it get the same treatment as real-world assets. One of the fundamental pieces that has given crypto a second life for institutional investors is building the business of holding crypto on someone else’s behalf – custody. Custody is nestled deep in the bowels of post-trade but the market for crypto custody is incredibly vibrant, ranging from completely digitally native custodians to digital-first firms backed by investment banks and traditional exchanges. It may soon include the incumbent custodian banks who are currently building out their digital asset teams and services.
Custody has made crypto investable for institutions, not only by making it safer but allowing for more efficient use of capital. Holding crypto with a custodian can lower margin but through collateral management those savings are multiplied, freeing up more balance sheet for investment. For hedge funds and asset managers who trade using a prime broker or on leverage, centralising collateral is especially important. Having crypto collateralised in the same way or place as traditional securities will further lower the barriers of entry. What will drive institutional investment is making crypto look, feel and behave exactly as any other asset class.
The successful launch of several spot bitcoin ETFs last year demonstrates there is strong demand from investors, but that lack of regulation is holding the industry back. Investors want rules and guidance.
Certainty for crypto
The industry continues to build traditional guardrails around crypto but the most important factor in making it a mature asset class is certainty. Jurisdictions that have passed regulation specifically outlining the rules around crypto have seen the most success in attracting crypto-firms and institutional adoption.
Switzerland has been one of the first countries to allow for digital assets operations to be ‘normalised’ within the certainty of a regulatory framework, leading many Swiss firms to be at the forefront of the industry. The EU followed suit with the DLT Pilot Regime and later with MiCAR. The regulatory certainty around digital assets has given firms confidence to experiment with innovative ways to tie digital assets with the traditional ones, such as through tokenisation of real-world assets.
These rules have created an environment where Europe leads the world for digitally native bonds. According to a report by the Association for Financial Markets in Europe, the EU and Switzerland made up €1.8bn of the €3bn digital bonds issued globally. The US is playing catch-up but is making strides. Within the past month the Securities and Exchange Commission established a crypto task force and repealed SAB 121, which placed crypto on bank balance sheets, clearing the way for more institutional adoption.
Certainty combined with the work the industry is already doing by bringing the safeguards learned from decades of experience in trad-fi markets will underpin institutional adoption in crypto. Its maturity and long-term prospects require a set of rules and regulation to ensure it success isn’t tied to changes in government, whose political or regulatory priorities may fluctuate. Hype comes and goes as these past few months have demonstrated. For crypto to thrive, it must stand on the firm foundation of regulation and institutional-grade infrastructure.