Besides doing research and having a good strategy, latency is also an essential aspect of trading every investor should be familiar with. However, due to its complex and subjective nature, this concept is often overlooked. So what is latency in trading? Keep reading to discover all about latency and how to maximize your chances of successful trades.

Latency in Trading: Definition

In a nutshell, latency is the delay experienced between a request and a response. In trading, latency affects how fast traders can receive vital market updates and respond to them. 

It’s become increasingly important for modern traders to measure latency since they rely on online trading platforms to trade on markets. Latency is usually measured in milliseconds, and latencies under 1 millisecond are described as being “ultra-low”.

Latency in Trading: The Importance of Latency

Now that you know what is latency in trading, it’s not difficult to see why having latency issues can affect your trading performance. The higher the latency, the longer it takes for servers to execute orders, which puts traders at an instant disadvantage in the highly competitive marketplace. 

Active traders depend on real-time market-pricing data to make split-second decisions on their trades every day. However, high latency can disrupt the process entirely, leading to irrelevant prices, slippage, or rejected trades. 

You may be surprised how even the slightest delay can result in massive losses amounting to millions of dollars. Hence, low latency has always been the goal, as it means faster response times over your competition and increased profitability of your trades. 

Latency in Trading: Understanding Slippage

Slippage is a type of latency in trading. It refers to the situation when you receive a different trade execution price than what you expected. Slippage happens when the bid/asks spread shifts during the time a market order is requested and the time when the order is executed. 

Latency in Trading: Examples 

• In the Market Data-Streaming Process

Your online trading platform typically receives market-pricing data from the exchange or marketplace before it reaches you for interpretation. 

This process is vulnerable to data stream issues and inefficiencies, also known as data lag. Data lag could be a result of anything from hardware to hidden internet problems, increasing latency and impacting trades negatively.

• In the Order Routing & Execution Process

The order routing and execution processes are areas of e-trading that can also be affected by latency issues. The key to profiting in trading lies in consistent order fills and low slippage. 

Since your orders need to reach the market before your competitors, high latency will obviously throw a wrench into your plans. Late orders will no doubt be sold at unfavorable prices and will likely lead to loss from slippage. 

Latency in Trading: Methods to Manage Latency

There are things you can do to minimize the chances of high latency when you interact with the marketplace. Keep your computer hardware in optimal condition and perform regular internet connectivity tests to help maintain low latencies. You should also evaluate your trading platform’s performance frequently to eliminate data lag.

Latency in Trading: How DMA Reduces Latency

Some institutional trading firms have figured out a way to curb latency in trading. They invest massive amounts of money to acquire low-latency infrastructures. By securing direct market access (DMA), these trading firms manage to gain a competitive edge in the marketplace. 

DMA allows traders to bypass a few steps in the order routing process, accelerating its arrival at the exchange and executing orders faster than their competitors. This direct access to the order book of exchange is what makes firms with DMA services a desirable option to traders. 

Low latency is crucial for success in major world financial markets such as the forex. That’s why Just2Trade offers traders direct access to markets and low latency trading with speeds starting from 0.05 seconds. 

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