Latency

Latency is the delay between the occurrence of an event and a subsequent event. It can also be defined as any delay in time between a request and a response.

Advantages of Low-latency Traders

1. Adequate productivity: When there is a high latency in operation, much time is wasted. This, in turn, causes low productivity.
2. Uncompromised reputation: When a company opens a new product that is attractive to its clients, there will be an influx of orders. High latency, caused by poor network connection and lack of a backup circuit, causes an operation to lag for some hours. The delay might upset the customers and consequently damage the reputation of a company.
3. Minimal loss of revenue: Electronic traders run their transactions online. In case there are delays occasioned by slow internet, customers opt to move to the next trader. Consequently, the turnover from the investment is reduced.
4. Timely communications: When there is low latency, the volume of information transmitted per unit time will not be affected. Much data can, therefore, be sent or received.

It is worth noting that electronic traders must use fast computer systems to minimize latencies.

Question

Which of the following statements about latency is the most accurate?

1. High latency causes an improved overall efficiency of the market.
2. Low latencies improve the overall efficiency of the market.
3. Using fast computers increases latency.

Solution

The correct answer is B.

Low latency means that there is less delay time between a request and a response. Therefore, low latency leads to high productivity in the system; thus, the overall efficiency is improved.

A is incorrect. When there is high latency, much time will be wasted in the system. This will cause low productivity in the system.

C is incorrect. The use of fast computers reduces latency because assigned tasks are executed quickly.

Portfolio Construction: Learning Module 6: Trading Costs and Electronic Markets; Los 6(h): Describes the comparative advantages of low-latency traders