What is latency? In simple terms, latency refers to a time gap between one event and another. In forex terms, latency has to do with the time gap between a market-based request, and a market-based response. Such events are detailed in this table below.
Order transmission from the trader’s workstation (request) to the broker’s dealing desk or interbank market.
|Execution of trader’s order request, resulting in opening of the trade.|
|Market news update from front-end of the trading platform (i.e. the trader’s side)|| |
Transmission of news from trading servers to the broker’s station and on to the trader’s platform.
Any day the trader steps onto a computer or smartphone to trade, he or she will interact with the market in various ways. Whether it is from placing orders, requesting for news data or scrolling in between timeframes for update pricing information on charts, today’s trading has become more competitive than ever before. The ability to act in a timely and decisive manner in response to new/updated market information is increasingly becoming the distinguishing factor between success and failure. So just as light travels faster than sound, so also ultra-low latency trading infrastructure will trump basic setups any day, any time. This is why many institutional setups have invested billions in infrastructure and algorithms which have the ability react to market information in the order of nanoseconds. For a retail trader to survive in this arena, a knowledge of latency, how to quantify it and how reduce it is critical to success. You will probably not learn this in any forex school, so try to take in as much as you can from this piece.
Latency: Where Does it Come From?
Where does latency in trading come from? Forex trading is all about data, which has to emanate from a source to a destination. For instance, pricing information emanates from the dealing desk or interbank market (source) to the trader’s workstation (destination). A trade order has to emanate from the trader’s PC, laptop or smartphone (source) to the broker’s dealing desk or interbank market (destination). In a globalized market where source and destination can be as far as 20,000 miles apart, there will be an element of latency or time lag as the data travels through the network. Inefficiencies can exist in the data streaming process, and this can occur at various points. These points are:
- Trader’s computer hardware and software
- Internet connection
- Exchange or market servers
- Brokerage servers
These four factors typically affect reception and transmission of market data such as news and price data. But latency may also affect another type of data entirely: order data. Order data always emanates from the trading station. Typically, a trade order passes through this pathway.
Order Process in Forex Trading
The sad truth is that latency can not only occur at any of these points, but it can also occur at multiple points, thus adding up and adding to overall delays that will be experienced. The end result is that traders end up getting filled at more expensive prices. You may not consider this to be too much of a big deal if you are a small-cap trader. But if you trade as many as 10 lots per trade, and you trade 300 lots a month, this translates to a $30,000 revenue loss, simply as a result of latency-induced slippage!
Techniques Used in Reducing Latency
Here is how to reduce latency for retail forex trading.
- Use Workstations Built for Trading
One method of reducing latency in trading is by upgrading the equipment used in trading. Use of smartphones and tablets may be chic, but the truth is that they are built primarily for use in voice calls. Their data transmission capabilities are not engineered to support fast-paced trading. Such consumer-grade connectivity adds to latency; up to 1 second in some cases.
- Use 5G Networks
Another method is by using enhanced internet connectivity. 5G networks appear to be the new standard for retail forex trading as far as internet connectivity is concerned. If your country still offers 3G, you are probably out of luck. If you have access to 4G, you can make do with that.
- Forex Virtual Private Servers (VPS)
The third approach will require the use of a forex VPS. Now you have to be careful here. You should choose VPS services with hypervisor technology. This technology allows a forex VPS to host multiple applications without suffering a degradation of performance.
A forex VPS is a remote computer on which an expert advisor can be hosted. The aim is to get your trade robot as close to the broker’s datacenters as possible so as to reduce data lag. A VPS vendor known as ForexVPS.net has published on its website, latency periods it claims to have measured from several broker platforms. A section is reproduced below. All figures are in milliseconds.
|Broker name||New York |
These figures have not been independently unverified and so should not be used for trading without due diligence. However, we will simply use them for educational purposes.
We can see that:
- Latency with ADS Securities for its London server is 1ms, whereas it is 118ms for orders received to its Tokyo datacenter. If you live in Asia, it is preferable to host your VPS with the London datacenter as you will get executions of orders 118X faster.
- A London-based trader may decide to go with AIMS and not Admiral Markets, since execution on AIMS would be 4X faster if the figures for the London Equinix LD4 servers are anything to go by.
- Latency for US markets is lower with Ally Invest than with AIMS. So a trader who wants to trade US stocks may prefer to use Ally Invest (1ms latency) and not AIMS (latency of 69ms).
This goes to show how important the use of low-latency VPS setups can boost trade speeds.
In addition to the techniques stated above for reducing latency, there are other measures that can be taken to reduce latency. You should perform ping tests on your internet connection before you start trading. You should also update your charting and pricing software. You may need to pay for a charting application which is hosted on an advanced speed server to ensure you get price and news data in a timely fashion.
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