Three ways to get the trading edge

IN the high-frequency forex-trading sphere, it is latency of executions that grabs the headlines – that is the delay between an order being sent to a venue, and the venue executing that order. But as Dan Hubscher, industry marketing manager for Progress Software points out, investing in low latency trading execution systems is simply your stake to buy a place at the high-frequency trading (HFT) table: “Ultra low latency is not enough in itself to make you a contender. You need to look beyond that to get the edge in the market.” So where should institutions look to eke out the most from their trading systems?

1 During the design stage, people often get bogged down thinking about the latency of each individual component and neglect to optimise the interdependence of those components. “You can choose the best router, the best lines, and the best software, but if those components haven’t been designed to work as a whole you will run into issues,” says Pierre Francois Filet, chairman of QuantHouse. “The last thing you want to deal with is 17 different network providers, 20 different data-centres and 3 different software vendors.”

2 Obtaining best execution on forex transactions is a very different approach to that taken with equities trading. As Steve Grob, director of strategy at Fidessa, points out, there is no industry mandated standard for best execution of forex. There is no obligation on the part of up-stream brokers. In the forex market it is up to the trader to find the best execution venues. According to Dan Hubscher, this provides forex traders with an opportunity. Algorithms work by finding advantages that others can’t: “To get this information, traders need to take a birds-eye view of the markets and look for shifts in liquidity, before feeding this data into other parts of the algo system.”

3 500 years ago, the man who had the fastest horse could get from the cliff to the market place before his competitors to profit when he saw how laden down the trading ships were as they appeared on the horizon. And speed and accuracy of information is just as crucial in the modern trading world. If you’re working with old or inaccurate information, it doesn’t matter how fast your trade is executed. According to Scott Richie, managing director at BSO Network Solutions, while improvements in latency of trade execution can be measured in thousandths of a second, much greater improvements can be made in terms of network infrastructure: “The average London to Hong Kong round trip is 240-250 milliseconds, we have got our network latency down to 184 milliseconds. This can give traders real advantages.”