What does latency mean in trading?
In trading, latency refers to the time delay between the moment a trader places an order and when that order is executed on the exchange. This delay can be due to various factors including internet speeds, processing times, and system performance. It's crucial because even the slightest delay can lead to differences in the expected and actual execution price of an order, potentially affecting the profitability of trades.
Let's understand this with an example:
Imagine a scenario where Mr. A aims to purchase 100 shares of ABC Ltd. priced at ₹100 each. He enters a market order at precisely 10:00:00 am. However, owing to latency issues, his order only reaches the exchange two seconds later, at 10:00:02 am. During this brief window, the price of ABC Ltd. has climbed to ₹100.05 per share. As a result, Mr. A ends up spending an additional ₹5 for his transaction than he originally planned.
It's evident from this example how latency can impact a trader's position, especially in highly volatile markets where prices can fluctuate rapidly within fractions of a second.
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