Why is latency important in trading?

Why is latency important in trading?

Latency is significant in trading as it determines how quickly traders can react to market movements and capture opportunities. Low latency enables faster trade execution and better price discovery, while high latency can result in slippage, missed opportunities, and reduced returns.

For instance, suppose Mr. Ronnie and Mr. Mani both want to buy 1000 shares of ABC company at ₹100 per share. Mr. Ronnie uses a trading terminal with a latency of 300 milliseconds, while Mr. Mani uses a trading platform with a latency of 50 milliseconds. Mr. Mani’s order will get to the exchange 6 times quicker than Mr. Ronnie’s order. This means that Mr. Mani has a better chance of buying the shares at ₹100 per share, while Mr. Ronnie might have to pay more if the price goes up.

Latency can also affect different trading strategies differently, such as:
  • Arbitrage traders exploit price differences between different exchanges or instruments. They need very low latency to take advantage of these opportunities. 
  • Scalpers make small profits from frequent trades in short time frames. They also need low latency to execute their trades quickly and accurately. 
  • Algo traders use computer programs to automate their trading decisions based on predefined rules or signals. They may need low or high latency depending on their algorithms and objectives.

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