Every online transaction, every network route, and every millisecond of market movement is dependent on latency. It dictates the speed at which a server responds and can shape the overall user experience of any online platform.
So, what exactly is latency?
Latency refers to the amount of time it takes a data packet to travel from one computer to another. Also seen as the measurement of a delay in a system, it plays a critical role in how quickly data is transmitted across a network.
Because latency often directly impacts end-user experience and satisfaction, it’s crucial for businesses in many industries to aim for the lowest possible latency. But in some industries, low latency means more than a buffering TV episode or a slow-loading website - it can mean the difference between profit and loss.
Fintech is one such industry. In this blog, we’ll be answering why latency plays such a vital role within the operations of fintech and trading, and what to consider when preparing your infrastructure for the lowest possible latency.
To put it simply, low latency in financial trading is the minimal delay between placing an order and its execution.
In order to fully understand how this works, we first need to look at the route data packets take as they travel from their source to their destination and back again. This journey is known as a round trip.
For trading infrastructures, a round trip looks like this:
Milliseconds separate the moment a trader places an order from the instant they receive confirmation. This is known as the round-trip time (RTT). However, a single millisecond can be the difference between a good trade and a bad trade.
Time is money – and in fintech, that saying is literal. There are three key reasons why low latency is so important to financial trading: trade slippage, order priority in the execution venue queue, and arbitrage.
For every stage of a trading round trip, low latency is crucial in ensuring a transaction is executed at the price the trader intended. Otherwise, market volatility combined with a delay in data transfer, can quickly turn a profitable opportunity into an unwanted loss.
This has become so common in trading that a name for this occurrence has been coined: trade slippage.
Trade slippage occurs when a trade is executed at a different price than originally requested. This most often happens during periods of high market volatility or low liquidity (when there aren’t enough buyers or sellers to fill orders at consistent prices).
While slippage can be either positive or negative, an unexpected loss can discourage the trader from returning to the platform. Low latency helps reduce this risk by executing trades faster, giving the trader the greatest chance to make their deals at the intended price.
Mohammad Mazeh, Head of Brokerage and Platform Administration at FxGrow, explains how their ultra-low latency trading infrastructure, achieved in partnership with servers.com, is a solution to potential trade slippage:
“Minimizing the latency from our trading infrastructure to the bridge infrastructure is a huge selling point. When we get closer to our bridge provider, we minimize the latency from trading execution to liquidity providers (LPs) and pricing aggregation from LPs. This minimizes errors and latency with our traders.”
When a broker sends an order onto an exchange or LP, it doesn’t get executed instantly – it first enters a queue. This queue determines which orders get filled, first based on price (a higher value trade will have priority), and then time. So, even if two traders submit the same price, the one who reaches the execution venue first gets their order filled first.
Orders at the front of the queue are more likely to be executed, and in fast, volatile markets, orders can even miss the window entirely. This is why ultra-low latency trading is so important, as reaching the front of the queue sets a trade up to be as successful as possible.
In fast-moving markets, small price differences can appear across platforms. This is where arbitrage comes into play. Arbitrage is a trading strategy where a trader buys an asset at a lower price in one market to then sell it at a higher price in another market.
One type of arbitrage is latency arbitrage, whereby traders with lower latency can take advantage of delays in price updates on slower systems. They can see price changes before others and are best positioned to act on them instantly.
The window for trading arbitrage can be open for just fractions of a second. These opportunities are extremely short-lived, and if a system’s latency is even slightly too high, the price may shift before the trade is executed, causing the opportunity to vanish entirely.
It’s clear how significant a role latency plays in the performance of trading infrastructure. So, what steps can you take to ensure low latency trading?
Several considerations are key to achieving a low latency infrastructure:
The closer your servers are to the execution venue, the faster your trades are executed. Physical distance plays a part in every server communication, as data can only travel as fast as the speed of light allows. Setting up your infrastructure in a data center that is in close proximity to the location of an exchange or LP can knock milliseconds off the RTT.
Even if the server is physically close to the execution venue, a poor network route can cause delays. Every hop a data packet takes – from router to router – introduces latency. The aim is to find the most direct path.
The hardware you use directly affects how quickly your system can process and respond to incoming data. Components such as CPU, RAM and storage all play a role in how quickly a server can make a trade. High-performance bare metal can be tailor-made to meet the demands of low latency trading, and eliminates the extra processing time and resource usage that come with virtualization.
When trading platform provider Ark Technologies faced challenges with latency and a lack of support from their previous infrastructure provider, they weren’t just looking for a fix - they wanted to future-proof their servers, upgrading them to support long-term growth.
This prompted them to migrate to a provider that could tailor their servers to find the best performance for trading.
“Once we migrated our first customer onto a new server, their resource immediately benefitted from enhanced stability” says Iyad Yasser, co-founder and CTO of Ark Technologies, after migrating their infrastructure to servers.com. “Within days, servers.com were able to deploy brand new servers for more customers, migrating their operations onto upgraded hardware, solving their previous performance limitations.”
As we’ve seen, latency is instrumental in measuring server performance, especially in fintech. So, when Ark Technologies reported a vast improvement in server speed for their Ark Trader platform, that was confirmation for them that they had found the right provider.
“We went from 400ms with Ark Trader version one to 180ms today. Route optimization has also improved speed, reducing network hops from up to 70 to just 9. We haven't modified the backend in any way - this is purely a result of the hardware.”
Guided every step of the way by fintech specialist Mike Sparshott, Ark Technologies achieved transformational growth by finding servers that matched their specific needs. If you want to learn more about their partnership with servers.com, you can take a read of the case study.
From avoiding trade slippage to order priority in the execution venue queues, low latency can make the difference between a successful and a struggling fintech infrastructure.
Whether you’re a broker, online trading platform or liquidity provider, investing in the right infrastructure ensures you stay competitive in a market where speed matters.
If you’d like to learn more about how servers.com can support your infrastructure, feel free to reach out to our Fintech specialist, Mike Sparshott, directly or contact us here, and we'll be in touch.
Nathan studied Creative Writing at Bath Spa University, including a six-month Erasmus scheme at Stockholm University in 2020. Outside of work, Nathan is both a film buff and car enthusiast.
