Financial and trading firms don’t care about a “fair game”, all they care is winning and making a profit. Thanks to high-end technology, they have the ability to trade extremely fast which gives them advantages on the market. Low latency networks are the weapons of choice!
The trading game is still the same, what has changed is the technology behind it. Supercomputers are replacing those agitated traders at the halls of the exchange office trying to pass their orders. Today is no longer the guy who can scream and jump louder, but the equipment that can process and send orders faster.
A microsecond can make the difference
This high demand for speed in trading and financial networks has brought a new kind of technology into the field. Today, a financial firm with the right technology is able to process an order in less than 400 microseconds (µs or 0.0004 second), more than twice the speed of a camera’s flash.
In this racing environment, the firms that can get rid of extra microseconds are the ones that get to keep the millions. A single microsecond can make all the difference between issuing an order and losing an opportunity.
But even the fastest communication suffers from some sort of latency. Latency is the time delay it takes for a request to reach a destination and return with a response. To have fast communications, all traces of latency must be lowered at all costs.
Latency is important for applications such as Voice over IP; if the latency is high then it is difficult to have a good conversation. But for finance and trading, latency is an urgent matter of life and death. According to Information Week Magazine, in modern trading applications, each millisecond can be worth over $100 million in revenue per year.
High-Frequency Trading for financial and trading applications
It is not possible to talk about speed in the financial world without mentioning High Frequency Trading (HFT). This is a very fast computerized type of trading for the stock market. It has been a hot topic lately, not only in trading but in the global economic scale, because it makes up about 50% to 60% of all trades and has the power to change markets in less than a blink of an eye.
HFT allows many orders to be sent to the stock exchange at near-millisecond Round-Trip Times “RTT” using ultra-low latency networks and advanced computing algorithms.
Low latency networks in financial and trading applications
The network connections of financial institutions require reliable, secure and ultra-low latency private links. HFT firms have completely dismissed the possibility of using a shared medium (such as the Internet) or high latency transmissions (like satellite) to transmit their data as a slight trace of network congestion would be totally unacceptable.
Reducing response times is a challenging game. As both networking and computing latencies must be reduced side-by-side. When making a trading decision, computing algorithms make up most of the total latency and the network stack creates about 10%.
While trading firms target most of their investment on decision-making algorithms, the network infrastructure is as important “if not more” a piece to the puzzle when lowering the latency. According to an article published in Automated Trader, Switches, NICs, and specially cabling, are all part of the infrastructure that will help to lower those seconds (sometimes from 20 to 2 microseconds).
The connection points involved in a trading transaction, are depicted in the following diagram. Major financial traders are using private optical circuits with MPLS/VPN for applications like HFT. Electronic trading consists in sending orders to the stock exchange. The stock exchange then matches and executes the trade. The Information feeds transmit pricing of stocks which are made visible to the market.
In order to lose those extra microseconds, the algorithms in the servers can be continuously improved; a lot can be also done in the network infrastructure.
To reduce networking latency even more, the infrastructure is beginning to adopt FPGAs (Field Programmable Gate Arrays) to help offload the server and reduce its latency, without fully replacing software algorithms. FPGAs can accelerate transactions because they can be programmed to interpret market data in the lowest latency possible. To dramatically reduce server latency, some vendors like NewWave DV, are even offloading common trading tasks from the servers into the NICs.
Latency in a financial network
Low latency networking providers are targeting three causes of latency, specifically transmission, proximity and transport delays.
- Transport medium: The time that data spends at the transmission itself. Fast traders are mainly using optical fiber to provide connectivity between servers, as it provides the necessary speeds at a reasonable cost. But lately, microwave links are also becoming the new norm, as they have proven to be faster at long distances but at a higher price. Transmission is so critical when reducing latency, because the longer the link is, the higher the latency. Studies have shown that in optical fibers, the light propagation produces over 90% of network latency. So, it is critical to engineer fiber optic connections with the shortest links between source and destination.
- Proximity: Refers to the actual distance between servers that are trying to communicate. According Ciena, a global telecom supplier, the latency for light propagation in optical fibers is 5ms/1,000 km, so the more distance between servers, the more added latency. If an HFT firm is placed as close to the server of the exchange as possible, the trading transaction will be much faster. That is why some HFT firms are looking for data centers nearby the exchange offices. Some exchange firms are even starting to house or “co-locate” HFT firms in the same premises that the exchange server is. Doing this allows distances to be minimized and they can complete stock transactions before everyone else.
- Transmission equipment: The transmission equipment that processes the data transported in the link, also adds up latency. The processing delays of different networking blocks, such as packets flowing through servers or added hops (like amplifiers, transponder, switches, etc) are contributors to the total latency. To reduce added latencies in HFT, equipments can use special software or hardware based algorithms like FPGA. To add or remove devices in the path is a tricky decision, because the more devices need to process data on the path the more latency added. On the other hand, signals need to be regenerated or packets need to be switched, some devices are mandatory for efficient communication.
Low latency networking vendors
Low latency networking has started to get higher demands to satisfy different high speed applications. Vendors that focus strictly on latency have gotten a lot of attention. The following are some providers that focus their equipment and transmission especially on high speeds for finance and trading applications.
Cable Solutions: optical fiber has proven to been a great cable solution to connect HFT firms with exchange offices.
- Arista is a leader in low latency cloud networks. They have targeted financial applications and web-centric computing. Arista has a large availability of low latency switches and cables/transceivers.
- Fujitsu have designed their products around the low-latency concept. They focus on delay sensitive applications such as, cloud computing, online gaming and high frequency trading. Fujitsu focuses on lowering transport equipment latencies.
- Huawei, provides a solution for low latency private line solution together with Transport Software Defined Networking (TSDN) and Multi-Service Optical Transport Networking (MS-OTN) that can offer millisecond latency private lines to financial and trading firms.
- Mellanox is also a well known provider for low latency trading platforms. Mellanox believes in speed and acceleration.
Microwave Solutions: wireless solutions are getting a lot of attention lately. Exchange offices are being connected through microwave due to the high reliability and fast speeds.
- Aviant networks, is the leader in ultra low latency microwave solutions. Aviant focuses on lowering latencies at the transmission level. According to Aviant, microwave signals can propagate 50% faster than optical fiber.
- Exalt is also well known in the market for next-generation microwave speeds. Their long distance connectivity with microwave for HFT, is bringing a lot of competition to optical cable providers.
Technology has changed financial markets so much, that firms seem to be competing more for the fastest equipment rather than the transaction itself. A single millisecond of delay in fast trading could result in great losses, so having the lowest latency solution as possible is really important.
The key to remove significant latency in the path of the electronic trade is in the networking equipment and the distance of cabling. HFT firms are doing the impossible to be the exchange office neighbors or to sit right next to their server and are investing large sums of money into the right networking infrastructure.