Transmission latency in forex

Friday, 20 November 2009 17:49

On Friday, November 20, 2009, a reader sent us the following question:

What is your view on the impact of latency on forex trading? For instance, the network bringing the data and executing the trades, and the impact of transmission latency on this.

As you are probably aware, there is a lot of work taking place in the equities space at reducing latency on networks to deliver higher profits through getting a better price sooner than the competition.

I'd be interested to hear if you had looked into this at all in your research.

No, I have not looked into this. I understand that the transmission latency is there, but I would expect the distribution of latency times to be contained within the time intervals much less than, say, 10 seconds. All research here is being carried out from the buy-side point of view -- when I say "trading algorithm", I don't mean an algorithm that matches buyers with sellers to strike the deals.

From the buy-side point of view, high frequency trading may be interesting for arbitrage but that's a very different area of research, requiring very different core competencies. It's not likely to be covered here. Anything more complex than the classic arbitrage (that is, more complex than working with two simultaneous price quotes for the same instrument) will likely require decision making logic of such high complexity that the decision making latency and not the transmission latency will be of primary importance.

Most of the research presented here deals with time scales of an hour or more, with the notable exception of one AUD/USD report where the correlation structure of the time series is analyzed down to 10 seconds. That report shows that the different time scales are not born equal, and that the interest in high frequency trading in forex is justified. For the trading systems being developed right now (one decision per day) and in the immediate future (one decision per hour), I expect the question of transmission latency to be of negligible importance. The strategy however is to progress in the direction of high frequency.

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