How Does Latency Impact Trading?

Yippee, the order execution is successful!

The expression clearly reflects the joy and satisfaction of swiftly capitalizing on a market opportunity.

But here's the catch. The success and failure of the order execution depend heavily on latency, a critical factor that can make or break the trade. It refers to the delay or time lag between the trade initiation and its execution. It is typically measured in milliseconds (ms), and even small differences in latency can have a significant impact on trading outcomes. 'High latency' refers to a situation where there is a noticeable delay in trade initiation and execution, while 'low latency' in trading refers to a minimal delay in the initiation and execution of trades.

As you enter into the fast-paced world of trading, every millisecond counts. The speed at which trades execute makes the difference between profit and loss, success and missed opportunities.

Imagine a scenario where the stock suddenly reflects a significant price movement. Traders with low-latency trading platforms can immediately receive, process market data, and execute trades in milliseconds. They can buy or sell at favorable prices, seize market opportunities, and enhance the potential to make substantial profits.

Conversely, traders with high-latency trading platforms may experience significant delays in receiving and processing market data. By the time these traders could place orders, the other traders would have executed their orders and grabbed the available liquidity. As a result, they might buy stocks at a higher price or sell them for a lower price, missing out on the potential to make profits or incur more significant losses.

As the lifeblood of trading, latency holds the power to shape outcomes, making it an important aspect to understand. In this blog, we will delve into how latency impacts trading and what FYERS offers to mitigate the risk of lagging behind.

How latency impacts trading?

Latency can significantly impact trading, especially in volatile markets. Here's the list of ways in which it can impact trading:

• Execution Speed

Lower latency empowers traders to execute trades faster, enabling them to capitalize on market opportunities before others. Traders reacting quickly to market movements have a competitive advantage and hold the potential to secure better prices. For instance, high-frequency traders rely on platforms with low latency to execute many trades seamlessly.

• Price slippage

Latency can result in price slippage, wherein the market price changes between the time the trade is initiated and executed. If the latency is high, traders may buy or sell at a less favorable price than anticipated, resulting in reduced profits or increased losses. Price slippage is also known as impact cost. 

For instance, a trader wants to buy 1000 shares of XYZ Ltd, which is currently trading at ₹200 per share. The trader decides to place, but due to high latency, there is a delay in the order reaching the exchange. In this process, the price of the stock increases to ₹200.25, and the order executes at the same price. As a result, the trader experiences a price slippage of ₹250 (0.25*1000).

• Arbitrage Opportunities

In arbitrage trading, high latency can significantly impede the ability to exploit price discrepancies across different markets. With high latency in receiving market data or executing trades, traders will miss out on profitable arbitrage opportunities due to slower response times.

For instance, a trader finds that a stock is trading at ₹400 on the NSE, while on the BSE it is trading at ₹400.25. This price difference presents a potential arbitrage opportunity. The trader plans to execute an arbitrage opportunity by buying shares from the NSE at a lower price and selling shares on the BSE at higher price simultaneously. However, due to higher latency, order executed when the price discrepancy diminished. As a result, the trader missed out on the opportunity of making profits.

• Market Access

Latency can impact the speed at which traders can access information and interact with different trading venues, such as exchanges. High latency delays order routing, leading to missed trading opportunities or incomplete executions.

• Order queue position

In highly competitive trading environments, the order in which trades are executed can be crucial. Latency can determine the position of a trader's order in the execution queue. Traders with low latency connections may have their orders executed ahead of others, giving them a competitive advantage.

• Risk Management

Latency can also impact risk management. For example, suppose there is a sudden market event or a significant price movement. In that case, traders with high latency may struggle to exit positions quickly or implement risk mitigation strategies, potentially leading to larger losses.

How has FYERS optimized latency for clients?

"At FYERS, orders fly 3x faster than you blink, clocking in under 50 ms!"

Isn't it interesting!

Checkout the below video of the orders placed via the FYERS Web platform.

We have always endeavored to provide the best-in-the-class platform for traders and investors. Optimizing the platform with low-latency capabilities resulting in faster order execution has been a top-notch priority for us. The platform also offers features like high-speed order placement, real-time market data, and advanced order types. Open a demat account for free with FYERS instantly and trade with zero time lag.

If you've any friends and family members looking for a seamless trading experience and faster order placements, do consider referring here.

Conclusion

In a nutshell, latency is an invisible force that shapes trading outcomes. From high-frequency trading and faster order execution to risk management, the impact of latency on traders is undeniable. Understanding the complexities of latency and trading with low-latency platforms can give traders a competitive edge and enhance their trading journey.

FYERS has successfully optimized technology infrastructure with low latency and leveraged advanced analytics, empowering traders to embrace the essence of success in the fast-paced world of trading.