In electronic trading, latency is the term used to mean a delay in the time it takes for a packet of data to get from one designated point to another. Latency plays a key role in the current trading environment, which involves algorithmic trading and, more specifically, high-frequency trading.
The latency assumption seems to be that data should be transmitted instantly between one point and another (that is, with no delay at all). Microseconds imply missed trading opportunities.
Predictability is another dimension of latency, it is the guarantee that an application will respond within a bounded time interval to an external event. Jitter is defined as the variability from this interval. Jitter causes applications to behave in unpredictable ways, the antithesis of a low latency trading environment.
Some of the factors that contribute to latency are:
- Propagation: The time it takes for a packet to travel between one place and another at the speed of light.
- Transmission: The medium of transmission, whether optical fiber or wireless, introduces some delay.
- The size of the information packet: a larger packet will take longer to receive and return.
- Router and other processing
- Computer and storage delays