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The Rob Daly piece from Waters that I referenced last week really got me thinking.  I responded to the piece in Waters and will reprint it below, but the topic has been a source of ongoing debate. Recently, I was out with several customers where we spent dinner discussing the physics of information movement within complex systems.  The gist was that we continually tweak our market data systems to ensure low latency, yet we just don't have the time (or the insight) to look at it more systematically.  This is a problem.

The Waters Letter

Rob Daly's September column, "Stop the Latency Insanity," is a harbinger for a much broader discussion on a systematic approach to addressing and analyzing latency across the entire trade-execution spectrum. The ever-elusive latency equation is inherently complex and consists of diverse variables whose individual characteristics are constantly changing. Mr. Daly covers several of these, including network bandwidth, protocol stack bypass, application architecture, and so forth, but we need to look at the entire chain, not just the pieces.

Unfortunately, we struggle as an industry to fully grasp the entire latency spectrum. Why? The reasons are as diverse as the variables. Trade execution spans departmental and organizational boundaries, preventing integrated and holistic analysis; latency tools only cover a limited number of discrete systems; volatility and the non-deterministic nature of market data inhibit accurate modeling; algorithmic execution generates non-deterministic computational and network loads.

The semblance to chaos theory is warranted. We're dealing with complex, inter-related, dynamic systems, which is why latency is so hard and-stealing from Mr. Daly's point-insane. While chaos theory puts much emphasis on initial conditions (market open), today's trading ecosystems introduce more stimuli all the time (Fed announcements, earnings reports). The mathematical modeling of latency around chaos theory may be a good concept (and a reasonable PhD dissertation), but it's just not pragmatic in the real world.

That shouldn't, however, stop us from attempting to solve the latency equation-which also needs to include stability, predictability and scale. There isn't a choice, especially in today's markets. Not having a grasp on broader, systemic latency will not only put our trading systems at risk, but erase any market advantage as well.

=rob.ciampa

Tags: low latency (4) chaos theory (1) 

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