What is Latency and How Does it Impact Trading?

When data is transmitted, it is sent at various speeds – latency refers to the rate of information transmission, which, for online traders, has a significant impact on how fast they can carry out their buy and sell orders.

In the digital realm, latency is rather important. It is basically how fast data is able to move between various systems. Low latency means data can be sent more quickly, and high latency refers to a slower speed of data. Both terms, high and low, are relative, obviously, and as technology has advanced, there has been a swift toward lower and lower latency levels across most of the Internet.

Having low latency is particularly significant for online systems that need precise timing, including competitive games and trading. Online traders want to ensure that their orders are placed as soon as they click the ‘Confirm’ button. The longer the delay, the more the price of the digital asset they are trading may trip. This can impact the execution of the strategy being carried out, which is not good.

To tackle this issue, the majority of online exchange platforms try to offer the absolute lowest latency possible by using the latest technology. Although this has been true for a while in legacy trading systems, it has become even more important and required in the world of cryptocurrency.

Is This Different for Cryptocurrency Exchanges?

‚ÄčIn the ever-changing world of cryptocurrency, latency becomes even more significant than ever before, as prices can shift in a few seconds. Moreover, extremely low latency will be crucial in bringing institutional money into these platforms.

The digital type of cryptocurrency and the hype and uncertainty that covers most of the sector can lead to considerable volatility in crypto markets. Only a couple of seconds can make a massive difference in how successful the strategy is – and more than ever, traders have to know that their trades are being placed as quickly as possible.

What is High-Frequency Trading?

High-frequency trading is a term used for systems that utilize algorithms to post their trades in a fully automated manner while also reacting to opportunities in the market that can be there for only a few milliseconds.

The process of using computer programs to trade automatically is not new to the cryptocurrency world. Still, it is easy to see the kind of these assets lends itself to this strategy. Besides being volatile, cryptocurrency exchange platforms run 24/7, so traders have a robust incentive to let the algorithms manage everything in a mainly hands-off approach. Still, traders need to ensure that their systems are programmed with the proper strategies and are oversaw to adapt if the market conditions change.

Besides being automated, algorithmic trading systems are able to make numerous trades per second, usually making small profits from minor price changes. Obviously, this takes lightning-fast connections to the exchange platform to be able to open and close orders at that particular speed. Also, if data cannot be transmitted fast enough, the whole system won’t function well. Worsening the problem is the fact that these markets have become extremely competitive. A great HFT system has to be slightly faster than the majority of other HFT systems, or it will be left behind.

The Bottom Line

While still in their very first days, most top exchange platforms have sufficiently low latency for average traders, and more are starting to offer colocation services to professionals. Colocation enables clients to rent servers that are physically placed on-site with the firm’s own systems and are directly wired into them.

Overall, if users use exchanges to only accumulate cryptocurrencies, or if they carry out swing trading or other long-term strategies, then accurate timing won’t be such an issue.

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