The Low Latency Advantage in Online Trading

The Low Latency Advantage in Online Trading
by Barry Bahrami of Commercial Network Services

Latency is arguably the most important and often disregarded factor for the online trader. It is often neglected because it sounds like a complicated computer term, but understanding what it is can quickly and substantially increase the trader’s earnings. Computer networks communicate by sending packets of data through the Internet. Latency is the time required for data to travel from the source to destination network. It is measured in milliseconds, or 1/1000th of a second.

It is a public misconception that everyone enjoys the same Internet. Data traveling over the Internet can be compared to delivery vans on the road carrying packages to their recipients. The recipients of the packages are all over the world, and so some delivery vans must travel a lot farther than the others in order to reach their recipients. Some experience delays due to detours and traffic jams. Others experience lost or damaged packages and need to restart the delivery again at the expense of time. The delivery van that travels only a city block or two will get to the destination first and with little chance of damage to the packages. This is because the other delivery vans travel hundreds or even thousands of miles farther to reach the destination, which increases the time required to deliver the package and likelihood of a problem or detour along the way.

With online trading, latency is even more crucial because data must travel round trip to make a single transaction. That is, a price quote must travel from the broker’s server to the trader’s VPS to be processed and then the data must travel the same distance back to the broker’s server to enter or adjust an order. Since the market waits for nobody and will continue to move while price quotes are in transit, the trader with the lower latency VPS will always have a more true and real-time reading of the market then the trader with a higher latency VPS. If the market is volatile and latency high then the price quote may not be “fresh” when it is finally received by the recipient.

The financial advantage of a low latency VPS over any other VPS can be staggering to the trader. To understand why, we only need to adjust our previous example to better reflect the real chain of communication in an online trading scenario. That is, data must travel from the broker to the VPS and back to the broker.

Imagine two traders; one is located in an office two city blocks off Wall Street and the other in a costume shop 880 miles away in Atlanta, Georgia. Both are using the same NYC broker. For the purposes of this illustration, imagine the price quotes and orders are sent by taxi from the broker to the trader and back.

For the first trader in NYC, the data must only travel from the broker down the street two blocks. That trader then sends the taxi back another two blocks with instructions for the broker to open or edit an order.

Although both taxis left the broker at the same time, the second trader will not receive their same price quote before the first trader has already sent their taxi back and entered an order with the broker. This is because the second taxi must travel an additional 880 miles just to deliver the price quote – the first ½ of the round trip. It must then make the return trip back – all while the market continues to move during their journey to the destination. The first trader will have completed many round trips for every one made by the second trader. During periods of volatile market activity, the price quote received by the second trader may not even be current due to the longer time required to deliver data. Clearly, the trader only two blocks away from the broker has a tremendous advantage over the other nearly 900 miles away.

Although data really travels much faster over the Internet then cars do on the road, the distance data must travel and the time advantages are virtually the same in real world online trading. The result is that the trader closer to the broker will receive price quotes and execute orders significantly sooner and with fewer errors then any other trader, and always have the most current representation of true market conditions.

Errors?

Yes, errors in trading. Higher latency connections are more prone to packet delivery delays and loss. It is a missed opportunity for the trading terminal every time the expert advisor receives a late packet or experiences connection problems with the broker due to the longer path the data must take through the various networks that make up the Internet.

The proof is in the results

If you think this is only theory then think again. The difference can be substantial and will vary with the strategy employed by the EA. Just how much of a difference can be demonstrated by reviewing the same exact EA to the same NYC broker from two different Commercial Network Services data centers, each located on opposite coasts of the United States.

On April 26, 2009, Commercial Network Services restarted all demo expert advisors at US$25,000 to better illustrate the importance of low latency to the online trader. In the most drastic example, the Bogie-NN-v8 expert advisor in the CNS NYC data center enjoyed a 284% larger profit than the same EA in the CNS SDCA (US west coast) data center to the same NYC broker. While the EA managed to earn a US$870 profit on a US$25,000 account after only 9 days from the US west coast VPS, the same EA with a low latency NYC VPS to the same NYC broker earned a US$2,475 profit during the same time period – nearly 3X more profit. The results continue to compound, and can be viewed in real-time on the CNS Top Expert Advisors page. The advantage in this example can be dwarfed by scalping EA’s, such as FapTurbo and Megadroid.

In reviewing the statements side by side, it’s easy to see how lost packets along the way and the higher latency from the increased distance can result in less favorable or missed trades. Every lost or delayed packet is a lost opportunity for the EA.

After reviewing the MT4 log details, William (Wackena) Boatright, the author of Bogie NN-v8 and 2nd place winner of the 2007 Automated Trading Championship said:

I did not find reason for difference by reviewing logs. I was hoping to find login to server issues. If both demo are running on same server URL, the west coast demo did not see all of the same trade signals that NYC had. Only reason I can think of is server connection difference. I have not seen on my CNS vps, but on my local PC, MT4 terminal will lose connection to server without a log entry to ID. I manually login again and then MT4 terminal reconnects.

Best regards,

William (Wackena)
Bogie Enterprises




In another example, the advantage of a low latency VPS for EA's that enter market orders can be realized. Reviewing the following Artemis Breakout statements side by side demonstrates price advantages for the lower latency VPS with market orders. The Artemis Breakout EA was started on April 30, 2009 in identical VPS’s within CNS data centers on opposite coasts of the United States. After just a few short days, the lower latency VPS is already securing better prices on executions over the higher latency VPS. Notice the time of the two highlighted orders are the same, but the lower latency VPS secured the better price for the market order. Indeed, the profits realized from the better entry prices will add up quickly.



ABO with NYC VPS to a NYC broker:

Ticket Open Time Type Size Item Price S / L T / P Close Time Price Commission Taxes Swap Profit
7536067 2009.05.04 09:43 buy 0.30 eurusd 1.3324 1.3224 1.3424 2009.05.04 13:02 1.3254 0.00 0.00 0.00 -210.00
7548618 2009.05.04 13:59 sell 0.10 eurusd 1.3251 1.3250 1.3151 2009.05.04 14:18 1.3231 0.00 0.00 0.00 20.00
7550432 2009.05.04 13:59 sell 0.20 eurusd 1.3251 1.3234 1.3151 2009.05.04 15:28 1.3234 0.00 0.00 0.00 34.00
7611494 2009.05.05 09:07 sell 0.10 eurusd 1.3378 1.3377 1.3278 2009.05.05 09:22 1.3357 0.00 0.00 0.00 21.00
7612336 2009.05.05 09:07 sell 0.20 eurusd 1.3378 1.3370 1.3278 2009.05.05 09:41 1.3370 0.00 0.00 0.00 16.00
7627067 2009.05.05 12:45 sell 0.10 eurusd 1.3379 1.3378 1.3279 2009.05.05 17:23 1.3359 0.00 0.00 0.00 20.00
7648898 2009.05.05 12:45 sell 0.10 eurusd 1.3379 1.3359 1.3279 2009.05.05 17:50 1.3338 0.00 0.00 0.00 41.00
7652389 2009.05.05 12:45 sell 0.10 eurusd 1.3379 1.3356 1.3279 2009.05.05 18:01 1.3356 0.00 0.00 0.00 23.00
7734699 2009.05.06 16:33 buy 0.30 eurusd 1.3349 1.3249 1.3449 2009.05.06 17:06 1.3278 0.00 0.00 0.00 -213.00
7794522 2009.05.07 09:25 sell 0.30 eurusd 1.3262 1.3362 1.3162 2009.05.07 13:06 1.3333 0.00 0.00 0.00 -213.00
7810434 2009.05.07 13:06 buy 0.10 eurusd 1.3339 1.3340 1.3439 2009.05.07 14:49 1.3359 0.00 0.00 0.00 20.00
7821351 2009.05.07 13:06 buy 0.20 eurusd 1.3339 1.3347 1.3439 2009.05.07 14:58 1.3347 0.00 0.00 0.00 16.00
7825195 2009.05.07 15:22 buy 0.30 eurusd 1.3348 1.3248 1.3448 2009.05.07 15:36 1.3267 0.00 0.00 0.00 -243.00



ABO with west-coast VPS to NYC broker:


Ticket Open Time Type Size Item Price S / L T / P Close Time Price Commission Taxes Swap Profit
7536069 2009.05.04 09:43 buy 0.30 eurusd 1.3324 1.3224 1.3424 2009.05.04 13:03 1.3254 0.00 0.00 0.00 -210.00
7548624 2009.05.04 13:59 sell 0.10 eurusd 1.3251 1.3250 1.3151 2009.05.04 14:18 1.3231 0.00 0.00 0.00 20.00
7550436 2009.05.04 13:59 sell 0.20 eurusd 1.3251 1.3234 1.3151 2009.05.04 15:28 1.3234 0.00 0.00 0.00 34.00
7611496 2009.05.05 09:07 sell 0.10 eurusd 1.3378 1.3377 1.3278 2009.05.05 09:22 1.3357 0.00 0.00 0.00 21.00
7612337 2009.05.05 09:07 sell 0.20 eurusd 1.3378 1.3370 1.3278 2009.05.05 09:41 1.3370 0.00 0.00 0.00 16.00
7627069 2009.05.05 12:45 sell 0.10 eurusd 1.3379 1.3378 1.3279 2009.05.05 17:23 1.3359 0.00 0.00 0.00 20.00
7648896 2009.05.05 12:45 sell 0.10 eurusd 1.3379 1.3359 1.3279 2009.05.05 17:50 1.3338 0.00 0.00 0.00 41.00
7652382 2009.05.05 12:45 sell 0.10 eurusd 1.3379 1.3356 1.3279 2009.05.05 18:01 1.3356 0.00 0.00 0.00 23.00
7734587 2009.05.06 16:33 buy 0.30 eurusd 1.3350 1.3250 1.3450 2009.05.06 17:06 1.3278 0.00 0.00 0.00 -216.00
7794538 2009.05.07 09:25 sell 0.30 eurusd 1.3264 1.3364 1.3164 2009.05.07 13:06 1.3335 0.00 0.00 0.00 -213.00
7810433 2009.05.07 13:06 buy 0.10 eurusd 1.3339 1.3340 1.3439 2009.05.07 14:49 1.3360 0.00 0.00 0.00 21.00
7821324 2009.05.07 13:06 buy 0.20 eurusd 1.3339 1.3347 1.3439 2009.05.07 14:58 1.3347 0.00 0.00 0.00 16.00
7825194 2009.05.07 15:22 buy 0.30 eurusd 1.3348 1.3248 1.3448 2009.05.07 15:36 1.3261 0.00 0.00 0.00 -261.00

It is also interesting to note in the ABO trades dated 09:25 and 13:06, the higher latency VPS appears to have secured the better price. However, this is really reflecting the movement of the market during the time required for the signals to reach the higher latency VPS and make the return trip back to the broker. In the trade dated 09:25, the market continued to move up with the trade, and so the higher latency VPS entered the order after the lower latency VPS. This demonstrates how the market will continue to move during the extended time the data must travel round trip to the trading terminal and broker. In this specific case, it worked out in favor of the higher latency VPS - but this can not be relied on for long term performance. Had the market turned quickly, the lower latency VPS will have been better able to respond quicker than the higher latency VPS. Scalping EA’s will realize the largest advantage in low latency trading.


What’s low latency to one VPS is not necessarily low latency to the other VPS

It is important to remember that latency is relative to the distance between the broker’s server and the VPS. The same east coast VPS can not be expected to perform nearly as well with a west coast broker, when compared to the same EA running in a west coast VPS.


How to use latency to your advantage


Most traders already have an account with a broker before they setup a new VPS. Since the location of the broker is known, the trader only needs to setup in a VPS that is located physically closest to the broker. The VPS that is physically located closer to the broker will have the least latency to that same broker. After the VPS is setup, the trader can transparently enjoy all the benefits of the low latency trading platform and not worry about it again. It is important to note that some brokers may give away a free VPS with a trading account, but these VPS’s do not necessarily have the least latency to the broker.

Commercial Network Services publishes latency to major brokers from CNS data centers in the Knowledge Base, allowing subscribers to setup or move their Trader’s Desktop to the data center closest to their broker. This document also contains information how to test the latency to your broker from any VPS or PC.

What CNS is doing to help subscribers earn maximum profits through the lowest possible latency

2009 is the year of growth for Commercial Network Services. With data centers in New York City and San Diego, CNS subscribers enjoy the lowest latency to all major brokers in the USA.

We are just a few short weeks away from opening our newest data center in the UK, to offer our subscribers the lowest latency to Alpari-UK and other European brokers. (we will begin accepting reservations soon) We are not stopping there – more data centers are planned for 2009.

Some CNS subscribers have trading VPS’s in both west and east coast data centers. It is easy to setup a secure and private network to transfer files between them. A future version of CNS Autoboot will leverage two or more VPS’s into “clusters”, to run fully redundant trading platforms across multiple CNS VPS’s and data centers.

If you have comments or questions regarding the content of this article, please contact CNS Support and we will be happy to help you.

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Financial and Economic News and Comments

US & Canada

•US existing home sales in July jumped a more-than-expected 7.2% m/m, the largest month-on-month percentage gain since records began in 1999, to a seasonally adjusted 5.24 million annual rate, the highest level since August 2007, after a 3.6% m/m increase to 4.89 million in June, figures from the National Association of Realtors showed, indicating the US housing market is stabilizing. July existing home sales advanced 5.0% y/y. Sales rose for both single-family units and condos/co-ops. The median price for an existing home declined to $178,400 in July, down 15.1% y/y. Inventories of existing home sales increased 7.3% at the end of July to 4.09 million available for sale, representing a 9.4-month supply at the current sales pace following June’s 9.4. Regionally, July existing home sales gained 13.4% m/m in the Northeast, 10.9% m/m in the Midwest and 7.1% m/m in the South, while sales in the West declined 1.7% m/m.

Dollar Testing Support as Stocks Rally

•The dollar and yen fell on Friday as stronger European purchasing managers’ indexes and a jump in US existing home sales boosted risk appetite. Federal Reserve Chairman Ben Bernanke said “economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.” However, he did not give any indications of any tightening moves. The S&P 500 rose 18.76 points to 1,026.13. The yen was pressured by rising equity markets. The euro advanced as European stocks rose to a 10-month high and the eurozone manufacturing and services PMI climbed more than expected. Sterling fell modestly on the UK’s economic fundamentals despite better risk sentiment. The Australian and Canadian dollars gained on the stronger global economic outlook. Commodity prices rose and oil prices reached a 2009 high.


•The dollar index fell for a fourth day. Highly correlated with risk aversion and equity markets, the index failed to break the downtrend earlier in the week when global stock markets were under pressure. The dollar peaked when equities bottomed in March. US stocks are on the verge of breaking resistance while the dollar index is at important support. If the stock market continues its ascent next week, the dollar index is likely to test the 76- handle support.

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Books & Further Reading See our list of recommended books to further your research of the Forex market and Forex trading.

The charts and examples found on this website are educational examples and are not intended to be representations of profits or losses that can be achieved through forex trading. When reviewing any such examples, please keep in mind that past results are not necessarily indicative of future results.

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The essence of Forex trading is very simple. You exchange one currency for another when its price is low and then exchange it back when the price is higher and by doing so, you make profits. This simple tool shows you the mechanics of it. Note, in this example, the default leverage is 100:1 which means that each dollar in your account goes as 100 dollars. Higher leverage increases your profit potential, but also the risks of trading. In the actual trading account, you will be able to determine the leverage size of your trades.

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Imports: The Other Half of the Trade Equation

If you live in any country around the world -- but especially in the U.S. -- you know how big imports are. They're huge. The entire economy revolves around them and it's a fluid, exciting arena in which to work. Currencies values change, product lines are always in flux. There are new opportunities and new challenges. If you're smart and if you pay attention, you can cash in on these opportunities just as I and thousands of other have. More about importing --

Export Products to other Countries

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I know all too well how much money is being made in the global marketplace by normal everyday people. These are people like me. People like you. Lots of us work part time out of home offices. Some of us run small manufacturing companies.

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US dollar down against euro ahead of FOMC decision

NEW YORK (AFP) — The US dollar fell against the euro Tuesday after a key poll showed continued investor confidence in Germany, as the foreign exchange market awaited the conclusion of a Federal Open Market Committee meeting in Washington.

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GCI Financial Ltd ("GCI") is a regulated securities and commodities trading firm, specializing in online Foreign Exchange ("Forex") brokerage. In addition to Forex, GCI is a primary market maker in Contracts for Difference ("CFDs") on shares, indices and futures, and offers one of the fastest growing online CFD trading services. GCI has over 10,000 clients worldwide, including individual traders, institutions, and money managers. GCI provides an advanced, secure, and comprehensive online trading system. Client funds are insured and held in a separate customer account. In addition, GCI Financial Ltd maintains Net Capital in excess of minimum regulatory requirements.
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Introduction to Foreign Exchange Markets

Being the main force driving the global economic market, currency is no doubt an essential element for a country. However, in order for all the countries with different currencies to trade with one another, a system of exchange rate between their currencies is needed; this system, is formally known as foreign exchange or currency exchange.

In the early days, the system of currency exchange is supported solely by the gold amount held in the vault of a country. However, this system is no longer appropriate now due to inflation and hence, the value of one’s currency nowadays is determined through the market forces alone. In order to determine the value of a currency’s exchange rate, two main types of system is used which is floating currency and pegged currency.

For floating exchange rate, its value is determined by the supply and demand of the global market where the supply and demand is bound by all these factors such as foreign investment, inflation and ratios of import and export. Normally, this system is adopted by most of the advance countries like for example UK, US and Canada. All of these countries have a similarity where their market is well developed and stable in economic terms. These countries choose to practice this system due to the reason where floating exchange rate is proven to be much more efficient compared to the pegged exchange rate. The reason behind this is because for floating exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the actual inflation and other economic forces. However, every system has its own flaw and so does the floating exchange rate system. For instance, if a country suffers from economic instability due to various reasons such as political issues, a floating exchange rate system will certainly discourage investment due to the high risk of suffering from inflationary disaster or sudden slump in exchange rate