When traders talk about latency, the conversation is often dominated by the world of high-frequency trading (HFT). We picture a nanosecond arms race, where firms spend millions on microwave transmitters and fibre-optic cables to shave imperceptible moments off the time it takes to execute a trade.
For the systematic asset manager, the mid-frequency quant fund, or the proprietary trader whose strategies unfold over minutes, hours, or even days, it’s tempting to dismiss this obsession. “We aren’t competing in that arena,” they might think. “A few milliseconds won’t make or break our alpha.”
This is one of the costliest misconceptions in modern quantitative trading.
While you may not be an HFT firm, you are still competing against them—and thousands of other sophisticated players—in the same central limit order book. Every single order you send to an exchange is a race. And in that race, latency—the delay between your system’s decision and the exchange’s confirmation—has a direct, tangible, and often underestimated financial impact. That impact has a name: slippage.
Understanding Slippage: The Hidden Tax on Every Trade
Slippage is the difference between the price you expected to pay when you sent your order and the price you actually paid when the order was executed. It’s the few cents or basis points that vanish into the market microstructure between your signal and your fill.
Consider a simple example. Your systematic model identifies a buy signal for stock ABC, which has a current best ask price of £100.05. You send a market order to buy 10,000 shares. However, in the 50 milliseconds it takes for your order to travel from your server to the exchange, two things happen: an HFT firm sees the same demand and adjusts its price, and other market participants buy out the available liquidity at £100.05.
By the time your order arrives, the best ask is now £100.06. Your fill at this slightly worse price costs you an extra £0.01 per share.
- Cost of Slippage: £0.01/share * 10,000 shares = £100
It may not seem like much on a single trade. But what happens when your strategy executes 50, 100, or 500 trades a day? What happens when you rebalance a portfolio of hundreds of positions? This hidden tax of slippage compounds relentlessly, silently eroding your alpha and creating a significant drag on your P&L over the course of a year.
Latency’s Impact Beyond Simple Market Orders
The cost of latency isn’t just about getting a worse price on market orders. It fundamentally impacts a wide array of strategies.
- Statistical Arbitrage: For pairs traders and other stat-arb strategies, alpha is found in fleeting moments of price divergence. The window to capitalise on these dislocations is often measured in milliseconds. High latency means that by the time you act, the opportunity has already been arbitraged away by faster participants.
- Portfolio Rebalancing: For a large asset manager rebalancing a multi-asset portfolio, thousands of orders must be executed. Latency-induced slippage across this vast number of trades can lead to significant tracking error against your target index or model, undermining the precision of your strategy.
- Momentum Strategies: These strategies rely on getting into a trade as soon as a trend is confirmed. Latency means you are later to the party, entering at a less favourable price and capturing less of the subsequent market move.
It’s Not Just Your Orders, It’s Your Data
The second, equally critical aspect of latency is the speed at which you receive market data. Your entire view of the market—every bid, every ask, every trade—is delivered via a data feed. If that feed is slow, your system is making decisions based on a phantom reality.
A low-latency data feed ensures your models are reacting to what is happening right now, not what happened 100 milliseconds ago. This is crucial for accurately assessing liquidity, understanding order book dynamics, and ensuring your signals are generated from a true picture of the market.
The Institutional Solution: Proximity and Precision
Mitigating latency is not about winning a nanosecond race. It is about implementing a professional-grade infrastructure that gives your strategies the best possible chance to succeed. This is achieved through two core principles:
- Co-location: Placing your trading servers in the same data centre as the exchange’s matching engine. This drastically reduces the physical distance signals need to travel, cutting round-trip times from milliseconds to microseconds.
- Direct Market Access (DMA): Utilising high-performance APIs and network connections that provide the most direct and efficient route to the exchange, bypassing slower, aggregated broker networks.
In the hyper-competitive markets of 2025, assuming latency is someone else’s problem is an abdication of responsibility. For any serious trading enterprise, controlling for latency is a fundamental component of risk management and performance optimisation. It is the invisible force that can distinguish a profitable strategy from a failing one.
Don’t let your alpha slip away.
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