Correct measurement of these metrics requires the use of a network-attached monitoring system for accuracy reasons but the monitoring system must also be able to understand application-level logic in order to track latency across complex transformations. The system should understand order flow, market data and other internal messaging protocols and how they relate to each other.
The Latency Matrix
Traders moving to multi-venue and multi-asset strategies are faced with the challenge of managing inter co-location latency – latency between various co-location points, at multiple venues.
Identifying the best location for a multi-venue strategy that uses information from several feeds can be difficult. In addition, each location may have access to several copies of a market data feed, for example A- and B-sides of the feed and copies carried over different networks.
Traders can make informed decisions to meet these challenges when they have access to the venue/co-lo latency matrix, i.e., detailed measurements of latency between each co-location point and each trading venue.
The order-flow component of the latency matrix can be assembled by monitoring message rates and request-response times at each co-location point on a per-venue basis, including order-to-acknowledgement, quote-to-acknowledgement, cancel-to-confirm (U-R-OUT) and order to market data update.
Market data latency is traditionally considered harder to measure due to higher volumes and the unidirectional nature of the application. This element of the latency matrix can however be obtained by monitoring the relative latency of feeds received at different locations. This does not tell you the absolute latency of your market data, but it does allow you to compare the relative speeds of all feeds at all locations.
Sharing information and timestamps about market data updates across different sites requires a very lightweight communication protocol to avoid adding network load. The issue of clock synchronization must also be tackled, since the timestamps come from different clocks.
In practice we have found external synchronization infrastructures with universal coverage to be expensive and time-consuming to build, and because of this self-synchronized monitoring is normally preferable, except those places where external synchronization is already available.
Inter Co-Location Latency
Multi co-location trading requires a high performance, low latency network to interconnect strategies, venues and feeds, but the cost/performance trade-off of the different choices available is often far from obvious.
Direct monitoring of the network under actual production load provides a reliable way to:
Determine true performance
Assess the different options available
Assure expected performance
For the purpose of service-level monitoring, traders should aim to have greater visibility into network performance than the service operators themselves. This is feasible today using technology that tracks latency and loss with microsecond precision for every single packet sent between network end-points.
The techniques used are the same as those discussed in the previous section for monitoring the relative arrival times of market data updates; the quality of inbound market data can also be assessed by looking for sequence gaps in the feed as it enters the infrastructure. Trading firms often struggle to eliminate packet-drops within their own systems without realizing that the gaps they see are already present in the inbound feed.
A second important use case for network monitoring is to understand the contribution of the network to trading latency. Identifying this contribution tells you whether a high measured latency value to a particular trading venue can be eliminated by moving your strategy closer.
Conversely, if total latency is high but the network contribution is low, then the problem is due to application performance and eliminating network latency will bring no advantage.
Exchange-Side Latency Monitoring and Transparency
Latency within exchange systems is unavoidable, even to traders who are co-located, most will not be concerned so long as levels are low and affect everyone equally.
Exchange-side latency monitoring aims to provide the following views to the co-located trader:
Latency across different trading sessions, to verify equitable trading speeds,
Latency broken down by security/symbol, providing insight into performance in different parts of the market,
Latency for different order types and interaction styles, allowing impact on different strategies to be compared.
The required views can be assembled by continuously monitoring request-response and trade-to-tick latency at the edge of the co-lo installation. Results can be collected for every order/interaction and then classified according to trading session, traded security and request/response type to provide the above breakdowns. Producing results in real-time is an advantage, as they can be used immediately to move order-flow to faster sessions, or adapt strategy behavior.
Implementing Co-Lo Latency Management
A dedicated system for co-lo deployment must be compact and efficient in terms of power and space requirements. The best solution will be one that supports all of the use cases discussed in this article on a single platform. To achieve this, key system capabilities should include:
Accurate measurement of microsecond intra-co-location latency, with the ability to decode and track complex business logic in multi-protocol environments.
The ability to monitor the latency matrix for both market data and order-flow traffic between multiple venues and co-lo sites, including self-synchronization support for sites that don’t have external clock-sync infrastructure.
Comprehensive transactional latency measurement for order-flow traffic, including support for order-to-acknowledgement, order-to-fill, tick-to-trade and trade-to-tick latency.
Built-in support for low-latency network monitoring, including detection of microbursts, sequence gaps, bandwidth requirements, and one-way and round-trip network latency.
To support operational alerting and trading functions such as smart order routing, the latency management system must be able to present its data in real-time. In today’s environment this can mean producing and classifying real-time output for millions of messages per second so performance and scalability are therefore key.
Further Reading: this article is an abridged version of the Corvil whitepaper, Latency Management For Co-Location Trading, which discusses these benefits in greater detail. Click here to read the entire paper.