As we mentioned in our previous post, What is Colocation and How Can it Help My Business, Colocation is the practice of renting space in a data storage facility for your company’s servers. In that post, we detailed the reasons why everyday businesses who want to store and protect their company’s data can benefit from colocation services. These benefits include saving money on physical space, increased access to power and cooling, physical security, and more. For financial traders, colocation is especially important because it allows for high-frequency trading where fractions of a second matter. To find more about Colocation and Day Trading, the Perfect Pair, continue reading below.
What is High-Frequency Trading (HFT)?
High-frequency trading, or HFT for short, is a method of financial trading that uses high-powered computer programs to exchange a high volume of trade orders in fractions of a second. HFT is more technologically reliant than traditional trading. High-frequency traders use complex algorithms to analyze multiple markets and execute trades based on current market conditions. Generally, the traders with faster execution speeds are more profitable than traders with slower execution speeds.
Why does High-Frequency Trading Require Low Latency?
In the computing world, latency refers to the delay before a transfer of data begins following an instruction for its transfer. Latency is measured in the milliseconds of the Round Trip Time (RTT) required for a data request to be serviced. For traders, several milliseconds can equate to millions of dollars. Beyond trading, the internet world generally frowns upon latency. A study conducted by Google revealed that if a search request takes a half-second (500 ms) to yield results, there will be a drop in traffic of about 20%. While Amazon estimates every latency increase of 100 ms will lead to a 1% reduction in sales.
How Does Colocation Reduce Latency?
Colocation is a tangible solution for businesses to reduce latency in their day-to-day operations. Colocation reduces latency because workloads are closer to end-users. Latency is affected by several variables like available bandwidth, network congestion, network configuration, and more. However, the route taken by a transmission is perhaps the most important contributing factor to latency. An internet connection usually passes through 10 to 12 gateway nodes as packets are processed and forwarded from one router to another, which significantly impacts total latency. While there are plenty of solutions to increase efficiency, latency cannot be addressed without solving the number one problem associated with latency, physical distance. Data must abide by the laws of physics, so it cannot move faster than the speed of light. To send information from New York to San Francisco takes about 21 milliseconds, and there is no getting around it. Reducing the physical distance between a data source and its destination is the only sure-fire way to reduce latency, which is why colocation is so important to traders. Colocation (see our Texas colocation services) allows High-Frequency Traders to place their data source near the desired destination and therefore reduces latency.
To find out more about how colocation can benefit your business, click here.