The Next Frontier

Terry Flanagan

As increasing speed and lowering latency increasingly approaches the point of diminishing returns, some market participants are looking toward alternative avenues in their strategies.

With trade execution times measured in micro- and nanoseconds, market participants note that the race to zero is becoming more and more expensive. Some have now moved on from latency and are instead focusing on attaining better execution of their orders.

“While there are still some people continuing to pump millions of dollars for a microsecond, it gets to a point where returns are diminishing,” said Yuriy Shterk, vice president of product development at CQG. “You have to spend a lot more money to get another one percent. It’s getting to the point where very soon, traders paying for speed alone will not be able to recoup investments.”

Speed continues to be coveted by certain market participants, including those practicing high-frequency trading strategies. Exchanges have been implementing methods to offer low-latency execution as well, with the proliferation of co-location facilities at many venues, offering users nearly instant execution times. However, other types of traders are moving on from speed.

“Most of our clients are not only focusing on speed, but how can you make it smarter,” said Shterk. “That may come by paying attention to other markets, as well as looking at historical data and analysis. Being able to integrate aspects of where the market has been with where it is going. To decide where the market is moving. We are clearly seeing a trend of this move of ‘faster alone is not enough.’ You have to make it smarter.”

With the collapse of broker-dealer MF Global last week, more than ever traders are looking for more and better ways to manage risk.

“We’re being asked a lot about better risk management,” said Shterk. “They are looking for ways to provide pre- and post-trade risk management without delaying orders.”

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