05/04/2023 In liquidity provision, a split-second can make all the
difference. The speed at which trades are executed can determine whether they succeed or
fail, and the consequences of adverse trading outcomes can be significant. In some cases, if
firms are particularly egregious in their ability to provide low latency liquidity, they can
even incur serious legal penalties, such as the $2 million fine imposed on Deutsche Bank in
2022 by FINRA. Therefore, best practice on latency is crucial, which is why liquidity
brokers must ensure that their systems can handle even the most sudden and dramatic changes
in market conditions. In this article, we will explain how adherence to best execution
practices must include sophisticated technology and monitoring systems to optimize speed and
minimize the risk of latency-related issues. We will also explore the challenges of
providing liquidity in a fast-paced market and the importance of staying ahead of the curve
regarding latency management. Antony Parsons, Head of Liquidity at Finalto
and expert on best-execution practice states, “We strive to ensure that every order
processed through Finalto’s systems is sent through as fast as possible to minimize slippage
and the possibility of order rejection.” For any liquidity broker, providing the
fastest possible execution of trades to its clients is a cornerstone of exercising best
practice in the sector. It is crucial for such a fast-moving trading environment, where
milliseconds can make a difference between positive or negative trading outcomes for end
users. If a liquidity provider’s systems are slow, they risk losing clients to more robust
and reliable liquidity brokers, making minimising latency a crucial aspect of remaining
competitive. Parsons elucidates, “because client technology is becoming
so sophisticated, to the extent that updates happen every microsecond, the ability to
provide the most frequent and timely data is invaluable to our end users.” As trading
technology advances, clients expect more frequent and up-to-date data. This places
additional strain on liquidity brokers’ systems, making it more challenging to provide
low-latency execution and optimal client outcomes. At the crux of the sector, one of the
main challenges that firms face in the liquidity space is an increasing volume of updates
and order flow in key junctures of market movement. The more updates that need to be
processed, the more strain on a liquidity provider’s servers. If a liquidity provider’s
servers cannot handle the increased volume of updates during market events, it can lead to
latency or even system downtime, severely damaging brand equity and reputation. “Liquidity
brokers must ensure that their systems can handle high volumes of updates, especially during
market events that can trigger a surge in trading activity,” stresses Parsons.
For example, he explains, “if there is a news announcement that provokes a large volume
of flow, you need to ensure that your technology is robust enough to handle as many updates
as possible.” At Finalto, there are a number of agile and versatile tracking
information systems to help appropriately allocate server capacity to handle high volumes of
updates during market events. This helps to minimize latency and ensure that orders are
executed as quickly as possible. “At Finalto, we have real monitoring and alerting
systems in place to help allocate server capacity dynamically according to which liquidity
pools are undergoing the most strain,” Parsons notes. It is because
the impact of latency and speed for liquidity provision is so important, liquidity brokers
must ensure that their systems can handle high volumes of updates and provide low latency
execution to remain competitive in today’s fast-paced market. Finalto’s commitment to
setting an example for best practice for low-latency execution is ongoing. Parsons
concludes, “Finalto is continually endeavouring to ensure our execution speed is
optimal. We make sure our liquidity is sourced from reputable providers with robust systems
and invests in hardware and network controls to minimize latency. In addition, Finalto’s
systems are built on strong fundamentals of backdated testing and analysis to keep up as the
market evolves.” If you would like to find out more about brokerage best practice, you
can visit the Finalto Brokerage Series
here.
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