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The Stock Market, High Frequency Trading, and Lower Latency At Any Cost

By | January 28, 2021

 

We spend a lot of time at Zenlayer talking about ways to reduce latency – it’s literally our business, after all. But I have to be honest with you. While we go to a lot of effort to give our customers and their users the best experience possible, there is one group that puts even our efforts to shame: high frequency traders playing the stock market.

There are a lot of industries for which low latency is important: gaming, online education, streaming, etc, and we serve all of them. But after a certain point, the costs of reducing lag by another millisecond far outweigh the gains in user experience… usually. Not so for the traders who make millions and billions on trades taking place within fractions of a second.

The race to get a jump on other investors has been going on for centuries. Where once couriers and carrier pigeons eagerly awaited boats at the harbor, fiber-optic cables are now the medium of choice. Fiber was quickly adopted by the financial industry when it became available, but even lightspeed isn’t fast enough when money is on the line. In pursuit of ever-faster trades, firms have been laying out big bucks for literally direct routes, even if that means laying new cable across oceans or tunneling through mountains.

Over the last week, however, another aspect of low latency has come to the forefront: processing power. High frequency traders are, as the name implies, trading at very high frequencies, and it’s almost exclusively via computer algorithm. That means servers processing huge amounts of data constantly. Then, when the algorithms determine there is profit to be made, the transactions must be put through immediately, which means connecting to the brokers’ servers, ideally in a very secure fashion.

Prior to this week, the amount of connections made throughout the day was (usually) fairly predictable. But as you may have heard, a group of “retail traders” (aka people who aren’t the usual stock market players), mostly from online forums like Reddit, used free apps to make transactions on a scale neither the apps nor Wall Street was prepared for. The result was outages for trading platforms just when interest was at its peak.

There are a lot of very interesting questions being asked about the situation, but what I’m most interested in is how this will affect circuit and server usage by traders. Will the free apps start offering premium server access for a price, both nearer to the exchanges and with guaranteed uptimes? Will demand for direct fiber routes skyrocket, either from the new apps, funds looking for an edge, or both? Or will regulators step in to create rules that strip away the power of lightning-fast trades?

Right now, no one knows where this is going, which is why it’s so very exciting. But if you’re looking at your own business and wondering how you’d handle a sudden surge of demand, well, I’d be remiss if I didn’t mention Zenlayer has an (affordable) service for that. Just don’t ask us to tunnel through the Himalayas. 

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