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August 9, 2010

Scaling the New Bar for Latency in Financial Networks

by Brian Quigley

The bar for what qualifies as a fast connection or “low latency” networking has always been higher in finance than in other areas of corporate networking. It’s never been quite this high, however.

The increased use of innovative algorithmic-trading strategies has levied unprecedented pressure on financial firms to seek out and remove any possible delays that could threaten the successful execution of automated buy and sell orders. Significant time and resources are spent to achieve even modest, incremental improvements in latency at every point in the ecosystem of processes and systems that undergird algorithmic trading.

Managers of financial networks have found that the process of transporting data from one building to another is a common source of those delays. The fiber optic links between stock exchanges, alternative trading systems, colocation providers and information feeds all introduce additional latency into the system. Once, those amounts were deemed negligible — even in financial networking. Today, they are simply unacceptable.

Contemporary Trading’s Latency Intolerance

High-frequency trading (HFT) and other forms of algorithmic trading have emerged since the late 1990s. In all of them, a computer model has a predefined set of rules that automates the process of buying and selling. The computer receives various inputs from throughout the world (market data on price and volume, labor statistics, employment information, for example). The data is parsed and monitored in real time, and automated buy/sell decisions are executed according to how the model interprets the incoming intelligence.

Since the first trade to the market gets the best price, the delivery of a buy or sell order must be as fast as possible. Just a little more than a year ago, firms were concentrating on removing milliseconds from their network; today, a mere 250 nanoseconds make a difference.

The solution is not a matter of contacting the local phone company and deploying its most current high-bandwidth connection to the buildings that house an exchange. Even adopting the leading-edge, highest-speed model of router or multicore processor computer blades might not successfully address the financial world’s hypersensitivity to latency.

Traditionally, a firm has sought to improve its algorithimic trading processes by focusing first on the computer model itself. A lot of mathematicians have invested a lot of hours into tweaking the models that predict how the world is going to behave. Next, firms have sought to boost efficiency by optimizing the servers that process information against models, as well as the switches connecting those servers. More and more frequently, firms often locate or colocate clusters of computers in the financial exchanges themselves to root out proximity delays. Today, a firm’s various building-to-building transport connections are attracting attention from IT staffs.

It’s an entire ecosystem that must be optimized to wring as much latency as possible from algorithmic trading, and many financial firms now seek to take greater control over all of it.

From Buy to Build

Historically, when a financial firm required a connection between two buildings, it procured service from a phone company by ordering a circuit at a monthly fee, and the system would run through the phone company’s network, which typically would have some routing functionality for linking the two locations. Two key things have changed in the last few years.

One, algorithmic trading has crystallized scrutiny on the latency created every time traffic must pass through a router or take an indirect path to a central office. (It’s easy enough to quantify the sum of these delays; any member of the IT staff can look up the impact on the router.) Two, a combination of advances in optical technology that are specifically designed to eliminate latency, plus the lower costs and expanded availability of dark fiber, have enhanced a financial firm’s business case for building a dedicated infrastructure.

The performance gains are in the orders of magnitude — from 120 microseconds of latency for a carrier-provided service between buildings to 40 microseconds in a privately operated, optimized infrastructure. Service reliability can be enhanced with 24-by-7 monitoring predicated on the knowledge that 30 minutes of downtime to a financial firm can mean millions of dollars in lost revenue. The firm becomes more flexible to react and scale for new opportunities, as circuits can be turned up as needed. And it gains a path to continued innovation when partnering with vendors who understand the firm’s low-latency requirements and are under the gun to roll out enhancements to continually shave delays.

These developments have financial network managers asking, “Who can I partner with to sell me dark fiber, and what is the path that the fiber will take?” The ramifications of the answers are far-reaching. Financial firms must ensure that they are not sinking their money in a dark fiber route that snakes jaggedly under roads and up and down manholes, given the fact that eight inches of fiber can translate into a nanosecond of delay.

The next question is, “What is the latency of that path?” That answer demands an understanding of how optical transport works.

Getting into the Glass

There are four common optical networking functions where managers of financial networks often can realize game-changing efficiencies in latency budgets. When traffic beams across glass fiber, it encounters equipment that performs amplification, color conversion, dispersion compensation and regeneration. Each of these Wavelength Division Multiplexing (WDM) functions can be absolutely necessary to successfully carry out transport depending on the specific network environment, but each certainly also will inject some delay into the process. How much delay is something that financial managers must quantify and control if they are to squeeze every drop of latency from their end-to-end infrastructures.

  • Amplification — Optical networks frequently rely on Erbium Doped Fiber Amplifiers (EDFAs) to boost a traffic signal and offset the weakening that occurs across an optical span. Latency in the microseconds is the not-uncommon impact of the conventionally, widely deployed EDFA architectures. Consequently, financial networks supporting algorithmic trading must instead utilize emergent amplifiers optimized to yield lower latency.
  • Color conversion — In WDM optical networking, traffic is “transponded” — or, converted to a color of light — for delivery of a signal across a pair of glass fiber. Similarly, multiple colors of light are aggregated across a single fiber; multiple 10 Gbit/s services, for example, are “muxponded” into a single pair of fibers. Again, a financial network’s transponding and muxponding functions must be optimized for low-latency transport because conventional techniques such as Optical Channel Data Unit (ODU) encapsulation and thin film filters introduce too much delay.
  • Dispersion compensation — One of the ways that a traffic signal can degrade over the span of an optical link is “chromatic dispersion.” This is a phenomenon in which a signal effectively smears into a spectrum of hues, and it’s particularly common for data travelling at high speed. Installing kilometers of dispersion compensating fiber (DCF) has provided a remedy in some optical networks, but it’s not a wise approach in infrastructures supporting algorithmic trading. Latencies are too great. Optimized methods, like Fiber Bragg gratings, offer a low-latency alternative for counteracting chromatic dispersion.
  • Regeneration — Another method for preventing signal degradation over the course of a glass fiber connection is regeneration. Low-latency approaches to the function can help managers of financial networks claim significant efficiencies, because commonly deployed methods of regeneration produce considerable delay.


Contemporary finance is a race between markets. Firms are concerned with nanoseconds of latency in the processes and the systems that underlie algorithmic trading. Shaving eight inches of fiber equates to a one-nanosecond lead. Every element in a firm’s strategy is being evaluated for improvements, and optical fiber transport is targeted as a prime area for optimization.

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