Latency cost for Futures Traders Part 1
Futures traders might not be informed about the cost that arises from the latency (speed) of their execution. However, they pay a very significant cost even if they don’t utilize day trading, frequent buy and sells, or strategies that one might perceive to have on his/her strategies. The systematic cost associated with the latency cost could be significant and could turn a theoretical strategy, which is profitable to unprofitable in real life.
When you place a “Market Order” in the futures market, the price of execution (fill) could be very different from where you have observed the best bid/offer. This “slippage” has a tremendous effect on the bottom line of any strategy. Traders can place limit orders, however delays in placing, updating and cancelling orders could be a very costly effect as well. The speed of execution could add additional cost to futures trading.
Why would a trader experience delays in execution?
1) Geographic location (proximity to the exchanges)
2) Speed of Internet transmission (your ISP provider)
3) Hardware (your computer)
4) Server locations for the platform (data)
In the next section (part 2) we will address possible solutions to latency and execution.
Trading in futures and options on futures involves substantial risk and is not suitable for all investors. Past performance is not necessarily indicative of future results.