by Barry Bahrami of Commercial Network Services
Latency is arguably the most important and often disregarded factor for the online trader. It is often neglected because it sounds like a complicated computer term, but understanding what it is can quickly and substantially increase the trader’s earnings. Computer networks communicate by sending packets of data through the Internet. Latency is the time required for data to travel from the source to destination network. It is measured in milliseconds, or 1/1000th of a second.
It is a public misconception that everyone enjoys the same Internet. Data traveling over the Internet can be compared to delivery vans on the road carrying packages to their recipients. The recipients of the packages are all over the world, and so some delivery vans must travel a lot farther than the others in order to reach their recipients. Some experience delays due to detours and traffic jams. Others experience lost or damaged packages and need to restart the delivery again at the expense of time. The delivery van that travels only a city block or two will get to the destination first and with little chance of damage to the packages. This is because the other delivery vans travel hundreds or even thousands of miles farther to reach the destination, which increases the time required to deliver the package and likelihood of a problem or detour along the way.
With online trading, latency is even more crucial because data must travel round trip to make a single transaction. That is, a price quote must travel from the broker’s server to the trader’s VPS to be processed and then the data must travel the same distance back to the broker’s server to enter or adjust an order. Since the market waits for nobody and will continue to move while price quotes are in transit, the trader with the lower latency VPS will always have a more true and real-time reading of the market then the trader with a higher latency VPS. If the market is volatile and latency high then the price quote may not be “fresh” when it is finally received by the recipient.
The financial advantage of a low latency VPS over any other VPS can be staggering to the trader. To understand why, we only need to adjust our previous example to better reflect the real chain of communication in an online trading scenario. That is, data must travel from the broker to the VPS and back to the broker.
Imagine two traders; one is located in an office two city blocks off Wall Street and the other in a costume shop 880 miles away in Atlanta, Georgia. Both are using the same NYC broker. For the purposes of this illustration, imagine the price quotes and orders are sent by taxi from the broker to the trader and back.
For the first trader in NYC, the data must only travel from the broker down the street two blocks. That trader then sends the taxi back another two blocks with instructions for the broker to open or edit an order.
Although both taxis left the broker at the same time, the second trader will not receive their same price quote before the first trader has already sent their taxi back and entered an order with the broker. This is because the second taxi must travel an additional 880 miles just to deliver the price quote – the first half of the round trip. It must then make the return trip back – all while the market continues to move during their journey to the destination. The first trader will have completed many round trips for every one made by the second trader. During periods of volatile market activity, the price quote received by the second trader may not even be current due to the longer time required to deliver data. Clearly, the trader only two blocks away from the broker has a tremendous advantage over the other nearly 900 miles away.
Although data really travels much faster over the Internet then cars do on the road, the distance data must travel and the time advantages are virtually the same in real world online trading. The result is that the trader closer to the broker will receive price quotes and execute orders significantly sooner and with fewer errors then any other trader, and always have the most current representation of true market conditions.
Yes, errors in trading. Higher latency connections are more prone to packet delivery delays and loss. It is a missed opportunity for the trading terminal every time the expert advisor receives a late packet or experiences connection problems with the broker due to the longer path the data must take through the various networks that make up the Internet.
The proof is in the results
If you think this is only theory then think again. The difference can be substantial and will vary with the strategy employed by the EA. Just how much of a difference can be demonstrated by reviewing the same exact EA to the same NYC broker from two different Commercial Network Services data centers, each located on opposite coasts of the United States.
On April 26, 2009, Commercial Network Services restarted all demo expert advisors at US$25,000 to better illustrate the importance of low latency to the online trader. In the most drastic example, the Bogie-NN-v8 expert advisor in the CNS NYC data center enjoyed a 284% larger profit than the same EA in the CNS SDCA (US west coast) data center to the same NYC broker. While the EA managed to earn a US$870 profit on a US$25,000 account after only 9 days from the US west coast VPS, the same EA with a low latency NYC VPS to the same NYC broker earned a US$2,475 profit during the same time period – nearly 3X more profit. The results continue to compound, and can be viewed in real-time on the CNS Top Expert Advisors page. The advantage in this example can be dwarfed by scalping EA’s, such as FapTurbo and Megadroid.
In reviewing the statements side by side, it’s easy to see how lost packets along the way and the higher latency from the increased distance can result in less favorable or missed trades. Every lost or delayed packet is a lost opportunity for the EA.
After reviewing the MT4 log details, William (Wackena) Boatright, the author of Bogie NN-v8 and 2nd place winner of the 2007 Automated Trading Championship said:
“I did not find reason for difference by reviewing logs. I was hoping to find login to server issues. If both demo are running on same server URL, the west coast demo did not see all of the same trade signals that NYC had. Only reason I can think of is server connection difference. I have not seen on my CNS vps, but on my local PC, MT4 terminal will lose connection to server without a log entry to ID. I manually login again and then MT4 terminal reconnects.
In another example, the advantage of a low latency VPS for EA’s that enter market orders can be realized. Reviewing the following Artemis Breakout statements side by side demonstrates price advantages for the lower latency VPS with market orders. The Artemis Breakout EA was started on April 30, 2009 in identical VPS’s within CNS data centers on opposite coasts of the United States. After just a few short days, the lower latency VPS is already securing better prices on executions over the higher latency VPS. Notice the time of the two highlighted orders are the same, but the lower latency VPS secured the better price for the market order. Indeed, the profits realized from the better entry prices will add up quickly.
ABO with NYC VPS to a NYC broker:
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ABO with west-coast VPS to NYC broker:
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It is also interesting to note in the ABO trades dated 09:25 and 13:06, the higher latency VPS appears to have secured the better price. However, this is really reflecting the movement of the market during the time required for the signals to reach the higher latency VPS and make the return trip back to the broker. In the trade dated 09:25, the market continued to move up with the trade, and so the higher latency VPS entered the order after the lower latency VPS. This demonstrates how the market will continue to move during the extended time the data must travel round trip to the trading terminal and broker. In this specific case, it worked out in favor of the higher latency VPS – but this can not be relied on for long term performance. Had the market turned quickly, the lower latency VPS will have been better able to respond quicker than the lower latency VPS. Scalping EA’s will realize the largest advantage in low latency trading.
What’s low latency to one VPS is not necessarily low latency to the other VPS
It is important to remember that latency is relative to the distance between the broker’s server and the VPS. The same east coast VPS can not be expected to perform nearly as well with a west coast broker, when compared to the same EA running in a west coast VPS.
How to use latency to your advantage
Most traders already have an account with a broker before they setup a new VPS. Since the location of the broker is known, the trader only needs to setup in a VPS that is located physically closest to the broker. The VPS that is physically located closer to the broker will have the least latency to that same broker. After the VPS is setup, the trader can transparently enjoy all the benefits of the low latency trading platform and not worry about it again. It is important to note that some brokers may give away a free VPS with a trading account, but these VPS’s do not necessarily have the least latency to the broker.
Commercial Network Services publishes latency to major brokers from CNS data centers in the Knowledge Base, allowing subscribers to setup or move their Trader’s Desktop to the data center closest to their broker. This document also contains information how to test the latency to your broker from any VPS or PC.
As you can see, latency matters! That’s why it’s important to chose a forex vps service that give you the lowest possible latency to your preferred broker!