What Is Latency and Why Is It so Important?

Day-traders who handle large quantities of cryptocurrency often find themselves searching for an exchange that has one particular feature:  low latency. In trading terms, latency means how fast a person’s trading bot can react to the current state of the market. Trading bots are specialized programs designed to buy and sell assets within a minuscule period (generally less than a second). If an exchange has low latency, it means that trading bots can react faster to the actions of the market. Day-traders who take part in this sort of activity are often looking for low latency of between 10 milliseconds to 0.1 milliseconds. Due to the rapid nature of all markets, traders found that there is a significant amount of money to be made by buying and selling in milliseconds. Of course, only machines can reliably trade with that sort of speed.

For low latency trades to be lucrative and worthwhile, users need an exchange that can handle such speeds. A latency of 1 second or more is not considered low latency, and to some, even 300ms (0.3 seconds) is slow. Anything around 0.5ms is considered good for trades, but this is somewhat rare to find. Most cryptocurrency exchanges are not designed for low latency trades, which leads people to develop their own programs and software to facilitate submillisecond transactions. These programs can be hit-or-miss. Sometimes they work perfectly, and sometimes they don’t even function at all.

What the cryptocurrency market needs is an exchange which has built-in low latency capabilities. Right now to perform low latency trades in the cryptocurrency market, you need to have at least a basic understanding of programming so you can implement extra software. If an exchange made this functionality accessible, it would open up this type of trading to more people and make the act of low latency trading more available.

For low latency trading to be truly useful, people also perform ‘high-frequency trading,’ which is the act of buying and selling the same asset hundreds of times within an extremely short period. Doing this throughout a few hours or an entire day is an effective way of making money as a day-trader. High-frequency trading is only possible when there is a low latency on the market. The lower the latency is, the higher the frequency of trading there can be.

In the stock and FOREX market, neither low latency or high-frequency trading is much of a concern because many exchanges already provide the services. Right now, most cryptocurrency markets don’t. In some ways, this is quite a hard task for the industry. For an exchange to offer high-frequency trading they must have enough of an asset to provide at least 1 million trades per second. This already means that most small exchanges are unable to do so, but this is entirely possible for large exchanges. Once we start to see large exchanges offering this, the market will be one step closer to gaining the same respect that other asset classes enjoy.

 

Kai is a cryptocurrency copywriter and professional trader. He can often be found investigating various cryptocurrencies, whitepapers, and blockchain technologies. Kai has been a professional writer for 5+ years, and has invested in 50+ different coins and tokens. He also currently studies Law and Philosophy at university.