Quote from gmst:
Appreciate your response. It is clear that you find it useful for your trading and you have mentioned the reasons for it. However, it reads like a lot of hand-waving to me (no offense intended). Can you at least give one example of how having a low latency feed that saves you say 100/200 ms actually helps you in achieving better execution over time? I hope even one example will make the discussion much more concrete. Feel free to PM if you don't want to write about it here. Thanks.
That's a simple answer. The average retail trader is close to one full second behind the market and most retail shops (like the etrade & scottrades of the world) don't even supply a full book, meaning they only subscribe to a partial market data feed so your data is both late and not complete. I mean one second from the time the exchange records the record to when it hits your desktop.
It isn't just about a low latency feed. Half of what I do is clean up networks so that they are efficient enough to deliver feeds on time. For example, a burst of market activity can overcome the buffer (if any) on your network card which would then push the data into the machine's cache... if you are paying thousands each month using a cheap router or network card can ruin your data feed.
Most individual traders and even in the small hedge funds that I see all have stuff like iTunes and screen savers or desktop wallpaper installed as well as a slew of other stuff almost like downloading too many aps on your new iPhone and slowing it to a crawl.
I know clearinghouse specifically was asking about low-latency feeds so I won't go off on a tangent too much but my point is that the quality of the data as well as the infrastructure is equally important as the latency of the feed.
Getting back on topic and addressing how a low latency feed can help over time - the reason why I mentioned infrastructure is because most people willing to pay $2,500/month or more are going to do things properly: dedicated hardware, proper infrastructure, legit internet connection, decent router, etc. If you are trading on your $1,000 laptop why would you ever pay $2,500++ a month on a data feed to drive laptop data?
As clearinghouse said, he drills down to the market micro structure. If you have poor infrastructure then during fast moving markets or bursts of activity your data will be delayed and you will drop packets whether it be held up or dropped locally by you or held up & dropped by your service provider at their syndication servers. Over time this is when entries, exits and stops are usually hit. As the data comes out it is essentially delayed or not complete (dropped packets) so as you enter, exit or approach a stop you are doing so with incomplete market data. Trading over time based on inaccurate or incomplete market data can hurt a strategy.
Most of the time when you hear traders say things like "why didn't I get filled" or "why was my stop hit (or not hit)" during those times the market is moving quickly and you are caught on your heels - you are never trading proactively, you are trying to figure out what just happened and trying to minimize the damage. You have two choices, either change your strategy so that your entries, exits and stops aren't impacted by faster moving markets or spend up for the complete picture of what is happening. It can be as small as realizing you need to be more or less aggressive on your pricing or even something as little as changing size. Many traders find (speaking from personal experience) that a certain order size is more or less likely to be filled. If you have the tick by tick you could read the tape and see that every 100 share order got filled but your 200 share order didn't or that the book keeps getting swept up/down three cents not four... so your bid/offer just matched the new NBBO but didn't get filled.
It's as simple as whether or not you want to be trading based on complete information or only a partial picture.
The good news about doing nerdy IT stuff is I can type lengthy replies like this at 2am while I wait for servers to rebuild... bad news is that something broke in the first place.
