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Addressing the need for speed

Posted: 10 November 2010 | FX-MM | No comments yet

While technological advances have literally transformed the world of forex trading over the past decade, increasingly the focus is on shaving fractions of a second off execution times to make trading faster and more efficient than was ever possible before, writes Tim Håman, CEO of Fair Trading Technology.

While technological advances have literally transformed the world of forex trading over the past decade, increasingly the focus is on shaving fractions of a second off execution times to make trading faster and more efficient than was ever possible before, writes Tim Håman, CEO of Fair Trading Technology.

While technological advances have literally transformed the world of forex trading over the past decade, increasingly the focus is on shaving fractions of a second off execution times to make trading faster and more efficient than was ever possible before, writes Tim Håman, CEO of Fair Trading Technology.

When you talk about technology in the foreign exchange market, at the end of the day, it all comes down to milliseconds.

Significant resources are being spent on reducing the amount of time it takes traders to reach the market, all because of technologies that have completely transformed the world of forex trading over the past decade. ‘Time is money’ may be a bit of a cliché, but increasingly this time is measured in fractions of a second that make the blink of an eye seem like a long time. As this current decade progresses, the goal is to reduce this time even further, to the point that speed is no longer an issue at all and ‘slippage’ becomes a virtually meaningless term.

To say that technology has changed forex trading would be a gross understatement. It was only 10 or 15 years ago that currency trading was the exclusive domain of big players, where $100 million was the minimum to even be able to enter the market. As financial barriers to entry lowered, technology also started to create a new segment of the forex market: retail trading. While it began in the second half of the 1990s, it wasn’t until the early 2000s that software platforms were developed that started to make these markets accessible to a wider trading community, with the biggest breakthrough coming with the 2002 introduction of MetaQuote’s MetaTrader platform. As such, automated trading was brought to the retail sector. With the release of MetaTrader 4 in 2005, more and more of the market moved to digital transactions, requiring less need for human intervention. This was the real birth of the retail market and the cutting edge of major changes in the market at the hands of technology.

With this new base for trading established, the biggest advances that technology can now offer to forex trading are in the area of speed – how quickly it can allow a trader to get to the market. As any trader can attest, speed equals advantage, which is increasingly where every millisecond counts.

If we look to the fully digital stock market though, even milliseconds are becoming irrelevant. Trade times are now measured in microseconds. In early October, the London Stock Exchange set a new bar for speed, announcing that trades on its Turquoise trading platform take place in just 126 microseconds. To put that in perspective, a human eye takes on average 300 milliseconds to blink. In that same amount of time, the LSE’s platform can complete almost 2,400 trades.

Those kinds of speeds are not yet possible in the world of forex trading, if for no other reason than the layers of participants required to complete a trade. Currently, for example, a typical forex trade could go from the trader’s terminal to a MetaTrader server, then to a bridge and to an ECN before reaching the market, where it is executed and then returns the same route in reverse. The entire process can take 600 or 700 milliseconds. While that is by no means slow, the goal over the next five to ten years is to significantly reduce this amount of time, bringing it down to micro- or even nanoseconds. The question is, ‘how do we get there?’

In the past, the biggest leaps in technology came with the development of increasingly powerful and more efficient processors. To this day, the financial market is one of the key sectors targeted by chip manufacturers when developing the next generations of newer, faster processors. But in reality, the speed of development across the whole technology industry is starting to slow. Moore’s law, which states that the computing power of processors will roughly double every 18 months, is still applicable, but we are starting to get to the point where the timeframe is beginning to be stretched – even by Moore’s own admission. Raw power in a single processor, while still important, is being increasingly replaced by multiple cores within the CPU, substituting brute strength with an ability to execute more tasks at once.

Even with fast processors, unless the operating system and trading platforms are optimised to fully take advantage of them, the speed and efficiency of the whole system will be limited. MetaTrader 4, while revolutionary when it came out, is a singlethread application, meaning that it is only capable of processing one order at a time. You can have as many processor cores as you can afford, but MetaTrader 4 is programmed to only use one of them. If there are too many orders, a queue will form, delaying each one and increasing slippage. Things are changing with MetaTrader 5, which will bring a multithread server solution, able to deal with many orders at the same time instead of oneby- one. This itself could significantly improve the time it takes to complete a trade.

Another key to improving both speed and efficiency is to move as much of the trade into cloud computing as possible. For example, instead of running a bridge on one server and a MetaTrader server on a separate one, both can be operated on a virtual server, meaning both are housed inside the same server, being executed by the same CPU. So when one server has to talk to the other, it can be extremely fast since the same CPU is computing for both, accessing the same memory and disk. There is no need to go to the network, let alone a second server. Milliseconds can therefore be reduced to microseconds. Overall efficiency is also greatly increased, as the server is able to use around 80% of its capacity at any one time instead of the typical 5-15% seen in standard, stand-alone servers.

Operating in tandem, the increase in computing power, optimised platforms and more efficient grids of cloud computing will significantly reduce the amount of time it takes to execute a trade in the coming years, bringing a trader to the market faster with less risk of loss due to slippage. It’s not hard to imagine that at some point in the future, the race for speed will end – when the time it takes to execute a trade is no longer limited by technology, only by physics and the speed of light – but we’re not there…yet.

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