Importance of Execution Speed in Cross-Exchange Order Execution
Summary:
- The traditional finance trading technology has evolved from a simple electronic order book to an ultra-fast, interconnected, AI-supported unified liquidity, allowing investors and institutions to facilitate advanced trading strategies.
- In traditional finance, professional traders utilize low-latency internet connections and servers close to the stock exchanges to gain advantages.
- Latency is one of the biggest bottleneck to achieve unified liquidity in the cryptocurrency space and there are six leading causes that can affect cross-exchange order execution latency times.
- In cross-exchange order matching, high latency can result in a high order cancellation rate, making trading inefficient and exposing the infrastructure to financial risk.
- FLUID’s infrastructure will allow connecting to liquidity in multiple ways and match cross-exchange trades using its owned liquidity.
Trading technologies have evolved significantly over the years. The traditional finance trading technology evolved from a simple electronic order book to an ultra-fast, interconnected, AI-supported unified liquidity, allowing investors and institutions to facilitate advanced trading strategies. These strategies engage powerful computers and servers and the fastest connectivity technology to trade large orders at extremely high speeds. Due to the ultra-fast capabilities of these solutions, liquidity aggregators can almost instantly facilitate cross-exchange orders. They can use advanced hedging techniques to minimize the potential financial exposure in case of order cancellation or connectivity issues.
For cross-exchange order execution, fast architecture and connection speeds are essential. In traditional finance, professional traders utilize low-latency internet connections and servers close to the stock exchanges to gain advantages.
In high-frequency trading strategies, milliseconds decide if the trading strategy will be successful. Due to this fact, traditional financial institutions have invested a significant amount of time and effort on building the fastest, smartest, and most secure liquidity aggregation solutions that can route orders across the market in the most efficient way.
Understanding Latency
Latency can be best-described as the time interval between any two points in trading infrastructure. For example, in cross-exchange matching, latency could be defined as the time the matched order needs to take to be routed to the exchange and executed. In cross-exchange order matching, high latency can result in a high order cancellation rate, making trading inefficient and exposing the infrastructure to financial risk.
There are six leading causes that can potentially affect cross-exchange order execution latency time:
- Slow software and infrastructure of an exchange
- Inefficient order routing infrastructure
- Transmission media such as WAN or fiber optic cables
- The physical distance it takes to travel from one source to another
- Routers take time to analyze information (Each hop information taken from router to router increases latency time)
- Intermediate devices like switches and bridges can also result in delays
Trade execution latency is vital for settling trades across external infrastructure components. Unfortunately, latency is one of the biggest bottlenecks to achieving unified liquidity in the cryptocurrency space.
Cryptocurrency liquidity is fractured across the whole blockchain landscape. It is fragmented across multiple chains, centralized exchanges, liquidity pools, user wallets, decentralized applications, smart contracts, crypto-fiat gateways, and more. Almost all liquidity sources are standalone islands on the liquidity map. Most current liquidity transmission pipelines are slow, expensive, or require manual processing to move liquidity across the ecosystem. This is a natural occurrence in what is a new and developing space.
However, there have been multiple efforts in building infrastructure that unifies liquidity across cryptocurrency. Most of them have relied on connecting buy and sell orders from two liquidity sources by introducing architecture, allowing routing of orders using predefined rules to execute in the fastest and most efficient way. Cross-exchange order matching engines are simple in assumption but challenging to achieve in the current technological state of the crypto industry.
Smart Order Routing
Although the concept behind smart order routing is a straightforward process, it is nevertheless complex. A smart order router is an automated order matching process that follows a set of rules to find the best way of executing a trade, taking advantage of opportunities across a range of liquidity sources through advanced algorithms.
In traditional finance, SORs were first used as a solution in the equities market, but they are now an integral part of most trading platforms across all asset classes. Smart Order Routers serve users and institutions to analyze the different offers and execute orders based on the best available option. However, since the basic concept behind order routing is to take an order from one venue and execute it against an external liquidity source, there are certain challenges to overcome for an efficient order routing infrastructure.
Cancellation Problem
Whenever an order is routed for an external execution, it must travel a physical distance from the initial point to the destination, where it is executed. Each stage of the order execution process takes time. Placing the order, checking for potential execution internally, routing the order, sending the order to the external venue, and final execution, all take time and increase execution latency. During this time, a user who has placed an order might not want to wait and can already decide to cancel it. This creates a problematic situation where an executed order could be already canceled on the initial exchange but the information is received by the exchange with a delay of just nanoseconds.This exposes the routing infrastructure to financial risk. Without implementing mechanisms dealing with latency and order cancellation issues, the whole routing infrastructure would not be usable, especially nowadays, when institutions use high-frequency trading strategies to process thousands of transactions per second.
Cryptocurrency Liquidity Aggregation Landscape
In comparison to traditional finance, blockchain-based finance infrastructure is significantly slower. The number of transactions per second and execution time cannot compare to the more mature centralized finance technology. Even though blockchain technology is developing rapidly and allows for the processing of remarkable amounts of transactions, it is still too slow to facilitate advanced trading strategies institutional clients employ. The diminished blockchain transaction capacity is one of the hurdles keeping institutional players from crypto, and keeping that in mind, a specific approach must be taken when building the cross-exchange order matching infrastructure.
FLUID’s Vision
The FLUID team has spent years in traditional finance, working on various aspects of trading execution, besides advising projects on liquidity aggregation in DeFi. Currently, and based on extensive market research, most blockchain-based projects that claim to allow cross-exchange execution are not efficient enough to deliver solutions that meet the user’s requirements.
In addition to cross-exchange infrastructure that will route orders across the fragmented market, FLUID will also have its own liquidity to execute orders instantly. By leveraging vast industry experience, FLUID will build AI and machine learning trading systems to hedge its routing infrastructure financial exposure.
FLUID’s infrastructure will also allow connecting to liquidity in multiple ways and will match cross-exchanges trades using its owned liquidity. It can route the trade to execute it against another liquidity source or place the order in the internal order book. The whole solution will be augmented by a unique token economy model allowing $FLD token holders to be incentivized for being a part of the FLUID ecosystem.
