Summary:
- Latency refers to how quickly data can travel across various platforms, significantly affecting how quickly traders can place their buy and sell orders
- In traditional finance, professional traders utilize low-latency internet connections and servers close to stock exchanges to gain advantages
- Cryptocurrencies are digital and can cause significant market volatility, making latency more crucial than ever
Retail traders and point-and-click traders predominated the early cryptocurrency markets in a significant way. As markets evolved, more seasoned competitors entered the fray. The TradFi industry strongly emphasizes systematic and algorithmic trading, and the same approaches are now used across the rapidly expanding crypto industry. Technology is ingrained in the DNA of these companies, and trading and speculation are commonplace.
As speed is the most important factor in the execution of a deal, latency is a critical factor in algorithmic trading. Due to the competitive rates for trade execution, it has become essential to offer low latency solutions. Unfortunately, this lack of infrastructure makes it difficult for many businesses to enter the market. As a result, the advent of low-latency solutions made it easier for experienced market players from traditional markets to enter the crypto industry and enhance its fundamental quality by increasing market fragmentation and liquidity.
What is low-latency?
Latency refers to how quickly data can travel across various platforms, significantly affecting how quickly traders can place their buy and sell orders.
The concept of latency is fundamental in the digital age. Data can be sent more rapidly when there is low latency and more slowly when there is high latency. Naturally, high and low are relative concepts, and as technology advanced, most of the internet began to move toward lower latency levels.
Low latency is crucial for online systems that demand precise timing, including competitive gaming and trading. Online traders want to submit their orders as soon as they click the confirm button, if at all feasible. The price of the asset they are dealing with may decline further as the delay increases and may negatively impact how the approach is implemented which is not desirable.
Is this different for crypto exchanges?
In the volatile world of crypto, every second is crucial. Cryptocurrencies are digital and can cause significant market volatility, making latency more crucial than ever. Currently, volatility translates into changes in values within milliseconds. This makes latency critical in the world of crypto. Furthermore, integrating institutional money onto these platforms will require incredibly low latency.
Lack of standards or standardization causes consumers to experience additional latency problems on exchanges. While some exchanges are slow, others may have excellent infrastructure and speed. As more traders use numerous platforms, especially arbitrage traders looking to make money from price differences between marketplaces, this might become problematic. Because they don’t endure very long, low latency is necessary to take advantage of these possibilities.
These performance issues not only affect individual human traders. Institutional investors are currently breaking into the cryptocurrency space, and if this trend continues, there will need to be platforms that can cater to high-end users. Institutions are already expecting the best and fastest services, and only platforms that offer this will be able to attract their business. This is partially due to algorithmic trading — a trading method that is now popular in the world of digital assets. In this case, transactions are done by computers that are programmed to use particular tactics. Speed has always been crucial to beating the competition when dealing with humans, but automated transactions have taken it to the limit and given rise to high-frequency trading, or HFT.
What is high-frequency trading?
High-frequency trading is the name for systems that employ algorithms to execute deals autonomously while also reacting to market opportunities that may last for only a few milliseconds at a time.
Crypto trading automation is not a novel concept but it is simple to understand how the characteristics of these assets make this approach appropriate. For example, in addition to being volatile, cryptocurrency exchanges run round the clock, giving traders a solid incentive to take a mostly hands-off strategy and let the algorithms handle the trades. This isn’t magic; of course, traders must still ensure that correct methods are put into their systems and monitored so they can be adjusted if market conditions alter.
How is this changing cryptocurrency?
While many agree that reducing latency increases market efficiency, others argue that HFT offers some participants an unfair advantage.
Lower latencies will undoubtedly shape crypto markets, but not everyone agrees this is good progress. Many claim that increased speeds only improve the effectiveness of price discovery in marketplaces. Theoretically, since trades move more quickly and there is more competition, markets should be able to pinpoint an asset’s true price more quickly than before. While it’s correct that this can cause extremely high volatility in the near term, most investors anticipate it will stabilize as the size of these markets continues to increase.
However, there may be a drawback in that it can exacerbate the level of unfairness in the field of play. Most people cannot afford the quickest internet connections, let alone sign up for a colocation account. The costs will probably reflect that both top-tier internet and colocation accounts are often targeted at professionals. This results in the all-too-common financial problem where those with more money are given even more opportunities to advance, leaving those with less money even further behind. This is not the intent behind the creation of cryptocurrencies, but it is perhaps an outcome of a free market.
Ultimately, it is doubtful that average internet speeds will drop soon. Thus, in the upcoming years, a growing number of people should have access to progressively reduced latency.
Why is achieving low-latency critical for cryptocurrency exchanges?
Achieving low latency is critical for cryptocurrency exchanges for several reasons:
- Competitive Advantage: In the highly competitive world of cryptocurrency trading, having a faster trading platform can give an exchange a significant competitive advantage. Traders are often looking to execute trades quickly and take advantage of market movements, and a low-latency exchange can provide them with the tools they need to do so.
- Increased Liquidity: A low-latency exchange can attract high-frequency traders and market makers who rely on low-latency trading systems. These traders can increase liquidity on the exchange, making it easier for other traders to execute their trades.
- Reduced Risk: In the fast-paced world of cryptocurrency trading, delays in order execution can result in significant losses. A low-latency trading platform can help reduce the risk of these losses by ensuring that orders are executed quickly and accurately.
- Better Customer Experience: Traders who are able to execute trades quickly and efficiently are more likely to have a positive experience with the exchange. This can lead to increased customer loyalty and repeat business.
- Regulatory Compliance: Many regulatory authorities require cryptocurrency exchanges to have low-latency trading systems in place to ensure fair and transparent trading practices.
Achieving low-latency is critical for cryptocurrency exchanges to remain competitive, attract high-frequency traders, increase liquidity, reduce risk, provide a better customer experience, and comply with regulatory requirements.
The vision of FLUID
The FLUID team has years of experience in conventional finance, where they worked on various trade execution-related projects and provided project advice on liquidity aggregation in DeFi.
FLUID will feature instant order execution liquidity and cross-exchange technology that will transport orders across the fragmented market. FLUID will create AI and machine learning trading systems by utilizing its extensive industry knowledge to ensure the financial viability of its routing infrastructure.
The architecture of FLUID will link to liquidity in various ways and use its liquidity to match cross-exchange deals. Either the order will be placed in the internal order book or routed to be executed against another liquidity source. In addition, a novel token economy mechanism that enables $FLD token holders to be rewarded for participating in the FLUID ecosystem will supplement the solution.
