What Is Latency in Trading?
The Short Answer
In trading, latency is the time between when you decide to place an order and when you learn the result of that order. It includes network round-trip time, exchange processing, and order book matching.
Why Latency Matters
In high-frequency trading, profits are measured in pennies per trade, and firms compete for the same opportunities. If your order reaches the exchange 10 microseconds faster than a competitor's, you win the trade and they don't.
Your firm: 50.0 μs → fills at the bid
Competitor: 60.3 μs → order rejected, price already movedTaking vs Making Liquidity
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Taking liquidity: you send a market order that immediately matches against an existing order. You "hit the bid" (sell) or "lift the offer" (buy). This removes liquidity from the book and typically pays a fee.
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Making liquidity: you send a limit order that doesn't immediately match. It sits in the book waiting for someone else. You "provide the bid" or "make the offer." This adds liquidity and may earn a rebate (payment for order flow).
Round-Trip Time (RTT)
The total latency is the round-trip time from your decision to your confirmation:
- Decision → 2. Encoding → 3. Network send → 4. Exchange processing → 5. Matching → 6. Network return → 7. Confirmation
Each hop matters. Professional HFT firms colocate their servers in the same data center as the exchange to shave milliseconds off the network.