Low-Latency Options Trading: Unraveling the True Meaning of Speed Executive Summary The key to understanding the term “low latency” is knowing that it can mean different things to different asset classes and can shift at each stage of the trading process. Options are not equities, and pricing analytics are not quote engines; the two shouldn’t be measured on the same scale. Case in point: Whereas most of the focus for reducing latency is on order execution in the equities markets, the options world presents a different story. A better definition of low latency at each stage of the

With few exceptions—namely market markers—firms trading in the options market are more concerned with the speed at which market data is received and disseminated, trading opportunities identified and validated, and orders generated than they are with sub-millisecond executions. It is true that some proprietary trading firms and market makers benefit from quoting milliseconds faster than their competitors, but even then it is just as much the speed at which they receive market data as it is reducing quote generation latency.

The obstacles associated with trading options at high speed are more than just speed bumps. Despite the innovative solutions that help all participants trade at the speed that best suits their strategies, implementing the technology provides obstacles of its own. There are a number of implementation options available, each of which appeals to a different segment of the market. The traditional build versus buy does exist, but it is the grey area between that presents the most questions.

Low latency is critically important in the options market, and in the coming years it will only become more so.  Latency is already being reduced at each stage of the trading process but at increments and levels of priority that vary by firm. Options pricing and analytics will be shaved from minutes to seconds, market data will be disseminated in single- rather than double-digit milliseconds, and trading opportunities will be identified and acted upon within microseconds. The timelines to reaching these goals, too, are constantly being shortened.

There is considerable room for growth in the low-latency options game. TABB Group estimates that in 2008 hedge funds and traditional asset managers in North America will spend a combined $253 million on low-latency options infrastructures.  By 2011, that number will jump to $305 million, a CAGR of 6%.  Vendors who are attuned to their clients’ specific needs and traders who truly understand where reduced latency will bring profits are the ones who will ultimately succeed. For those who are fast when and where it counts, the remaining latency will be low enough.

The TABB Group Report on Low-Latency Options Trading:
Unraveling the True Meaning of Speed

This report is based on conversations with hedge funds, sell-side firms and solutions providers focused in the options market.  Their unique vantage points create a holistic picture of trading options in today’s high speed environment.  The report outlines the cause and effect of a faster options marketplace, the available technology to manage that speed, and how different market participants utilize this technology to increase profits.