Zero Latency: The Next Arms Race

no speed limitIn the near future, your company may be competing with a computer.

In fact, companies with the fastest computers, most sophisticated algorithms, technical know-how and most complete data sets will begin to separate themselves from competitors. In a world where milli-seconds will make or break your company, how should you best prepare for this new arms race?

Zero latency is all about reducing the time between when an “event” occurs and subsequent action from your company. GPS phones, sensors and real-time analytics are just some of the technologies allowing businesses to sense and respond to changing market conditions in shorter intervals of time.

Let’s look at the world of high frequency trading (HFT) for a preview of a zero latency future.

In a gross oversimplification of a very complex topic, high frequency trading is a strategy where financial companies purchase ultra-fast computers that execute trades autonomously. By subscribing to data feeds from stock exchanges and other sources, these companies often use algorithms to analyze data (voice, video, html, stock quotes etc.) as they pass by and then execute an instruction (bid/offer) for a security. The capture of data and analysis is completed in milli-seconds.

In fact, for HFT speed is of the essence. To make a trade faster than competitors, some companies have seen fit to place their servers directly on the floor of the stock exchange—effectively giving them a direct pipe into the trading platform.

A Traders Magazine article notes that many HFT firms use, “chips designed for video games to more quickly process the market data that enters their models.” The same article also mentions that, “some (HFT) firms are investing $2m every other month on new servers.”

HFT companies are actively scanning multiple data feeds for anomalies, detecting events in real time, and then executing based on predefined business rules. In this new arms race, to make money, HFT companies have discovered that zero latency wins the day. In other words, high frequency traders know they must be milli-seconds ahead of their competition in transforming data streams into actionable insight.

And while HFT is all the rage in financial circles, it’s not far fetched to see how in other industries, the ability to respond faster—to customer needs or changing events is conferring competitive advantage. Some examples:

  • Netflix’s Cinematch algorithm serves up movie recommendations in real time, based on subscribers past rental history and movie ratings. The right recommendation keeps customers satisfied and inventory turning.
  • Airlines often reroute flights based on weather events in real-time, making sure connections are not missed for their most valuable customers.
  • Overstock.com sends out 25 million event-driven emails each week (each with a dozen personalized recommendations) to over 300 customer segments. Campaigns go out daily, whereas some marketers take weeks to build a campaign.
  • And of course, Google serves up real time recommendations (advertisements) in milli-seconds based on your browsing history via cookie and search input

Zero latency means much more than making a fast decision. After all, making a poor decision—faster—isn’t going to help a company win market share.

While companies rapidly upgrade their analytical infrastructure and clean their data, they must also have the right talent in place to constantly tweak and keep their algorithms and models current. That said, in some cases these algorithms will actually “learn” from their successes/failures and improve, without human intervention.

Thoughtful analysis of changing market conditions is a mainstay of successful companies. However, in the near future, some analysis (based on quick correlation) will no longer take days and hours—it will be done in milli-seconds.

In a fast paced global economy—in most instances—latency in decision making will not be your friend. The best execution will be based on collecting and analyzing data and then acting faster than the competition. Is your company ready for a zero latency future?

  • Advances in hardware technology and advanced analytical applications make zero latency possible. Will small to medium size companies with lower IT budgets be able to compete? Is this fair?
  • What impact will a zero latency future have on the skills marketers need to effectively compete?
  • With advent of Smartphones and location based services, accurate behavioral targeting will be a key beneficiary of “zero latency”. Is a Minority Report future that far away?
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3 comments

  1. Hello! Do you use Twitter? I’d like to follow you if that would be okay.
    I’m absolutely enjoying your blog and look forward to new updates.

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