The Cost Of Latency

Modern electronic markets have been characterized by a relentless drive towards faster decision making. Significant technological investments have lead to dramatic improvements in latency, or, the delay between a trading decision and the resulting trade execution. The authors of this paper describe a model that allows for the quantitative valuation of latency by considering a stylized trade execution problem. The model is surprisingly simple and provides a closed-form expression for the cost of latency, in terms of well-known parameters of the underlying traded asset. The method provides a useful "Back-of-the-envelope" calculation to assess the importance of latency.