In engineering terms latency is defined as the time interval between a simulation and a response. In quantitative trading it generally refers to the round-trip time delay between the generation of an execution signal and the receipt of the fill information from a broker that carries out the execution.3
Such latency is rarely an issue on low-frequency intraday strategies. The expected price movement during the latency period will not affect the strategy to any great extent. The same is not true of higher-frequency strategies where latency becomes extremely important. The ultimate goal in HFT is to reduce latency as much as possible to reduce slippage.
Decreasing latency involves minimizing the “distance” between the algorithmic trading system and the ultimate exchange on which an order is being executed. This can involve shortening the geographic distance between systems, thereby reducing travel times along network cabling. It can also involve reducing the processing carried out in networking hardware or choosing a brokerage with more sophisticated infrastructure. Many brokerages compete on latency to win business.
Decreasing latency becomes exponentially more expensive as a function of “internet distance”, which is defined as the network distance between two servers. Thus for a high-frequency trader a compromise must be reached between expenditure of latency-reduction and the gain from minimizing slippage.