How Speed Became The Most Important Weapon in the Armory of Hedge Funds

Stock market trading has long ceased to be a sole battle of intelligence and anticipation. Today, hedge funds are more dependent on speed than ever before. Here’s how ultra-low latency and the need for speed became the most powerful consideration on Wall Street. 

With the capabilities of artificial intelligence and generative AI closing knowledge gaps across institutions, some 94% of sell-side firms and 80% of hedge funds currently highlight ‘speed of execution’ as the most important factor in achieving the best execution for trades. 

The global high frequency trading market has grown significantly in recent years as institutions battle it out for lower latency. With a market size of $10.36 billion in 2024, the industry is expected to grow at a CAGR of 7.7% between 2025 and 2030. 

These figures underline the value of speed to hedge funds today, but why is faster trading such a necessity? Let’s take a deeper look at how the pursuit of faster market movements became imperative to institutional investors: 

The Need for Speed

Latency is the name given for the time that elapses between a user request and the completion of that particular request. While modern trading is carried out at breakneck speeds for many casual onlookers, even the fastest executions can feature measurable delays. 

This can have an adverse impact when it comes to trading, particularly when acting on emerging market trends faster than rival institutions. Even if your desired trade is marginally slower than your rivals, the slippage caused can lead to higher costs, devaluing the trade you’re attempting to carry out. 

There are many causes of latency in the world of trading, and when requests are carried out from networks to a server or system, network components like switches, routers, protocol changes, translators, and other exchanges through cable, fiber, and wireless data transfer can all contribute to delays. 

The growing requirements of what was once termed low-latency trading has given way to ultra-low latency (ULL) strategies, which emphasize the importance of reaching lightning speeds when executing trades. In the world of ULL trading, hedge funds seek to take advantage of nanoseconds, rather than microseconds, when it comes to buying and selling securities. 

It’s for this reason that the rollout of new ULL hardware is greeted as watershed moments for the industry. The November 2024 launch of AMD’s Alveo UL3422, a ULL accelerator card to deliver record trade speeds for high-frequency trading, raised the stakes further for institutions on Wall Street. 

Infrastructure Matters

For hedge funds, it’s important to balance the speed and complexity of modern trading algorithms. In finding the right balance, complex algorithms are capable of making better trading decisions, but these computations can take longer to process, potentially causing funds to miss out on opportunities. 

As a result, it’s important to get the right trading infrastructure in place. One commonplace but expensive aspect of ULL is co-location, where market data feeds directly from exchanges. 

Because data transmission is theoretically only limited by the speed of light at its very fastest, institutions can co-locate their ULL strategy in the same data centers as exchanges, and cross-connect cables to minimize the physical distance between transmissions. 

This enables market data to feed directly from exchanges, as opposed to through consolidated feeds or a third-party vendor, preventing unnecessary latency caused through the processing of those consolidated feeds. 

Uptime is another core infrastructural concern for hedge funds. According to Pingdom data, the average cost of downtime in the brokerage service industry is one of the world’s most expensive, weighing in at $6.48 million. For funds seeking to take advantage of unexpected price movements faster than rivals, the cost of a lost opportunity could easily flow into the millions of dollars. 

Navigating ULL Frameworks

Optimizing your fund for ultra-low latency trading is a dynamic process where ageing hardware must be replaced on a regular basis, while internet connections and software architecture must be regularly audited for signs of inefficiency. 

Performing thorough risk checks and compliance validation can all help to improve latency trading systems, which rely on maintaining a strong balance between ULL execution and appropriate analytical risk management technology. 

For this, finding the right prime services for hedge funds is essential, and scouting out a provider that’s capable of adapting to changing market conditions without the risk of latency degradation can make all the difference between outpacing rivals or falling behind the pack. 

Cost is a key consideration on this front. Finding prime service providers must be accompanied by a sustainable ULL strategy that resolves to carry out essential software fixes on an ongoing basis or to overhaul hardware with newer solutions altogether, must factor into your considerations. 

Finally, all ULL systems must undergo sufficient resiliency testing to ensure that all factors impacting performance won’t undermine your access to high frequency trading. 

Finding Sustainability in Trading

Like it or loathe it, ultra-low latency trading is here to stay. As our access to AI analytics helps more hedge funds to keep their proverbial fingers on the pulse, trading is a matter of accelerating execution times to access the best possible prices throughout key financial markets. 

This means that more hedge funds have expressed their need for speed at scale, and with high-cost co-location infrastructures to help shape faster trades, capitalizing on opportunities remains a matter of resources. 

To achieve a more sustainable trading strategy, it’s worth monitoring the performance of your executions for signs of slippage, and to make adjustments at the earliest sign of strain. In the age of speed-focused trading, every nanosecond counts.