Managing Microbursts

Man, those trades should have been filled, what happened!? “You know, the market data feeds just do not look right, why?” Statements such as these are becoming more and more common among algorithmic system traders. The primary causes of orders not getting filled when they should have is obviously that the market is no longer trading at the order price. This is often caused by a delay in data due to a microburst. Data microbursts have become one of high frequency trader’s greatest hindrances. These sudden burst like increases in market data can temporarily overwhelm trading networks to the point that data is not delivered in a timely manner. In other words, traders may not be able to execute on the visible data.

Market data microbursts often occur during times of the greatest stress on financial market data networks. These stressful times can occur at any point, but generally take place around economic reports or when the Fed issues an interest rate statement or minutes. The market stress-causing events sometimes result in all the market players moving at once. Active traders submit orders at a furious pace in an attempt to reposition themselves after the event. Some traders erroneously believe that the provider’s order entry capabilities are the culprit; however this is rarely the case. In fact, it’s critical to keep in mind that order entry traffic demands pale in comparison to the market data demands that face the firm.

The real issue with microbursts is many of the major feeds are now multicast. It is a non-guaranteed delivery method, so in the event that the influx of orders to the market generates more network traffic than the vendors line can handle they are likely to drop packets of information. These packets can contain critical information about the direction of the market thus result in locked or crossed markets being displayed to the vendor’s data feeds. Brokers are then required to detect these gaps and re-request the missing packets to provide accurate data to the end user. This lapse of accurate information can easily result in losses of hundreds if not thousands of dollars.

Managing these issues is the new frontier for direct access brokers. According to Donal Byrne, CEO of Corvil, “In the world of modern high performance trading, those with access to higher quality latency information will enjoy a competitive advantage”. Make sure your chosen firm in on top of the microburst latency issue. The difference between profit and loss can depend on it.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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