The Need for Speed - The Importance of Low Latency in a High Frequency Trading Environment

Sammanfattning: With the emergence of algorithmic trading, the importance of low latency has suddenly become a key success factor in capital markets. Many have realized having a "slow" trading system poses a new kind of risk and potential loss. We will in this thesis give an example where latency becomes a financial risk factor, potentially affecting the profitability of a bank / liquidity provider by creating a model and studying the Foreign Exchange market setting. The results show that cost increases with latency, more specifically that there is an increasing marginal cost of latency. The results also stress the importance of adapting to the new conditions in the market where high frequency trading is present.