What Is ‘Latency’ in HFT and Why Is It Critical for a Market Maker’s Ability to Maintain a Tight Spread?

Latency is the time delay between a market event (like a price change) and an HFT algorithm's ability to react to it. It is critical because a lower latency allows the market maker to be the first to update their quotes to reflect new information, enabling them to maintain the tightest possible spread while minimizing the risk of adverse selection or inventory loss.

High latency forces a market maker to widen their spread to compensate for the higher risk of stale quotes.