What is "Latency" in a digital recording studio?
Do I need to be worried about it? What is an "acceptable" level of latency?
What's the best way of reducing latency?
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Latency is the amount of time it takes sound to travel from the source to your ears. It occurs in digital and analog setups. For example: the further you stand from your speakers the longer the latency, due to the speed of sound (~1 ms/foot or ~3 ms/meter).
In a digital studio setup your signal is traveling into your sound card where it's converted from analog to digital, mixed with other digital signals, placed on an output buss, converted back to analog, amplified and then transmitted to speakers or headphones for you to hear. That entire process takes some finite amount of time and that's usually what people are referring to when they talk about latency in a digital studio setup.
The best way to combat latency is to use hardware that supports hardware monitoring. This is where the input signals from your live sources and your playback sources (the tracks being played back on your computer) are mixed in the hardware and not in the DAW software on your computer, before being converted back to analog and sent to your monitoring setup. Hardware monitoring provides the lowest level of latency possible — less than 1 ms. Low enough that you can't really perceive the difference between the sound from say, your voice hitting your ears and the sound picked up by your microphone and sent through your hardware setup and back to your headphones hitting your ears. It feels nearly instant and that's important when you're trying to perform. If latency gets to be too large you start to hear an echo of your performance in your monitors as it takes a perceptibly longer amount of time for the signal to travel through the system and reach your ears through the monitors than it does coming straight from the source (like your mouth in the case of singing).
Software monitoring via the DAW can cause latency to spike as your signal will have to travel in to the DAW software running on your machine, get mixed, and then get sent back to your interface for D/A conversion. Modern computers, while fast, are still general computing devices and in a busy DAW project or with too many plugin effects on a live monitored signal, software-based monitoring can get terribly laggy. If you can't avoid software monitoring make sure you're not putting a lot of effects (ideally no effects at all) on the signal you're monitoring and keep the number of effects on the playback tracks to a minimum to keep the CPU use light while monitoring.
Up-to-date drivers are also a good idea. If you're on Windows ASIO drivers are a huge improvement over DirectSound drivers. On a Mac the CoreAudio library is quite awesome and supported natively by anything worth using to record.
"Latency" is the amount of time it takes a digital sample of audio to travel from point A to point B.
For example... The amount of time it takes for audio to travel from the input of a digital mixer to the output.
It is important to keep the Latency as low as possible when mixing for a live concert or when monitoring for a recording.
Latency shouldn't be much higher than a handful of milliseconds (12–20, maybe), if possible. The lower the better, of course. You can improve your latency a number of ways—upgrading your sound card drivers, different hardware, etc. I'd recommend looking into setting up ASIO for your computer if you're having severe latency issues.