Its almost unimaginable in this age of fiber optic
lines, satellite transmissions and wireless everything that
physical space can still present barriers to competition. But
in the race to place trades in low latency/ high frequency
environments, the ability to shave 115 miles off the journey
information must travel from Chicago to New York, it would save
two milliseconds from the round trip and place a high frequency
firm at a huge advantage over its competition.
Dont worry if none of this sounds familiar. The
methods for reducing latency are still as cloaked in secrecy
today as they were in Napoleonic times when bankers Francois
and Joseph Blanc bribed operators of Claude Chappes 1793
invention, the semaphore telegraph, to tip them as to whether
the Paris Bourse was trading up or down. By the time they were
caught, in 1834, the brothers had made a bundle. They had
simply to note whether packages arriving by coach from Paris to
Bordeaux were wrapped in gray or white paper, and instantly
theyd knew whether to buy or sell their shares
nearly a day before the papers could carry the news. Today,
latency secrets are more confined to who has the best equipment
or where the best unused telecommunication lines are, than
unpublished market news.
The hidden weapons of big name hedge funds and proprietary
trading desks at mainly sellside firms are closely guarded,
says Kevin McPartland, an analyst with the Tabb Group, and
author of Long-Distance Latency:
Straightest and Fastest Equals Profit (June 2010).
For the past decade, firms have pursued a combination of
sophisticated trading technology and faster networks in a race
to the top. Still, up until this years Flash Crash, the
public was largely unaware. With things calming down in
equities, the topics been brought to the top of
peoples minds, says McPartland.
Ten years ago firms would rely on telecom providers to
advise them, he says. Now the same firms are hiring away
those experts to get the jump on the competition and also
ensure it wont figure out their strategy. Telecom experts
are paid well for their closed-mouth discretion, sources tell
us. Also fueling the need for secrecy is that although
theres tons of connectivity, as McPartland
says, there is very little in the fastest modes.
One reason is that between trading centers such as New
York to Chicago and London to Frankfurt, there are many places
where lines cant be dug through mountains, across
rivers, under churches, for example.
Dig, you ask? What about satellites, microwaves, wireless
communications? Radio, in theory, could work but
bandwidth is so low; it doesnt come close to enough space
to support trading volumes and trade data, says
McPartland. Cable has come a long way from copper lines to the
latest innovations in hair-fine fiber optics, but theres
a finite amount that has actually been laid. And fiber optics
need a clear line of sight to carry light from one point to the
next. Satellites are sexy, but time is lost whipping data
through the sky and back to earth again. So the push is on to
find the shortest, fastest routes.
You only need to be a tiny bit faster than the other
guy, Kevin Formby tells his clients. The new vice
president for business development at Endace, an Atlanta-based
contractor that captures and analyzes network traffic in order
to evaluate the trading performance of their clients
platforms. There are always clever people out there,
especially when theres an awful lot of money to be
made, says Formby, a transplanted Brit from Manchester.
People have found the way around fiber optics by using
repeating cables, he notes. And, microwave relays using dish
antenna can bring that technology up to the speed of light. The
option of adding towers to boost microwave signal speed also is
not off the table.
But how fast is fast? It takes us 300 milliseconds to blink
an eye, says McPartland. A price tick takes less only
16.5 milliseconds to race from New York to Chicago and
back. One-way takes only 7 milliseconds 7, 1000th of a
second! On August 16th, Spread Networks Inc., a privately held
telecommunications provider, announced it had broken the
record, with an ultra low-latency rate between the two cities:
a round trip speed under 13.33 milliseconds. To achieve those
results, Spread, based in Ridgeland, MS, worked with optical
equipment manufacturers ADVA Optical Networking, Ciena
Corporation and Infinera.
And then what? How fast can one act on the information? BATS
Exchange, which claims to have the lowest latency numbers in
the industry boasts an average order lifetime of 8
milliseconds. And, says BATS, a 99.9 percent fill
which includes the time to accept, process and
acknowledge a member order within 1.3 milliseconds.
Competitors will go to such lengths as buying buried fiber,
unlit, called dark fiber, and using their staff to build their
own boxes for transmitting signals at either end of the line,
says Formby. The dark fiber supplier will often recommend box
manufacturers that theyve tested, he adds. These options
are definitely not for the smaller players, he notes. This is
just part of the arms race. It makes for a little bit
quicker system than the other guys got. The next
horizon? Microseconds or millionths of a second. Its not
out of reach for these high spending, high trading,
winner take all professionals, says Formby. Every
day they change their algorithms based on how they did the day
before, analyzing the data and changing the programs, because
their competitors are doing the same thing.
So the only factor in question seems to be, does the
potential reward equal the cost of doing whatever? In
most cases, says Formby, theyll spend the
money on that semaphore.