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unpublished market news.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.