Future of Finance

Could the next big trading glitch come from the sky? An expert in satellite technology says it’s possible, and he wants more traders and investors to be aware of the potential problem.

The danger lies with the global positioning satellite system, according to Todd Humphreys, a professor of aerospace engineering and engineering mechanics at the University of Texas at Austin. High frequency traders depend on GPS technology for accurate time signals to guide their trading strategies, but the satellite system’s rooftop receivers are vulnerable to jamming, he contends. GPS signals can also become the target of hacking attacks, known as “spoofing,” that can send out false time signals and disrupt trading, he adds.

“GPS vulnerabilities represent a soft spot in our nation’s financial system,” Humphreys tells Institutional Investor.

To date, there have been no official reports of GPS technology jamming or spoofing impacting securities trading or the financial industry, according to the Financial Services Information Sharing and Analysis Center (FS-ISAC), a clearing house for security updates, and the American Bankers Association. But that doesn’t mean such attacks couldn’t happen, considering our ever-widening dependence on GPS technology.

GPS jamming and spoofing has plagued a host of other industries and organizations, which depend on the precise time and location data provided by the system’s constellation of 31 satellites. In 2009, for instance, GPS-guided systems at Newark Liberty International Airport were disrupted by a trucker in the area using a GPS jammer to prevent his employer from monitoring his whereabouts. It took the airport several months to correctly identify the problem. Tests show that cellular networks that rely on GPS technology for precise timing can be spoofed, causing cellular towers to block phone calls and 911 services. And in May of this year, South Korea complained that North Korea was intentionally jamming the South’s airline GPS systems and the location data they provide to pilots, potentially putting lives at risk.

It’s not surprising, then, that concerns have been voiced about potential vulnerabilities in the U.S. financial services industry, and in particular among high frequency traders.

How exactly do traders use GPS technology?

Global positioning satellites transmit precise time data to GPS antennas sitting atop data centers, where many high frequency trading firms house their computer systems. The antennas transmit this information to a firm’s trading computers. Such signals help to correctly guide a firm’s high speed trading algorithms, the software programs that execute trading strategies in fractions of a second. The time signals ensure that at each decision point in the algorithm, it has the correct time in relation to data it receives from other sources. It also helps to ensure that time stamps and time records are kept correctly. This allows for the proper ordering of transactions and time synchronization throughout the network. If the algorithm does not receive the correct time, the trading strategies may not function properly, strategies may fail to be adjusted or corrected in a profitable way, or algorithms may stop working altogether.