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The Next Wave in High Frequency Trading

Radio beats fiber in electronic transmission speed, helping digital microwave provider Cielo Networks give high frequency, “low latency” traders an extra edge.

Can quantitative trading possibly get any faster? During the last decade, computers and fiber-optic networks have dramatically reduced the time it takes to execute an order in the financial markets. Ten years ago that lag was measured in seconds. During the last few years it was reduced to milliseconds and then, in some circumstances, to microseconds.

For a certain breed of high frequency traders, that delay, or latency, means everything. Low latency traders rely on direct, ultra-high-speed market connections to profit from fleeting price discrepancies in the price of a stock or other asset as it trades in different markets. To make that arbitrage work, low latency traders have relied on cutting edge algorithms developed by computer scientists — and super-high-speed fiber networks.

The latest weapon in that arms race may be ultra-fast microwave radio networks that can outperform even the fastest fiber-optic circuits. It’s a small and highly secretive niche of the trading world, where traders seldom talk about their technology or strategies. But one veteran microwave engineer and entrepreneur agreed to discuss the emerging market with Institutional Investor.

“Over any given distance, radio signals travel significantly faster through the atmosphere than do optical signals in fiber. That’s just the physics, but it is the main reason latency sensitive traders are now interested in microwave technology,” says Gordon Moller, founder and president of Cielo Networks, a digital microwave system supplier in the Dallas area.

Moller studied engineering at Annapolis and served in the Navy as a signals intelligence and electronic warfare officer. Having worked for over 15 years in several successful microwave start-ups including Ceragon and Innova, Moller founded Cielo Networks in 2006. The company is privately held and has no outside investors. Its clients range from schools and government agencies to Internet service providers, telecom carriers and, since last year, trading firms and financial IT companies.

Point-to-point microwave radio technology has been used worldwide for decades in long-distance, cellular and myriad private networks, but it has only recently become advantageous to traders. Microwave radio reliability has steadily improved, mostly through the commercial application of military technology. Concurrently, the systems have become much more flexible and scalable via ever more pervasive microprocessor integration. Their cost has come down dramatically as well.

The market is dominated by global giants like Ericsson, NEC and Alcatel Lucent, which primarily serve large markets such as wireless telecommunications. Numerous medium to smaller players exist as well, some of whom address niche markets where more rapid innovation and customization matter most. For Cielo Networks, the focus has become financial networks.

The demand for microwave technology in the “latency sensitive” financial community is barely two years old, according to Moller. “It started when some in the high frequency trading community realized that a combination of factors made microwave networks faster than their fiber equivalents between major trading centers. Radio signals’ speed through the atmosphere is very fast — very close to the speed of light in a vacuum — the fastest speed physically achievable. That is much faster than optical signals in glass fiber-optic cable. It also helps that point-to-point microwave links connecting towers and mountaintops between two distant cities can achieve shorter end-to-end distances than fiber cables, which must route around terrain and infrastructure obstacles." Says Moller: “Not only is radio inherently faster, but it can normally connect two distant points with a shorter circuit. That’s a big double advantage for microwave.”

The chief obstacle to microwave technology is the time required for data signals to travel through the radio equipment electronics in the series of microwave links. Microwave signals require line-of-sight transmission and must be regenerated by radio terminals every 20, 30, 40 or more miles, so Cielo Networks is modifying software and hardware to reduce the amount of processing that must be done by such terminals. “Microwave trading networks are not live yet, but they are under construction,” says Larry Tabb, founder of financial market researcher TABB Group. He says the first trading application may be faster wireless links between the trading centers of New York and Chicago. Microwave technology could reduce the 13-millisecond latency on that route appreciably.

Moller declined to discuss network speeds or details of how his equipment performs and reiterated that latency will vary for different network configurations; however, he says the appeal of microwave extends well beyond speed. “For some users, fiber’s higher latency is just fine, and it will always offer higher bandwidths than microwave,” Moller says. “But once fiber is in the ground, it isn’t coming out. Microwave equipment, on the other hand, is relatively easy to relocate and reuse when facilities move; it doesn’t become a sunk cost like underground fiber cable. And microwave networks are typically much quicker and less expensive to deploy than long-haul fiber.

”Moller also declined to identify his clients, citing confidentiality agreements, but did acknowledge “it is a small market.” But, he adds, “it fits our business model and strengths very well.” The financial market is still too small to move the dial for large vendors of microwave technology who sell a broad range of products worldwide to enormous clients such as wireless phone companies. That leaves little potential competition for Cielo for now in the low latency, microwave space, and Moller plans to exploit it. “We’re narrowly focused but technically very deep. We can bring innovations to market pretty quickly.”

“People tried to use microwave for broadband 20 year ago, but the technology wasn’t there,” Tabb says. That has changed, and a new weapon in the low latency wars finally may be ready for the market.

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