It takes nearly 13 milliseconds for a roundtrip data transmission through fiber between Carteret, NJ and Chicago. Well, that is if you do not dig a tunnel through mountains, etc. That’s an eternity in our business, for as you all know, a high frequency trading firm can flicker their quote (i.e. enter and cancel orders continuously) nearly a thousand times in those thirteen thousandths of a second! This is simply too slow. Fear not as more speed is on the horizon, and as everyone knows from listening to Vanguard’s Gus Sauter in Ghost Exchange at the 59 second mark, “Fast Trading is fine, and faster trading is even better.”
The CME and NASDAQ have detailed plans to launch a wireless joint venture in May that will cut that round trip time by about 35% to 8.5 milliseconds. The new network will use microwave transmission to beam stock and futures trading information between Aurora, Illinois and Carteret, New Jersey. Microwave towers with dishes will need to be licensed, built, and placed every 30 miles or so. From the linked WSJ article above,
“There will always be demand for [fast speeds] between data centers,” said Craig Mohan, managing director of data center services for CME, in an interview.
This is good stuff. Firms need this faster speed so that when they arbitrage the minute price differences between stock index futures and ETFs, in order to catch someone with a slow-to-adjust quote and pick them off, they can make a lot of money narrow the spread of the ETF bid-ask from one penny to, errr one penny or slightly less. Academic professors from prestigious schools will write about these savings!
Everybody wants this, from Fred and Ethel to even high frequency trading firms. Except… maybe not so much. Here is what an anonymous HFT executive told the Chicago Tribune recently on this very topic:
“From our perspective, this stuff is just a pain in the butt,” the executive said. “We’d be much happier if everyone was just using the same line (between Chicago and New York). All this stuff does is cost a lot of money and cuts into our profit margins. I’d much rather compete on things other than speed, but we’re forced to do this stuff.”
And for those who still believe the race-to-zero-speed-war is fair, as everyone is free to engage, here is what the head of technology at HFT firm Peak6 Investments counters:
“Think about the firms that are building their own microwave towers; how many companies can really do that? How much room is there for error?” said Daniel Rosenthal, the chief executive of Apex Clearing Corp., who also is the managing director of technology at Peak6. “We decided at that point, we were not going to be in this arms race.”
With trading volumes down another 6% yet again so far in 2013, you would think the exchanges would have learned their lessons on what makes for a desirable market. Sadly, some of them still cling to the belief that chasing the ever-decreasing marginal benefits from more speed, whose costs are born by all, will bring back the volume.
Oh – one more thing. Be careful trading during heavy rain or snow, and watch out for suspicious characters near microwave towers with jamming devices.