A few weeks back I drove my #2 to University of Michigan to begin his college career. We drove from New Jersey all through Pennsylvania along the Interstate 80 corridor, through Ohio, “turning right” at Toledo up along Interstate 94 towards Ann Arbor Michigan. Along our route we were amazed at the number of microwave towers visible to us along our route (our interest piqued by Michael Lewis’s Flash Boys – and his closing reference to the fact that Manoj Narang – provider of the MIDAS speed-reading technology to the SEC – owns many of the microwave towers).

The use of microwaves to receive quote and trade data likely does not surprise any of you. High speed traders desire to trade very fast, and see order books very fast. It is not only important for them to beat someone else to the quote, it is important for them to know when the quote is changing so that they can pull their own quotes. High speed market makers, one class of HFTs, are always modeling and balancing the benefits from their providing a bid/offer (a rebate and potential spread capture and favorable price-move alpha) with the costs (adverse movement against them if one of your giant orders plows through that same bid/offer).

In the United States as in Europe, the ownership of the microwave towers is often challenging to ascertain, as the ownership is usually traceable back to shell companies to disguise the true ownership. While it was easy for us to figure out who owned the tower featured in the last paragraph of Flash Boys, it is but one tower. This is why we were very impressed with the efforts of Alexandre Laumonier, a blogger/journalist based in Belgium. Check out what Laumonier mapped – this is a Google Earth image listing a plethora of microwave towers surrounding the UK-France region.

You can look at a higher resolution larger image here, where Laumonier shows who some of the tower owners are:

Jump Trading:             45 towers

Vigilant:                      22 towers

Optiver:                       18 towers

Latent:                         13 towers

McKay:                       13 towers

Flow Traders:              7 towers

Jump Trading appears to be leading this speed race; they supposedly own 130 licenses in the US and Europe combined.

Why is it so important to be this fast? Again it goes back to the balancing act referred to up a few paragraphs:

It is not only important for them to beat someone else to the quote, it is important for them to know when the quote is changing so that they can pull their own quotes. High speed market makers, one class of HFTs, are always modeling and balancing the benefits from their providing a bid/offer (a rebate and potential spread capture and favorable price-move alpha) with the costs (adverse movement against them if one of your giant orders plows through that same bid/offer).

Laumonier demonstrates the lengths and expense savvy traders are willing to incur to master the “providing liquidity” game. Armed with the knowledge of how the typical smart order routers work, they can play a game of chicken against each other, and against investors, with the result being a typically more narrow spread viewable by the human eye.

Final point?  Throw out your TCA that measure your costs based on some kind of bid-ask spread. The spread viewable by the human eye is a red herring in a fragmented marketplace, be it in the US or in Europe. Savvy traders have known it for a decade. We showed it to you in our 2012 book Broken Markets. Liquid Metrix’s Darren Toulson showed it quite effectively in this 2013 article – Do HFTs really Game buyside orders?, and Michael Lewis showed it you earlier this year in Flash Boys.

And Laumonier shows it indirectly by demonstrating the great efforts being undertaken by the world’s fastest traders to be able to take – and withdraw – “liquidity” when it suits their profitability. Later today you should be able to see Laumonier’s map on his blog, complete with public documents demonstrating the microwave tower ownership.