HFT Firms Place Trades with Military Towers
The topic of High Frequency Trading (HFT) has been getting a lot of attention lately, partly due to Michael Lewis’ new book “Flash Boys.” For those of you not familiar with the subject, the practice of HFT simply boils down to firms trying to profit by placing trades at very fast speeds in order to take advantage of small fluctuations in security prices. In the arcane world of HFT, firms would want to be located near a data center as close as possible so that they can receive quotes sooner than everyone else, even if it’s a matter of nanoseconds. This is known as Latency Arbitrage and that’s why anything that would expedite transmission time is crucial and highly sought after.
Traditionally, fiber optic cables were the core of a HFT trade; it has a large bandwidth and it can transmit data as quickly as 6.6 milliseconds. However, one disadvantage of fiber optics is that it has to be routed around obstacles like rivers, trees, and mountains, thereby lengthening transmission time. Opting for a better option, Jump Trading, a Chicago-based HFT firm, bought up a microwave tower, once used during the Cold War to transmit messages for the US armed forces, in Belgium for $6.7 million. All of these efforts were spent to decrease the transmission time down to a mere 5 milliseconds. With the microwave towers, data are shot in a straight line from one tower to another, making it a much better but more expensive alternative.
Now that Jump has set the bar high, it will be interesting to see how other firms react and what they are willing to do to get back in the race. Thoughts?
HFT is a race to the bottom and HFT will be dominated by a select few BC margins will be so thin.
I agree with @"IvyLeagueVet" but microwave transmission, the tech you described, has been around forever and if they spent $6.7MM on tech that is >25 years old (Cold War) they got ripped off. Wireless carriers use microwave backhaul (backhaul is basically the term used by phone companies to describe how they get voice & data from the cell tower base station to a node somewhere along the line that allows the data to be transmitted to the rest of the network) and it costs far less than $6.7 and it's new tech so it's faster. They've also been moving away from microwave backhaul because fiber is cheaper, more reliable, faster and you don't have the risk of someone constructing a building in the line of sight.
But it costs about $200-250k to build a 90 meter tower and you should be able to buy the microwave equipment that's state of the art, fast and with a huge bandwith for less than $200k.
I don't even consider HFT "real" finance. It's only about technology and speed.
I don't know how someone could throw monkey shit at this ^^^. It isn't real finance. I don't really have a position on whether or not it should be legal, but just because it could be argued as an arbitrage opportunity doesn't mean that it is financially driven. This is simply taking advantage of a technical loophole.
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