It’s no secret that we’re not the world’s biggest fans of high-frequency trading (HFT). Ultra-fast algos scalping pennies off of trades isn’t that big of a concern for trend followers, most of whom hold their positions for at least a few days, if not for weeks or months at a time. But we do think this kind of trading activity raises some concerns about market integrity, as well as the risk that regulators will come down with a meat cleaver rather than a scalpel if (when) they crack down on HFT.
But our worries aside, HFT doesn’t seem to be slowing down – both literally and figuratively. Despite mounting criticism, the exchanges are doing everything they can to court HFT activity, including the creation of new infrastructure to facilitate ever-faster trading. The Wall St. Journal reports:
CME Group Inc. and Nasdaq OMX Group Inc. have detailed plans to launch a wireless network joint venture in May that will beam stock and derivatives prices between Chicago and New York in fractions of a second…
The new link will use microwave radio frequencies to transmit stock and futures-market trading information between CME’s data center in Aurora, Ill., a Chicago suburb, and Nasdaq’s facility in Carteret, N.J., just west of New York’s Staten Island. The network will be managed by Strike Technologies LLC and Epsilon Networks, two New York-based trading technology companies.
And how much faster will this new connection be? It will save just under four and a half milliseconds, cutting the round trip time down from 12.98 milliseconds to 8.5 milliseconds. If that number doesn’t boggle your mind, it should. The blink of an eye is downright slow compared to these connections – it takes anywhere from 100 to 300 milliseconds for a human to blink.
Keep in mind that to cover the straight line distance between New York and Chicago (about 1400 miles) at the speed of light (about 186,000 miles per second) would take roughly 7.5 milliseconds. In other words, exchanging market data much faster than this would require some kind of science fiction faster-than-light technology. Even without new laws from Washington, HFT is about to run up against laws that they can’t possibly break: the laws of physics.