Stock trades to exploit speed of light, says researcher

By Jason Palmer
Science and technology reporter, BBC News, Dallas

  • Published
Map showing relation between exchanges and trading locations
Image caption,
Optimal high-frequency trading locations (blue) exist for pairs of major financial exchanges (red)

Financial institutions may soon change what they trade or where they do their trading because of the speed of light.

"High-frequency trading" carried out by computers often depends on differing prices of a financial instrument in two geographically-separated markets.

Exactly how far the signals have to go can make a difference in such trades.

Alexander Wissner-Gross told the American Physical Society meeting that financial institutions are looking at ways to exploit the light-speed trick.

Dr Wissner-Gross, of Harvard University, said that the latencies - essentially, the time delay for a signal to wing its way from one global financial centre to another - advantaged some locations for some trades and different locations for others.

There is a vast market for ever-faster fibre-optic cables to try to physically "get there faster" but Dr Wissner-Gross said that the purely technological approach to gaining an advantage was reaching a limit.

Trades now travel at nearly 90% of the ultimate speed limit set by physics, the speed of light in the cables.

Competitive advantage

His first solution, published in 2010, considered the various latencies in global fibre-optic links and mapped out where the optimal points for financial transactions to originate - midway between two major financial hubs to maximise the chance of "buying low" in one place and "selling high" in another.

That of course resulted in a number of ideal locations in all corners of the globe, including the oceans. But wholesale relocation of operations does not immediately appeal to many firms.

"I'm now working... with real companies on real deployments that don't require you deploy a floating data centre in the middle of the ocean; we say, 'OK, you have your existing infrastructure, that's not moving - now, given your location, which stocks in various locations are you best positioned to trade?'"

"If you don't have the budget to put new data centres in the middle of the ocean you can, for example, use existing data centres that are an approximation to the optimal location in the ocean - say, Nova Scotia for New York to London," Dr Wissner-Gross told BBC News.

Because there is a clear, physical advantage to the approach, Dr Wissner-Gross said that the first firm to try to exploit the effect will be at significant competitive advantage - until more firms follow suit.

That means that out-of-the-way places - at high latitudes or mid-ocean island chains - could in time turn into global financial centres.

"It's instructive to start to think about latency correlations as a new sort of resource," he explained.

"If you're positioned between two major financial hubs, you may be far out of the way, rather far from population centres, maybe economically poor, but because of your unique position, that could be a natural resource."

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