The days of traders shouting orders on the New York Stock Exchange's floor may soon be over. A new breed of investing, known as High Frequency Trading, has taken hold of the equities market — one that relies on computerization and automation to exploit momentary price changes for an investor's financial gain. And where latency is the primary measure of success, calculated in milliseconds, fibre might not even be fast enough. But that's where the microwave radios come in.
HFT activity accounted for nearly 40 per cent of the total volume of equities traded in 2012, a figure worth some 6.7 trillion euros. That's 6.7 trillion reasons for a pair of companies, Perseus Telecom and Colt Group SA, to offer their customers a microwave radio transmission service between the NYSE Euronext Basildon data centre in London — home to the Euronext cash and Liffe derivatives markets — and Equinix in Frankfurt — where both the Deutsche Boerse cash and Eurex derivatives markets reside. Together, they're two of Europe's largest investment hubs.
Microwave radio is a line-of-sight transmission scheme that relies on a pair of high gain microwave radio antennas pointed at one another to transmit data at very high speeds. And by "high speeds", I mean they'll actually transmit data faster than the fibre optic networks offered by each company simply because the data travels a shorter distance — thanks line-of-sight requirement! Each radio relay has a maximum range of about 30 to 40 miles and are often located on mountain peaks because, again, line of sight and whatnot.
The technology itself is nothing new, AT&T has been developing microwave technology since its Long Lines systems in the 1950s and '60s. These relays used to daisy chain across the US but were overtaken by fibre optic technology in the 1980s. These days, microwave radio links are most often used by news vans to beam a feed from the reporter in the field back to the studio. That said, "There is more money being poured into this wireless space than any time in its history," remarked Mike Persico, chief executive of wireless communications network Anova Technologies. "High frequency trading is driven by being either the fastest to market, or equal fastest to market, and coming second is like losing," Hugh Cumberland, a manager at Colt, said in a press release.
Both companies microwave systems offer similar performance — reducing the time required to access the market by 40 per cent, in the sub-4.6ms to 4.74ms range, and offering 99 per cent uptime. That's nearly half the ping time of the fastest fibre routes, which clock in at a pokey 8.3 milliseconds.
Yes, of course this method of investing is risky — especially to the market as a whole! Remember the biggest-ever daily plunge in gold values? Really? It happened just last month. HFT scripted responses that dumped gold as values fell only helped to exasperate the price plunge. Similarly, the "flash crash" of 2010, when the US stock market plummeted 1000 points in less time than it takes to heat a frozen burrito, is attributed to HFT systems. 10 per cent of the stock market's value — poof, gone — in minutes.
No, of course the risk of setting off another Great Depression isn't enough to dissuade investors from the practice. “Our customers are always looking for speed to market advantage,” said Andy Young, a Colt transmissions specialist. “A combination of both microwave and fibre is the latest technology weapon in a high frequency trader’s armoury, as the race for more market liquidity gathers pace.”
Anything for a buck.