July 16 (Bloomberg) -- An 800-foot microwave tower in a Belgian cow pasture transmitted messages for the U.S. armed forces in 1983 when suicide bombers killed hundreds of military personnel at Marine barracks in Beirut, Lebanon. Now it’s being used by high-frequency traders.
Jump Trading LLC, a Chicago-based company founded by former pit traders, bought the tower last year through a U.K. affiliate called Toren Navo Aansluiting Ltd., according to documents filed in the U.K. and Belgium. The English translation of the name: “NATO connection tower.”
Trade orders that were once executed using shouts and hand signals now travel across continents with a swiftness that can approach the speed of light. Fiber-optic cable used to be the choice of electronic trading firms such as Jump that are locked in a contest to be the fastest. Now they’re adopting microwave technology, which can convey data in nearly half the time, to squeeze profit from fleeting and often tiny price discrepancies in assets traded around the world.
“It really comes down to defending your position,” said Peter Nabicht, a senior adviser to the Modern Markets Initiative trade group and the former chief technology officer at Chicago-based high-frequency trader Allston Trading LLC. “If one person goes to microwave, they have a distinct advantage, so other firms have to go to microwave, too, to maintain their relative speeds. It’s like bikers who are in a fight to be at the front of the pack.”
Jump’s purchase and recent refurbishing of the tower in Houtem, Belgium, comes as high-frequency traders face added scrutiny engendered by Michael Lewis’s book, “Flash Boys,” in which he accused the industry of rigging markets. Jump was one of the firms to receive subpoenas from New York Attorney General Eric Schneiderman, who’s looking into whether electronic traders profit from non-public information, a person with knowledge of the matter told Bloomberg News in April. The U.S. Federal Bureau of Investigation is also investigating the industry, Bloomberg News reported in March, citing a person with knowledge of the probe.
Jump executives declined multiple opportunities to comment. Co-founders Bill DiSomma and Paul Gurinas didn’t respond to phone and e-mail requests for interviews.
Jump didn’t respond to a message sent to its “media inquiries” e-mail address. The firm declined to meet with Bloomberg News when a reporter visited their offices without an appointment. Subsequent meetings arranged with Tessa Wendling, the firm’s general counsel, were canceled. She didn’t return phone calls seeking comment, nor did Jump’s chief operating officer, Matt Schrecengost.
Firms in the U.S. started experimenting with microwave transmissions four or five years ago to shorten the time for orders and financial information to travel between data centers outside Chicago and in the New York City suburbs, said Hugh Cumberland, a manager at Colt Technology Services Group Ltd. in London whose clients include high-frequency traders.
Microwave use has more recently moved to Europe, where trading firms are using former military towers to shoot signals at light speed from bourses in Frankfurt to exchanges in London. The goal is to profit from price moves in stocks and other assets that evaporate before human traders can catch up -- in times measured in millionths or even billionths of a second.
A disadvantage of fiber is that it can be slowed by obstacles such as roads, rivers and mountains. Another shortcoming is that light travels more slowly through cable than it does through the atmosphere. Microwave has the potential to be faster because data is shot in a straight line through the air from tower to tower. Speed matters because traders compete to capture price movements in stocks or other assets on different markets hundreds of miles apart.
Microwave isn’t perfect. It can’t carry as much data as fiber because the bandwidth is narrower and transmissions can be disrupted by poor weather and deflections off the English Channel, Cumberland said. Most trading firms using microwave back it up with a cable network, he said.
Custom Connect BV, based in Amersfoort, Netherlands, owns a microwave network completed in March 2013 that cut to 4.43 milliseconds, or by about 50 percent, the round-trip time it took data to travel from Frankfurt to London via cable, Jan Willem Meijer, the company’s chief executive officer, said in an interview. One-thousand milliseconds make up one second.
Custom Connect’s network was the first microwave link connecting the main financial centers in Europe that multiple trading firms could pay to use, he said. Individual trading firms had already built their own proprietary systems, Meijer said.
Karen Bertoli, chief marketing officer for Perseus Telecom, said her company, in October 2012, was the first to offer customers a microwave connection between Frankfurt and London. While Perseus sells access to the network, including the Houtem NATO tower, it doesn’t own it, she said in an interview today. She declined to identify the owner.
About 25 companies use Custom Connect’s network, including trading units at investment banks and high-frequency trading houses, said Meijer, who declined to name them. The network, which cost about 5 million euros ($6.8 million) to build, relies on 13 towers across Europe. Meijer wouldn’t comment on who owns the towers or their specific locations, saying he was concerned about competition. Meijer also declined to discuss how much Custom Connect charges clients.
Traders need multiple towers because signals run the risk of breaking up beyond 100 kilometers (62 miles). Controlling a single tower wouldn’t benefit a trader unless the goal was to force rivals to go around it by using a slower, less direct route, or hoarding the frequencies that companies rely on to transmit financial data, said Colt’s Cumberland.
“There are rumors in the industry that people have bought tower space or have bought frequencies that they don’t use,” Cumberland said. “We call it ‘frequency squatting’ or ‘tower squatting.’”
High-frequency trading of stocks peaked at 63 percent of U.S. trading volume in 2009 before declining to 51 percent last year, according to consultant Aite Group LLC.
In Europe, high-frequency trading grew to 41 percent of equity volume in 2013 from 25 percent in 2009, Aite research shows. The increase comes as Europe is moving to implement “one of the toughest set of regulations for high-frequency trading in the world,” Michel Barnier, the European Union’s financial services chief, said in April.
Jump’s tower in Houtem and others across the English Channel near the White Cliffs of Dover transmitted messages for the U.S. armed forces during the Cold War and when bombers attacked the Marine barracks in Beirut in 1983, said Darcy Calvillo, a former Air Force sergeant.
“At the time, those sites were incredibly important,” said Calvillo, 51, who spent the early 1980s helping manage the Air Force’s communication network from a military base outside London. “The United States is very fortunate geographically, because we have two oceans to protect us, but our protection goes much further than those two oceans.”
The U.S. Air Force gave up leasing rights to the Houtem tower when it decided to move to a fiber communications network in 2006, according to a spokesman.
Houtem, part of the municipality of Veurne, is about an hour-and-a-half drive west of Brussels near the English Channel.
Veurne Mayor Peter Roose said a sales and marketing executive from VolkerWessels Telecom Infra Technik GmbH, a unit of a Dutch conglomerate, contacted him in March 2013. The Belgium Ministry of Finance had sold the tower, which was the property of the nation’s Defense Ministry. The buyer hired VolkerWessels to upgrade it so traders could use the site as one link in a chain stretching between Frankfurt and London, Roose said.
“They came to me asking what they had to do here in Veurne to have the necessary papers to do these works at the tower,” he said in an interview. “Someone paid a lot of money for it.”
While Roose said he doesn’t know the identity of the buyer, he said Belgian government officials told him the purchase price was 5 million euros. Veurne land registry records obtained by Bloomberg News show Toren Navo Aansluiting owns the tower, without disclosing a purchase price.
Gjalt Rameijer, a spokesman for VolkerWessels, confirmed that his company was subcontracted to overhaul and upgrade the tower, which sports two new gray dishes and a fresh coat of paint. He declined to name the buyer. Belgium Finance Ministry spokeswoman Florence Angelici wouldn’t comment on who bought the tower or the price paid, citing the government’s “professional secrecy policy.”
Toren Navo Aansluiting, based in London, was incorporated in February 2013, according to a filing with the U.K.’s Companies House. The company’s one listed director is Steven Hunt. That’s the name of Jump’s chief technology officer, who is a former vice president of technology at Goldman Sachs Group Inc. Its only shareholder is ECW Wireless LLC, the Companies House filing shows. Jump co-founders DiSomma and Gurinas own stakes in ECW, according to the U.S. Federal Communications Commission’s ownership database.
Jump’s founders have been just as active across the Atlantic Ocean. World Class Wireless LLC, which ECW owns and has the same address and senior managers as Jump, holds more than 130 microwave licenses in the U.S., according to the FCC website. The firm has transmission locations in Illinois, Ohio, Pennsylvania, New Jersey, New York, Delaware, Maryland, Indiana and Washington, D.C., according to the site.
Some of the locations fall between the Chicago suburb of Aurora, Illinois, where CME Group Inc., the world’s largest futures marketplace, has a server farm, and northern New Jersey, where Intercontinental Exchange Inc.’s NYSE, Nasdaq OMX Group Inc. and a host of other stock venues have data centers.
Sending data back and forth between the U.S. Midwest and East Coast allows high-frequency traders to profit from price differences for Standard & Poor’s 500 Index futures in Chicago and stock prices in New York. Those money-making opportunities often last only tiny fractions of a second, far faster than a human unaided by technology can react.
World Class Wireless also has licenses for transmission locations on Long Island, including the town of Bellport, which is also home to a landing station for one of the underwater fiber-optic cables that connect the U.S. to Europe, according to Level 3 Communications Inc.
In England, World Class Wireless has secured frequency licenses for at least three locations, according to records kept by Ofcom, the U.K. communications regulator. The sites include Basildon, where Intercontinental Exchange has a 315,000-square-foot data center; Slough, home to a 226,000-square-foot facility owned by Equinix Inc. that accesses more than 20 European financial markets; and London.
Other financial firms in the U.K. have also turned to former military structures to gain a trading edge. A set of towers in Swingate near Dover once used by the U.S. Air Force are now owned by Arqiva Ltd., a company that evolved out of the British Broadcasting Corp.’s privatization of transmission facilities in 1997.
While broadcasters and mobile-phone companies make up most of Arqiva’s customers, companies that build microwave networks for traders are increasingly using its infrastructure, Cumberland said.
An Arqiva spokeswoman said that companies have been using its towers to transmit financial data since September 2011.
Optiver Holding BV, an Amsterdam-based proprietary-trading firm, has signed up for a frequency license near Dover, according to Ofcom. Optiver paid $14 million in 2012 to settle allegations that the firm used a trading program it called the “Hammer” to manipulate oil markets. Optiver didn’t admit or deny wrongdoing in settling the U.S. Commodity Futures Trading Commission’s complaint.
“The biggest advantage of microwave-trading technology is indeed speed,” said Hans Pieterse, an Optiver director who confirmed the company will use the frequency it obtained for trading. He declined to comment on the CFTC settlement.
Calvillo, the U.S. Air Force veteran, now teaches high school in Southern California after a 12-year career at MCI Inc. He said he was based about 18 miles west of central London at the U.K. Royal Air Force station in Uxbridge, England, from 1981 to 1984. From Uxbridge, his 2119th Communications Squadron operated part of the grid that essentially made up the U.S. military’s telephone network.
Over time, national-security priorities changed and technology evolved. The U.S. Air Force disbanded the 2119th squadron and the U.K. closed Uxbridge as an active base in 2010. Calvillo said he’s not surprised that the financial industry has found a new use for the towers he once relied on to transmit secret military communications across the globe.
“It makes sense, because the next generation of war is probably going to be financial related,” Calvillo said. “Everyone is trying to buy everyone else’s stuff.”