Stock Trading Is About to Get 5.2 Milliseconds Faster
In April the Canadian research ship Coriolis II will set out from Halifax to survey parts of the continental shelf stretching 1,000 miles off the east coast of Nova Scotia. The ship has been hired by Hibernia Atlantic, a Summit (N.J.)-based company that operates undersea telecom cables, to map out a new $300 million transatlantic fiber-optic line called Project Express. The cable will stretch 3,000 miles beneath the North Atlantic, connecting financial markets in London and New York at record transmission speeds. A small group of U.S. and European high-speed trading firms will pay steep fees to use the cable.
When it opens in 2013, Project Express will be the fastest cable across the Atlantic, reducing the time it takes data to travel round-trip between New York and London to 59.6 milliseconds from the current top speed of 64.8 milliseconds, according to Hibernia Atlantic. Those five milliseconds might not seem like a big deal, but to the handful of electronic trading firms that will have exclusive access to the cable, it will be a huge advantage. “That extra five milliseconds could be worth millions every time they hit the button,” says Joseph Hilt, senior vice president of financial services at Hibernia Atlantic.
Hilt has sworn to keep secret the identities of his trading firm customers, who use high-powered mainframe computers and sophisticated algorithms to sift through volumes of financial data flows in search of price discrepancies and split-second trading opportunities. The quant-driven world of computerized trading has received some unflattering attention lately, thanks to the botched initial public offering by Lenexa (Kan.)-based Bats Global Markets, which operates two electronic exchanges, and a new Securities and Exchange Commission probe into the business practices of high-frequency firms.
Yet there’s no putting this genie back into the bottle. About 55 percent of U.S. equities trading volume now comes from firms using high-frequency strategies, according to the financial market research firm Tabb Group. And the incessant desire to sift through stock and bonds pricing data at ever-more blistering speeds has high-frequency trading firms willing to pay millions for access to new or upgraded fiber-optic communications networks.
In electronic trading, speed is measured by latency—the time it takes from when a trade is started to when it’s executed. The farther a signal has to travel, the higher the latency, which is why a shorter cable is a faster cable. By connecting to Hibernia’s existing fiber-optic network along the northeastern coast of the U.S. and departing from Halifax instead of New York, Project Express will cut 310 miles off the shortest transatlantic path. “We spent seven months making sure this was the shortest route,” says Mike Saunders, Hibernia Atlantic’s vice president of business development. The fastest transatlantic cable, called AC-1, was laid in 1998 by Global Crossing, now owned by Level 3, which claims that through continuous improvements AC-1 will maintain its market position by the time Project Express opens.
Much of the Project Express cable line will stretch across the shallow waters of the continental shelf, something most fiber-optic cables were built to avoid. In shallower waters, the cables are vulnerable to damage or disruption from fishing and attacks from sharks drawn to their electrical currents. Cables on the continental shelf have to be wrapped in protective layers of steel and, where possible, buried several feet into the sand and sediment to protect the repeater devices that amplify the light signal traveling through them. Typically, they are about the size of a “double-barreled beer keg,” says Hilt. Those used on Project Express will be about the size of two beer cans, making portions of the line easier to bury.
Saunders got the idea for Project Express in February 2010 when he read about a similar cable being built between Chicago and New York by the Mississippi-based company Spread Networks. From 2007 to 2010, 155 construction crews built an 825-mile underground route from New York to Chicago, boring through largely rural, mountainous terrain. The project cut three milliseconds off the previously fastest route. The work was so secret that Spread Networks didn’t announce it until it was almost done. “We didn’t want any copycats,” says Chief Executive Officer David Barksdale. Like Hibernia Atlantic, Spread Networks charges a premium (it won’t say how much) to trading firms. And like Hibernia, it refuses to divulge the identities of these firms. “They’re very secretive,” says Saunders.
Some trading firms question whether these high-speed networks are worth the expense. “Nobody’s making extra money because of them; they’re a net expense on the industry,” says Manoj Narang, founder and CEO of Tradeworx, a firm that also operates a high-speed trading platform that handles more than 3 percent of the U.S. stock market’s daily volume. Narang says the only firms that can afford access to the faster cables are already among the fastest trading firms. “All they’ve done is impose a gigantic tax on the industry and catalyze a new arms race.”
Not to be left behind, Narang’s Tradeworx will soon start a wireless trading network open to other firms. It will be based on microwave technology that may deliver speeds 30 percent faster than fiber-optic cables between Chicago and New York, according to Narang. “We’re reaching a point where firms can build their own routes.”