You Need a Big Tower to Trade Stocks

High-frequency trading is, in part, the business of racing to send microwave signals from towers in suburban Illinois to towers in suburban New Jersey. The towers in New Jersey are near the data centers that run the stock exchanges; the towers in Illinois are near the data centers that run the futures exchanges. The job is to make the futures prices match the stock prices: If stock prices go up in New Jersey, your computer in New Jersey needs to tell your computer in Illinois to buy some futures there; if futures prices go up in Illinois, your computer in Illinois needs to tell your computer in New Jersey to buy some stocks there; vice versa and et cetera. If your computer in Illinois gets the information to your computer in New Jersey a few microseconds faster than everyone else’s, then you can beat everyone else and buy the stocks first and get rich.

One way to do this is to invest in the best technology, build your microwave tower as close as possible to the Illinois data center, send your microwaves in the straightest possible line to New Jersey, and generally optimize for the most efficient possible transmission of data from one exchange to another. Another way to do this is: You build a gigantic wall in front of your competitor’s tower, so that when your competitor wants to send microwaves from Illinois to New Jersey they bounce off the wall and you get there first.