How High-Speed Trading Is About to Get Speedier
According to Albert Einstein, the speed of light is the fastest speed there is. But for some Wall Street traders the speed of light—at least as it travels through a fiber-optic cable—just isn't fast enough anymore.
To solve that problem, CME Group and Nasdaq OMX have brought in a third company to build an even faster link between market data center sites in Illinois and New Jersey. The new system, according to NASDAQ-CME, can save just over four milliseconds of one-way transmission time between the two markets with the new system—a tiny sliver of time that can yield outsized results for high frequency traders operating superfast algorithmic trading systems.
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The link is composed of a series of towers transmitting microwave signals through several states. Those signals travel much closer to an absolute straight line from point-to-point than a fiber-optic cable that must follow the contours of the earth's terrain, bleeding precious time along the way.
"What's exciting is you are getting as close as possible to the theoretical speed of light," said Shawn Melamed, the global head of commercial products for Strike Technologies, the company that built out the new network. "The value of knowing what's the latest data for these cross-correlated assets...is really important for making your decisions, whether you're trading 100 shares or one hundred thousand shares."
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Backers won't say what the service will cost just yet, but one published report pegs the figure at around $20,000 per month. And they say they won't be transmitting orders over the new system, just market information. But that will enable traders who subscribe to the system to fire off trades a split second before competitors without the high speed information.
Critics noted that can be unfair to average investors. As traders move markets in milliseconds in Chicago and New York, "the cost of receiving and processing market data will increase for all market participants, but only a small group will receive the benefits," said Eric Hunsader, an expert on—and frequent critic of—high speed markets at Nanex LLC.
People who get faster information will benefit, said Hunsader. "Everyone else loses, including the regulator who will have more information to process."
Melamed of Strike Technologies doesn't see it that way. "I personally believe technology helps any kind of sector or field," he said. "I do believe that what we're doing in this case benefits everybody, definitely not just high frequency trading firms, but the wide public."
And one exchange official said the NASDAQ-CME effort will be more democratic than several other private microwave networks already operated by trading firms—the new network will be open to anybody who wants to pay for the information.
According to one study, it takes a human being between 400 and 500 milliseconds to recognize and respond to a visual stimulus—let alone make a complicated financial investment decision. So information services that offer a speed of two or four milliseconds faster than other services give an advantage to investors who use computer algorithms to trade faster than people can think.
The new system connects the CME Group data center in Aurora, Ill with the Nasdaq OMX data center in Carteret, New Jersey. In a press release, CME Group said that its Aurora data center is home to the CME C0-Location Services offering, which allows more than 200 direct customers, including global banks, hedge funds, futures commission merchants, trading firms and other paying customers to connect directly to the CME servers for high speed trading.
CME-Nasdaq said they're lining up customers and the service is expected to go live over the next couple of months.
—By CNBC's Eamon Javers; Follow him on Twitter: @eamonjavers