The Ultimate in High-Frequency Trading

Consider that this summer ice-breaking and cable-laying ships are scheduled to create the first-ever fiber optic cables through the Arctic Ocean. There are supposed to be three such cables when the planned work is done: two on the Canadian and one on the Russian side of the pole.

Each of these cables will connect Tokyo with London, and they are expected to shave 60 milliseconds off the time it takes for data to get from one of those cities to the other.

My first thought in this connection was about news. If there is a cabinet shake-up in Tokyo, or scientists there make some wonderful pharmacological break-through, traders and investors in London who have access to these cable transmissions will have the information a tiny bit more rapidly than will those who rely upon old-fashioned transmissions through the temperate zone.

But that just proves that I’m an old-fashioned stick-in-the-mud. Should there be a cabinet shake-up in Tokyo, the people who want to trade in London in some way that takes advantage of this will have to stop and give the implications some thought, and that fatal delay will dwarf any velocity gained from the new cable’s polar route. Even if we allow that sometimes algorithms go qualitative, the general point holds: the trading gains here don’t arise from the transmission of news.

60 Milliseconds

The real significance of these cables arises from the disappearance of those 60 milliseconds off the actual trading. As the HFT game is played these days, that is a heck of a lot of latency.  The usual talk among companies that provide services to HFT is about shaving off a microsecond here or there. Yet any one of those 60 milliseconds represents one thousand microseconds.

That is potentially quite valuable for combining HFT with arbitrage. It won’t do much for a Japanese hedge fund that wants to trade in London: so far as I can tell, it will always be easier to open an office in London and trade on a London exchange from there. But those milliseconds will prove useful whenever the same asset, or correlated assets, is trading both in London and in Tokyo, and a firm headquartered in either city wants to make a profit off of fleeting price discrepancies.

Yet, even if we assume the work done, the cables laid, that still isn’t the ultimate in HFT. Bruce Dorminey, a Forbes columnist who writes on “over-the-horizon technology,” posted a dozy of a column on April 30 in which he postulated that by using neutrinos, the high frequency traders of the not-too-distant future could send messages from Tokyo or Sydney to New York or London by sending them straight through the earth.

The Speed of Neutrinos

Quite aside from the neat through-the-planet short-cut: how fast is a neutrino? This turns out to be a very controversial matter. Last year, scientists working at CERN set off weeks of feverish speculation with reports indicating that neutrinos travel faster than light. If I understand this at all, it would mean if true that a New York or London trader could in theory accept a Tokyo trader’s offer before the offer had actually been made. Now that would be the ultimate in HFT: negative latency.

Alas, it seems not to be the case. Efforts to replicate the CERN experiments have produced results “compatible with the simultaneous arrival of all events with one speed, the one of light.”

Taking that as a given (for the nonce) there is still a mystery here. Neutrinos are generally thought to have mass. According to my lay understanding of relativity theory, anything that has mass moves more slowly than light. So even the fact that neutrinos and photons seem to have tied at the finish line is strange. Still, for the purposes of non-physicists we can perhaps finesse that issue. The mass involved is very slight, even by the standards of subatomic particles. According to some sources, the mass of a neutrino is “at least [a] million times lighter than the lightest elementary particle: electron.”

Let us, then, for our purposes, simply consider that neutrinos move at the speed of light. They are “weak interacting” particles, which is why they can travel straight through the earth – and regularly do. Catching the right neutrinos on the other side, and in effect tagging them so they convey the information, is the engineering problem here.

What is fascinating about the reported comments of John Learned, the University of Hawaii particle physicist www.phys.hawaii.edu/~jgl/ quoted in Dorminey’s column, is that if he is right, the “race to zero” in HFT trading may be near an end: not as a matter of sci-fi, but as a feat of engineering.

For all we know, a race into the negative numbers may be ahead for us.

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3 Comments

  1. Manu
    May 9, 2012 at 10:52 pm

    That neutrino speed claim was debunked already. The scientists made a mistake forgetting to account for cables. Some resigned. Let’s keep up with science news. people.


  2. Christopher
    May 13, 2012 at 6:00 pm

    Manu,

    Yes, I’m aware that the specific claim that set off so much excitement last year has not held up. But I also understand that there continue to be mysteries about neutrino mass and speed, and that some uncontroverted experimental results fit poorly with the Standard Model. If you click on the phrase “mass of a neutrino” in the above entry you’ll get to a webpage sponsored by the Berkeley Center for Theoretical Physics that explains this.

    It is all many leagues over my head, of course, but there seem enough caveats in the hard science of it to allow some hope that a Sheldon Cooper or Leonard Hofstadter will yet find a particle that can exceed c.


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