Microwaves, Proprietary Fiber, and the Confusing Latency Race

You know that cute bartender who chats you up for 15 minutes, flips her hair around, laughs at all your jokes, and then just when you're about to crank the flirt-o-meter to 11, she finds something fascinating on her phone and ignores you for the rest of the night? Confusing, right? Her messages are more mixed than her White Russians.

That's how I felt at the Futures Industry Association (FIA) New York Expo late last week. On one hand, the prevailing sentiment was that the race to zero is turning tortoise, and that the industry is shifting resources away from latency-based strategies. That supported rumblings I've been hearing for months. But a conversation with Greg Wood, a newly minted director at Deutsche Bank Securities and former bigwig on Credit Suisse's Advanced Execution Services (AES) algorithmic suite, revealed that the race might still be in full swing.

Two somewhat exclusive—and very expensive—methods of shaving milliseconds are being offered to high-frequency shops today. One is proprietary fiber optics cables that are charted between liquidity centers on a geographic course that avoids natural obstacles. A few miles removed from the line between New York and Chicago does make a difference.

The other method is to use microwave technology for line-of-sight transmission that passes over mountains and streets and everything else that blocks cables. The speed of light in air is approximately 50 percent faster than the speed of light through a pipe. Even though microwave needs several hops to make the journey, the networks offered by NeXXCom Wireless and McKay Brothers, for example, could still cut three milliseconds off the round-trip journey, which currently stands at about 13.3 milliseconds.

For the record, microwave is not a miracle cure. It can be blocked by heavy precipitation. The frequencies that it uses are licensed and therefore in limited supply. High elevation towers are expensive to construct and provision.

"There is always going to be someone trying to provide something that is faster, whether that is someone digging through central Pennsylvania and Ohio to get to datacenters or whether you're using microwave technology to avoid using any land lines,” Wood says. “People who value that type of service will obviously pay the premium for it. Does it mean that everyone needs to use that type of service? No."

Ugur Arslan, CEO of high-frequency hedge fund AienTech, says he has no use for such ultra-expensive technology. "The issue is, what are you going to use it for? If you're an arbitrage shop, if you need to get to different cities and exchanges first to make money, then spending $200,000 a month, if you're making millions of dollars spending that kind of money, then it's definitely worth it, no question."

If it's still making people money, then it's going to keep getting developed. That means that everything I was hearing about the move away from latency-based trading strategies is not exactly true. Or maybe it's true for the firms without big IT budgets. Too many mixed messages.

If you'd like to give me your take on whether the pace of low latency innovation is really slowing down, shoot me an email at Jacob.Thomases@incisivemedia.com.