Financial Trading at the Speed of Light

Once upon a time, stock exchanges were packed with traders running, shouting, and elbowing one another on an open trading floor. Today, virtually all stock trading is done, well, virtually—through massive, globally interlinked computer systems. The rates of these transactions are now limited only by technology and, increasingly, by the speed of light. So a costly arms race has begun for telecommunications and network links that can give traders a competitive edge as small as a few tens of microseconds.

“Everyone is driving toward zero latency,” says Graeme Burnett, who has worked for Deutsche Bank and ABN Amro Bank in the Netherlands and now runs Enhyper, a consultancy in England that specializes in financial engineering. “We’ve literally done every optimization you can imagine.”

The impetus is a recent phenomenon called high-frequency trading. Typically, a high-frequency trading firm—or rather, its computer systems—buys and sells financial instruments while holding on to them for perhaps just fractions of a second. High-frequency traders make money by exploiting tiny and fleeting disequilibriums in the markets—say, when the price of one asset changes and the price of another that should be equivalent in value doesn’t shift immediately to match. [read more..]