Look What’s Cooking: Microwave Speeds Ahead

Terry Flanagan

In the world of high-frequency trading, speed matters most and some participants are increasingly viewing microwave technology as the new panacea to gain a crucial split-second advantage of their rivals.

Microwave technology has been around since the 1970s, but some ultra-low latency traders have been traveling back to the future to compete in a world today where speed is critical. Fiber optic cables have, in recent years, provided the fastest connections to the world’s major trading centers while co-location is another method of reducing latency but microwave transmission could possibly trump all of these to become the new speed king.

Fiber optic cables have to avoid objects, such as buildings, and follow the terrain—which reduces speed—while microwave transmissions can be beamed from mountaintop to mountaintop, thus offering a shorter distance to the destination.

“We are doing microwave networks between markets and within markets today which is leapfrogging what we have in terms of fiber content—microwave is a coming development in the race to zero,” Mark Casey, president and chief executive of CFN Services, a provider of managed automated trading services based in Virginia, told Markets Media.

“In terms of the physics, microwave is just an infrared radio spectrum so it travels at the speed of light. Light through a vacuum is the true speed of light but light through air, like microwave, is pretty close. Its about 50% faster than light through fiber so you have an inherent advantage of sending through the radio spectrum and you can also create a straight line with microwave which you can’t really do with a cable—so you can create a much lower latency. The primary link in Europe is being developed from London to Frankfurt.”

Trading firms are also building microwave connections between New York and Chicago, while some HFT firms are developing their own private microwave-based networks to ensure greater trading speeds.

“Microwave is such that firms can build their own so you don’t need to rely on telecom firms for the infrastructure,” said Casey.

However, there are downsides associated with this microwave technology. Firstly, it needs to be beamed in a straight line, on a line of sight basis, between two towers or an antenna before it needs to be re-routed to another tower, which creates problems for shooting it across vast swathes of water, such as the Atlantic Ocean. Microwave connections are also prohibitively expensive for many firms, can experience interference from weather and carry less information than fiber optic cables.

A speed race across the Atlantic has been developing, using fiber optic cables, with two providers claiming that they will be able to offer execution times of sub-60 milliseconds between London and New York. The current top speed is 64.8 milliseconds. One of the providers, Hibernia Atlantic, a New Jersey-based operator of undersea telecom cables, is laying a brand new cable, at a cost of $300 million, to offer speeds of 59.6 milliseconds when it comes on stream some time next year. While Perseus Telecom, a New York-based trading connectivity firm, in partnership with Indian telecommunications giant Reliance Globalcom, says it is updating cables, at a cost of $30-$35 million, under the Atlantic in a bid to offer speeds of under 60 milliseconds between London and New York later this year.

“There is no other technology at the moment other than fiber optics that can do 5,400 kilometers between London and New York,” Jock Percy, chief executive of Perseus, told Markets Media. “You can’t shoot microwave an elliptical distance—it only goes 50-100 kilometers.”

Others in the industry believe that this race to zero latency is merely bumping up costs for market participants as technology companies spend ever more money on providing new services.

“It’s a daft strategy to say I always want to be fastest as there will always be someone who will be faster,” one market source, based in London, told Markets Media. “The race to zero is pretty much done now, but some people insist on measuring in microseconds.”

Research by consultancy Tabb Group suggested that financial services firms spent approximately $2.2 billion in 2010 on connectivity solutions, and this excluded spending by trading firms on their proprietary networks.

“I can see the race to zero continuing; it’s all about innovation to stay one step ahead and providing services around that,” Tim Furmidge, head of portfolio strategy, global banking and financial markets at communications provider BT Global Services, told Markets Media.

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