light just isn’t fast enough for these guys
01 October 2011 by Jeff HechtMagazine issue 2832.
Stripping back automated computer trading could shave milliseconds off trades – perfect for traders out to make their millions
EVERY microsecond counts in stock trading. The New York Stock Exchange handles a third of the world’s stock trading – around 22 billion messages a day. But NYSE Euronext, which operates the exchange, wants it to get even faster.
Now cable company Hibernia Atlantic is spending $300 million to build a new transatlantic cable to shave 6 milliseconds from the present 65-millisecond transit time between London and New York. It will be the first new cable to cross the Atlantic in a decade and trading firms are likely to pay premium rates to use it.
This is because even though a computer can execute millions of instructions in a microsecond, the furthest light can travel in that time – even in a vacuum – is just 330 metres. That is an age if algorithms are competing to execute the best trades.
“The speed-of-light limitation is getting annoying,” Andrew Bach, head of network services at NYSE Euronext, told the European Conference on Optical Communications in Geneva, Switzerland, last week.
With global markets currently in turmoil, it might seem a strange time to worry about the speed of trades, particularly when automated trading was implicated in the stock market’s May 2010 “flash crash”. But traders still want their computers to receive trading data and place orders instantaneously. And customers will go elsewhere if a rival is faster.
Bach proposes speeding up signals by shifting from the solid-core optical fibres used at present to hollow-core fibres. Glass slows light down by about a third, says Philip Russell, who studies hollow-core fibres at the Max Planck Institute for the Science of Light in Erlangen, Germany.
Bach also suggests a few changes to the way in which signals are sent. One is to stop data compression, normally done to save bandwidth. “We can’t afford 2 to 3 microseconds to compress data,” he says. This would mean less information could be sent at once, but it would be quicker.
A second is to abandon error-correction codes, which improve signal quality but take time to process, by designing a system that is more error-resistant. Ending the practice of retransmitting lost data packets could also help, says Bach. This can confuse computer-trading software by scrambling the sequence of trades. Even random fluctuations of 1 to 2 microseconds in the arrival of data packets, an effect called jitter, can confuse computer algorithms.
Some observers worry that further stepping up the pace may be a bad idea. In July, Andrew Haldane of the Bank of England warned that “flash crashes, like car crashes, may be more severe the greater the velocity”.
In contrast, Terrence Henderschott of the University of California, Berkeley, finds “no compelling evidence” for automated trading causing problems.