Forget the trading floor—in the future, an empty lot in Uzbekistan or a barge anchored miles off Chile’s southern coast may be the most lucrative spot for playing the market. A new analysis, to be discussed at Golden Networking‘s High-Frequency Trading Experts Workshop 2010 (http://www.HFTExpertsWorkshop.com), “Practical Implementation of High-Frequency Trading Strategies”, Hong Kong, November 22 & 23 and New York, December 9 & 10, finds the precise locations between the world’s major securities exchanges for gaming the speed of light.
As reported by Science News’ Rachel Ehrenberg, “in today’s markets, computers search for and act on relevant information in a flash, sending orders through fiber optic cables at nearly light speed. By buying or selling shares split seconds ahead of the rest of the market, holding stock for mere moments and then doing it all again, high-frequency traders are turning fractions of pennies into piles of dollars. To trim time in the extreme, firms will even buy space for their computers as close as possible to an exchange’s computers, a practice called “colocating” that cuts data travel time, giving some traders an edge.”
“But to exploit the 50-odd milliseconds it takes for information to cross the Atlantic, it turns out that the sweet spot isn’t always at the exchange’s door. For some assets sold on more than one market, such as the New York and London stock exchanges, the money-making spot is in the middle of the Atlantic Ocean, researchers report in a paper to appear in Physical Review E. The team figured out primo locations for performing particular trades on the world’s 52 major securities exchanges. The analysis considers the speed-of-light delay between exchanges, and characteristics of the exchanges themselves, such as volume and frequency of trades.”
“‘One surprising feature is that a lot of these optimal positions are in the ocean or other poorly connected areas,’ says study coauthor Alexander Wissner-Gross of the MIT Media Laboratory. ‘Simply owning or having sovereignty over a certain position on the Earth might turn out to be financially interesting.’ But some choice spots, such as Los Angeles, are already well connected, says coauthor and mathematician Cameron Freer of the University of Hawaii at Manoa. For trading some stocks sold on both the New York and Tokyo exchanges, the ideal location is probably already wired. However, even for hot spots with preexisting infrastructure, it’s unlikely anyone will take advantage of this money-making map anytime soon, says computational finance expert Michael Kearns of the University of Pennsylvania in Philadelphia.”