More than 150 years ago, Paul Julius Reuter, founder of what is now the Reuters news agency, used carrier pigeons to transmit news and stock information speedily and gain a competitive advantage.
The beat of wings has now given way to the flash of light down fibre-optic cables. But speed remains the name of the game.
In modern markets, a group known as high-frequency traders relies on the transfer of data in microseconds to dart across markets and trade at lightning speeds. They make their money by earning very small amounts on a huge number of trades.
Minimising “latency”, a term used to describe the delay it takes before a trade to be executed, has been an industry preoccupation for much of the past five years.
Potentially, any physical factor can affect the speed of a trade, from the hardware used to the distance the signal has to travel.
In an effort to be fastest, high-frequency traders have been exploring ever more ambitious ideas, such as using microwaves and even weather balloons to transmit data. But is the race for speed reaching its limits?
Kevin McPartland, head of research for market structure and technology at Greenwich Associates, a financial services company, says: “Certainly, there are a handful of people out there who continue to look for microseconds. For the broader market, we have almost hit the threshold. To get beyond where we are comes down to amazing innovations in technology.”
It also means higher costs. Dwindling interest in eking out a microsecond more than competitors on routes between big financial centres such as New York and Chicago has come as profits for high-frequency traders have been squeezed by market conditions.
The optimal environment for high-frequency trading is one of extreme volatility and large volumes: 2008 was a boom time. But the post-crisis period has been one of increasingly low volatility and small volumes.
Regulatory scrutiny is also raising costs for all financial groups. The publication of Michael Lewis’s book Flash Boys: A Wall Street Revolt, which placed high-frequency trading at the centre of a modern market structure that the author slammed as “rigged”, has only intensified the focus. To remain competitive, high-frequency traders will always need to worry about latency, but there are notable shifts in how they are seeking – and investing – to gain an edge.
“Speed continues to be important, but it is just one of many factors,” says one executive. “Markets are extremely competitive, so you need to be excellent in all aspects of your business to be successful. The means not just fast but smart in your decision-making and in how you manage costs.”
Being smarter in decision-making requires a whole set of skills beyond parsing software code and hardware.
Thomas Burrell of Chicago-based Objective Paradigm, a recruiter for high-frequency trading firms, says there has been increasing demand for people who specialise in risk management and quantitative trading strategies, and “big data types” who can undertake analysis that predicts trading patterns.
Ari Rubenstein, co-founder and chief executive officer of Global Trading Systems, a market maker and high frequency trader, says his company is working on ways to store and quickly access the “oceans” of financial data created by electronic trading.
This, he says, is important now that there are more risk and compliance checks on every order. Vigorous competition among such firms creates an enormous amount of electronic order flow.
“Speed is important, it gets you in the game, but responsible risk and compliance management allow you to win,” he says. “What makes a Porsche great, for example, is the brakes and handling, not the unbridled speed.”
For Chris Concannon, president and chief operating officer of Virtu Financial, it is about looking at the whole life cycle of the order.
“You cannot ignore any single stop on that life cycle,” he says. “That is not new, but there has been a refocusing of resources in terms of where to find ways to reduce speeds. A lot of time is being burned on the consumption of the data and what to do in response to that data. While you care about whether information is received in a timely manner, you also need to focus on how quickly you can respond to it.”
Latency cannot be ignored, no matter how far it has progressed. Some routes are saturated, others are inefficient, and companies will always need to worry about rivals finding faster pathways.
Jock Percy, chief executive of Perseus Telecom, a US trading technology company, says: “Firms are happy being in the fast lane, but if a car pulls out and passes, they have to go with it.”
He adds: “A lot of market participants do not want to make that move, but if the trading opportunity is there, someone inevitably will.”