The Digital Skeptic: Fast Traders Hit Speed Limit

This would all be so much theory if it were not for the fact the jig is finally up on high-frequency trading. Last week, The New York Times ran a front-page story confirming what everybody close to fast networks has been whispering for some time: Low-latency networks are about as fast as they are going to get. And exploiting their inefficiencies for profit is a fool's game.

And voila, blue-sky geeks such as Wissner-Gross and Freer are smack dab on the cutting edge of new approaches to trading.

What the two are arguing -- very coherently, by the by -- is that every fast trading strategy for every stock, bond or financial vehicle should include location as part of an optimal profitable trading approach. The factors in play include volume, price liquidity and the distance between where trades are executed. So say you're once again playing IBM between the Chicago Merc and the markets in northern New Jersey; somewhere in central Pennsylvania is probably the profitable location to trade. If you want to try to get paid with IBM between London and New York, the two say -- no kidding -- that a mid-ocean platform might make the most sense.  

"The fact is, there are specific, direct lines between these trading centers," Freer says. "And for companies willing to pay enough, where along that path you put a trading server gets you more efficient pricing."

"Pop-up Colo"
Wissner-Gross and Freer predict the future of fast trading will be based on so-called "pop-up colocation." (Think pop-up retail, except for location-based trading.) A fast trader will not colocate at a major center such as the Nasdaq. Rather, he or she will do business from an easy-to-install trading server module -- probably a portable shipping container stuffed with trading technology -- that can plopped down anywhere along a trading network route. Sure enough, these containerized server modules are hot items now. Silicon Graphics (SGI), Cisco (CSCO) and an operation called IOData all make such container servers. And the bellwether IT innovator, the U.S. Army, awarded a bunch of cloud data center contracts spec-ing these modules.

And here comes yet more grim news: As limits on the speed of trades push more volume outside major trading hubs, investors will soon realize they do not need to pay the freight for said hubs. They will see that, just like in media, publishing, and the legal profession, digital financial trading data turns simply too plentiful to be of much value. Which in turn means investors are looking at yet another bit of digital roadkill: the big, fancy centralized financial trading hub.

Exchanges such as the NYSE or the Merc will probably make excellent museums.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

« First ‹ Previous 1 2