This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Digital Skeptic: Fast Traders Hit Speed Limit

Stocks in this article: SGI CSCO

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.
2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs