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Monday September 22, 2014

High-Frequency Traders’ Sights Set on Microwave Dishes

Shrouded microwave relay dishes on a communica...

Shrouded microwave relay dishes on a communications tower in Australia. (Photo credit: Wikipedia)

Trading firms are racing to build groups of microwave dishes to generate higher-speed links between financial markets in Chicago and NY, as reported by The Wall Street Journal. A majority of telecom traffic will have to travel between these regions, and the cellphone towers that run along the roads and highways here are the main sights for a telecom boom.  The owners of cell towers, such as TowerCo LLC, have the opportunity to make immense profits on these properties.

According to the Journal, trading firms that have long relied on fiber-optic cables, are trying to get an advantage by building these microwave relays. In recent months the FCC has had filings from ten different firms for these networks. These increased communications are part of an effort to energize communications between financial hubs. Some companies have pegged the big profits in selling speed to banks and trading firms, while others say that most networks could never keep up with the rapidly growing technology.

Richard Elliott, head of trans-Atlantic cable owner Apollo Submarine Cable System Ltd., told WSJ that, “It becomes something of a grim arms race, with each successive millisecond [of speed] costing more than the last.”

Spread Networks LLC spent $300 million to bury a fiber-optic cable between NY and Chicago that cut only three thousandths of a second off communication time, according to the WSJ. The emerging microwave signals threaten to undercut the profits from fiber-optics. Microwave networks can travel faster than fiber-optic cables in some cases, and because cell towers are tall enough they have become top locations for microwave dishes.

The problem with these cables is that they are less reliable, and carry less information than other forms of communication. The advantage of extra seconds gives traders the opportunity to exploit the differences in pricing of securities between the two cities. The WSJ reported that trading firm, Tradeworx Inc. said 2.3 milliseconds saved is worth $1,350 a day for a trader trying to profit from price differences in the S&P 500 futures in Chicago and NY. Tradeworx is offering a feed of futures-market data to outsiders for $250,000 a year.

This race to build microwave networks is part of a movement towards telecom investment. There have been issues though, one of which is the difficulty in securing airwave rights needed to send signals between two cell towers on the path between NY and Chicago.

The Wall Street Journal (subscription require)