How Much Would You Pay To Be Faster Than Everyone Else

By: ispeculatornew
Date posted: 08.06.2012 (5:00 am) | Write a Comment  (1 Comment)

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I’ve discussed High Frequency Trading a few times (and the risks associated with algo trading) and one question that I get over and over is how firms are able to afford to spend so much to be competitive. A good example is the recent announcement of a new fiber-optic connection between Europe and Asia that will go through the Arctic. How much do you think this connection will end up costing? $1.5 billion!! The main users of this new connection will be high frequency traders.

Then there are the exchanges which continue to make record profits. They continue to look for increased market share through mergers which sometimes work but a few other times did not (London & Toronto, NYSE & Deutsche Borse among others). Then there are other platforms that were created to get traffic from HFT’s such as Bats Global Markets inc which turned public in March. You might have never heard about BATS but it is actually one of the most important exchanges in the world with over 10% of the volume on US markets. Like many other types of exchanges and dark pools, it stays out of the highlights.

Why The Need For Speed?

Basically, the whole idea is that there are tens of millions of dollars to be made every single day by providing liquidity and profiting from small arbitrage possibilities. The fact though is that hundreds of similar firms are fighting to get in front of each other, trying to get the volume, the trade and the arbitrage. The problem remains that if thousands of companies are trying to trade the same thing. Here is an example.

If a firm is trading the SPY ETF that tracks the S&P500. At any time of the day, if buying a stock such as Royal Bank (RY) and selling it in Canada is cheaper because of the FX rate, all of these firms would race to make the trade, trying to pocket $0.01 per share, or usually even less than that. Who would end up making the trade? The fastest firm.

How Much Is Being “Fastest” Worth?

If a firm is able to be the fastest, it would likely be faster for nearly every trade (think of car racing.. The fastest car does not always win, but it will win more often than not). If you could be able to make “risk-free” profit all day long, how much would that be worth? Likely a lot of money….

Where Will It End?

The problem though is that as these companies fight for microseconds, spending millions of dollars on faster connections, co-located servers and better algos, it only helps them keep up. It sems like the winners here are not necessarily the HFT’s but rather all of the service providers that can help these companies gain a few micro-seconds here and there, pocketing millions in the process…

It sure makes for an interesting industry to track

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1 Comment

  1. Pingback by Weekly Link Time — August 10, 2012 @ 4:00 am

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