Speed traders in talks to build Chicago-to-Japan microwave link

(Bloomberg)—Rival high-frequency trading firms are in talks to jointly build a Chicago-to-Japan communications link that would accelerate trading across the Pacific Ocean, according to people familiar with the discussions.

The project, dubbed “ Go West,” would install a line of microwave towers from the Chicago area to the U.S. west coast, possibly ending near Seattle, and then connect to an undersea cable that stretches to Asia, according to the people, who asked not to be identified because the talks, which started months ago, are confidential.

The cast of companies involved in the talks has included Citadel, Virtu Financial and Jump Trading, though the final roster isn’t set and the talks aren’t final, the people said. Those three firms declined to comment.

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Joining forces to construct a network may signal a truce in the arms race big traders have waged for years to shave milliseconds off trading times. Possibly six to 10 separate microwave networks that support speed trading are operating between Chicago and data centers in New Jersey where U.S. stock trading takes place, according to an estimate from Greg Laughlin, a Yale University astronomy professor who has studied the topic.

By teaming up, traders could cut their infrastructure costs, pitting their trading strategies against each other instead of just competing on speed.

“A consortium makes a lot of sense because you distribute the risk and you distribute the benefits and you also are able to kind of keep the status quo from being completely disrupted,” Laughlin said. “High-frequency trading strategies are very, very, delicate and difficult to come up with and temperamental and they don’t last.”

“Go West” might also be an early move in a broader attempt to reduce costs, according to a person aware of the talks. In recent years, exchanges have boosted how much they charge traders to access their markets and receive vital data feeds on prices. Automated trading firms might next step up efforts to whittle down those expenses and look for even broader support from brokers, the person said.

99 PERCENT OF UNIVERSE’S SPEED LIMIT

While fiber-optic networks used to be the main way big electronic trading firms shot their orders across continents, microwaves have helped them do business even faster. Fiber can convey information at roughly two-thirds the speed of light, microwave networks operate at about 99 percent of the universe’s ultimate speed limit. Over the more than 1,700 miles between Chicago and Seattle, what takes roughly 14 milliseconds with fiber takes only about 9.5 milliseconds with microwaves, assuming it’s a straight line.

Many automated trading firms engage in arbitrage, or betting that gaps in the prices of two similar things will disappear. Such opportunities exist between the U.S. and Japan. For instance, futures contracts on Japan’s Nikkei 225 stock index trade on both Chicago-based CME Group’s exchange and Tokyo-based Japan Exchange Group’s market.

The use of microwaves in trading has been controversial. South Korea’s exchange is trying to eliminate the practice in that nation. In England, some residents of the tiny village of Richborough have raised obstacles to traders wanting to build radio masts as tall as the Eiffel Tower to create the fastest communication link between London and Frankfurt.

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