High frequency trading firms may soon find themselves contemplating building a trading floor on transatlantic ships.
High-frequency trading that attempts to take advantage small price differences in the price of stocks, bonds or derivatives trading on two geographically removed markets requires super-fast trading.
Basically, the traders are trying to catch a fleeting arbitrage opportunity before the rule of one price kicks in and erases it.
The speed of trades, however, is limited by the universe’s ultimate “circuit breaker”—the speed of light.
Right now, trades travel at nearly 90 per cent of the speed of light through fibre-optic cables. They can’t really go much faster than that.
So what’s a trader to do if he wants to speed up his trading?
We already know that many firms co-locate with exchanges—placing their own trading hardware as close to an exchange’s hardware as possible.
But this won’t really help you if you are trying to trade between markets.
Doctor Alexander Wissner-Gross of Harvard has an idea: locate yourself midway between the two trading centres. So if you are trying to exploit pricing gaps between the markets in London and New York, you should put yourself somewhere in the Atlantic Ocean.
Apparently, floating trading floors is still a bit much for some firms. So Wissner-Gross is going about it the other way. Instead of relocating the trading floor, change the financial instruments you trade to those optimised by your location.
“I’m now working… with real companies on real deployments that don’t require you deploy a floating data centre in the middle of the ocean; we say, ‘OK, you have your existing infrastructure, that’s not moving—now, given your location, which stocks in various locations are you best positioned to trade?'” Wissner-Gross told BBC News.
But surely the floating trading floor cannot be too far off. If there’s money to be made in trading in a certain way—or from a specific location—you can be sure someone will be out there trying to make it.