In the past, I’ve written about the cost of latency and how reducing latency can drive more customer engagement and increase revenue. Two example of this are: 1) The Cost of Latency and 2) Economic Incentives applied to Web Latency. Nowhere is latency reduction more valuable than in high frequency trading applications. Because these trades can be incredibly valuable, the cost of the infrastructure on which they trade is more or less an afterthought. Good people at the major trading firms work hard to minimize costs but, if the cost of infrastructure was to double tomorrow, high frequency trading would continue unabated.
High frequency trading is very sensitive to latency and it is nearly insensitive to costs. That makes it an interesting application area and its one I watch reasonably closely. It’s a great domain to test ideas that might not yet make economic sense more broadly. Some of these ideas will never see more general use but many ideas get proved out in high frequency trading and can be applied to more cost sensitive application areas once the techniques have been refined or there is more volume.
One suggestion that comes up in jest on nearly every team upon which I have worked is the need to move bits faster than the speed of light. Faster than the speed of light communications would help cloud hosted applications and cloud computing in general but physics blocks progress in this area resolutely.
What if it really were possible to transmit data at roughly 33% faster than the speed of light? It turns out this is actually possible and may even make economic sense in high frequency trading. Before you cancel your RSS feed to this blog, let’s look more deeply at what is being sped up, how much, and why it really is possible to substantially beat today’s optical communication links.
When you get into the details, every “law” is actually more complex than the simple statement that gets repeated over and over. This is one of the reasons I tell anyone who joins Amazon that the only engineering law around here is there are no unchallengeable laws. It’s all about understanding the details and applying good engineering judgment.
For example the speed of light is 186,000 miles per second right? Absolutely. But the fine print is that the speed of light is 186k m/s in a vacuum. The actual speed of light is dependent upon the medium in which the light is propagating. In an optical fiber, the speed of light is actually roughly 33% slower than a in a vacuum. More specifically, the index of refraction of most common optical fibers is 1.52. What this means is that the speed of light in a fiber is actually just over 122,000 miles/second.
The index of refraction of light in air is very close to 1 which is to say that the speed of light in air is just about the same as the speed of light in vacuum. This means that free space optics — the use of light for data communications without a fiber wave guide — is roughly 50% faster than the speed of light in a fiber. Unfortunately, this only matters over long distances but its only practical over short distances. There have been test deployments over metro-area distances – we actually have one where I work – but, generally, it’s a niche technology that hasn’t proven practical and widely applicable. On this approach, I’m not particularly excited.
Continuing this search for low refraction index data communications, we find that microwaves transmitted in air are again have a refraction index near 1 which is to say that microwave is around 50% faster than light in a fiber. As before, this is only of interest over longer distances but, unlike free space optics, Microwave is very practical over longer distances. On longer runs, it needs to be received and retransmitted periodically but this is practical, cost effective, and is fairly heavily used in the telecom industry. What hasn’t been exploited in the past is that Microwave is actually faster than the speed of light in a fiber.
The 50% speed-up of Microwave over fiber optics seems exploitable and an enterprising set of entrepreneurs are doing exactly that. This plan was outlined in the Gigaom article from yesterday titled Wall Street gains edge by trading over microwave.
In this approach, McKay Brothers are planning on linking New York city with Chicago using microwave transmission. This is a 790 mile distance but fiber seldom takes the most direct route. Let’s assume a fiber path distance of 850 miles which will yield 6.9 msec propagation delay if there are no routers or other networking gear in the way. Give that both optical and microwave require repeaters, I’m not including their impact in this analysis. Covering the 790 miles using microwave will require 4.2 msec. Using these data, we would have the microwave link a full 2.7 msec faster. That’s a very substantial time difference and, in the world of high frequency trading and 2.7 msec is very monetizable. In fact, I’ve seen HFT customers extremely excited about very small portions of a msec. Getting 2.7msec back is potentially a very big deal.
From the McKay Brothers web site:
Profitability in High Frequency Trading (“HFT”) is about being the first to respond to market events. Events which occur in Chicago markets impact New York markets. The first to learn about this information in New York can take appropriate positions and benefit. There is nothing new in this principle. Paul Reuters, founder of the Reuters news agency, used carrier pigeons to fill a gap in the telegraph lines and bring financial news from Berlin to Paris. The groundbreaking idea of the time was to use an old technology – the carrier pigeon – to fill a gap. What Paul Reuters did 160 years ago is being done again.
Today, we are revisiting an old technology, microwave transmission, to connect Chicago and New York at speeds faster than fiber optic transmission will ever be able to deliver.
This technology is emerging just two years after Spread Networks is reported to have spent 300 million dollars developing a low latency fiber optic connection between Chicago and New York. Spread’s fiber connection will soon be much slower than routes available by microwave.
The Gigaom article is at: http://gigaom.com/broadband/wall-street-gains-an-edge-by-trading-over-microwaves. The McKay Brothers web site is at: http://www.mckay-brothers.com/. Thanks for Amazon’s Alan Judge for pointing me to this one.