With trading speeds of up to 40% faster, microwave transmission looks set to be an important technology tool for high frequency traders in search of a competitive advantage, but it won’t lead to a wholesale technology change across the industry. There are limitations to microwave and this is why a combination of low latency fibre and microwave is the optimum solution for high frequency trading.
Before these limitations are addressed, it is important to note that microwave technology offers irrefutable speed advantages. In the U.S., we have already witnessed a number of microwave systems going live this year, with the route between the financial centres of Chicago and New York receiving particular attention. Trading firms using the technology are already making their presence felt, with evidence that whoever is first or joint first to market with microwave will gain a significant competitive advantage. Trading desks have reported tangible hits on their fill rates when other market participants go live with microwave services, driving the demand for the IT department to investigate how microwave can be used alongside existing ultra low latency services.
Line of Sight Advantage
The chief advantage of microwave is its ability to travel point-to-point, or what is optimistically referred to as “line of sight”. Put simply, this is where the data is transmitted across the shortest distance between two points, making it faster. Fibre on the other hand has to go underground and around obstacles. In addition, electromagnetic waves travel faster through the air than they do through optical fibre, shaving further micro-seconds from the time it takes to transfer the data.
So far so good. There are, however, physical limitations that traders need to be aware of. As microwave operates point-to-point, the signal can be interrupted by an obstruction, and can become distorted when traveling over large expanses of water. Mountainous or hilly areas, of which Europe has plenty, are immediately ruled out. In addition, there are a finite number of microwave towers across Europe and a finite number of dishes that can fit on to a tower. Once a tower is “full” there is no room for additional capacity. Inevitably, this will mean a race among providers to gain access to these towers. As a result, take-up of microwave services could be restricted to the early adopters.
Availability of Bandwidth
Whereas with fibre you can just keep adding capacity, with microwave you are limited by the availability of bandwidth. The volume of market data being pumped out by exchanges exceeds the microwave bandwidth available, which means trading desks need to determine the best way to exploit microwave in conjunction with fibre. Some firms may, for instance, opt to send market data via microwave for their most profitable financial instruments, and use fibre for everything else. Others may choose to take their market data over fibre for clearing and settlement of trades and use microwave for order execution.
While there are limitations, the shortfalls are clearly not dampening the appetite for this latest weapon in the trading floor armoury. Much of the interest in our own microwave route, between Basildon and Frankfurt, has been driven by the fact that for trading firms, even the smallest of price movements can be the difference between profit and loss. So much so that we are already investigating other European routes and conducting detailed feasibility studies on other routes within the U.K.
Traders have always looked for new ways to trade more quickly. While microwave represents the latest technology to be employed in the race to zero, adopting microwave services will not deliver new areas of business for trading houses, but it will deliver a significant competitive advantage. What is important to consider is how and where the technology is used to best competitive advantage, complementing existing ultra-low latency fibre-based services to exploit pricing differentials.