HFT firms and traders espouse the virtues and benefits of high-speed trading - It creates liquidity! It levels the playing field against the big firms! Capitalism isn’t fair! It’s only technology! - but deep down they know the risks. Their HFT systems and strategies add volatility to uncertain markets and the chance to another Flash Crash awaits them every business day. What fortunes and respectable reputation they have earned in the past few years can vaporize in seconds.
And with new technologies, it can disappear in less than a second.
CNBC reports how HFT firms are using technologies that have been around for decades but have been repurposed for sub-second trading. These new communication system cost a bundle and have their own risks but these speed hungry traders could not care less. There is money to be made and competitors to leave in the dust.
Let’s look at the innovations: A new microwave network has cut connection rates from London to Frankfurt by roughly 40 percent compared your quaint 1990s era fiber optic cables. A system based on laser that once helped fighter jocks communicate and coordinate is set to speed trades between these two financial capitals in the coming months. Some firms are even contemplating the use of drones to transmit data - microwaves are cool but signals can distort in bad weather and the data packets are on the small side.
"Some people talk about using balloons or satellites, and some of what I have heard is even more crazy," Alex Pilosov, chief executive of Windy Apple Technologies, which takes credit for building the first microwave network between New York and Chicago, tells CNBC.
These innovations are cool and it’s heartening to see the usually risk-averse investment firms spend money on "new" technology, even if many of these ideas have been around since the 1960s. (Thank you, Cold War). But perhaps some of those skunkworks dollars could go to fortifying systems. After all, last week the markets fell when a hacker overtook the AP’s Twitter feed and tweeted “news” of a bombing at the White House that injured the president. While the systems recovered quickly, the automated trading platforms followed the news and caused a profound dip in the market.
And one has to think that all of this effort is all for naught. Afterall, regulators and lawmakers will be cracking down on HFT eventually. They have seen the Flash Crashes, seen the peaks and dives in the markets and they simply don’t trust these machines. An HFT tax or a time out is coming. In fact, one exchange just announced that it is might scrap its HFT policy for a bundled trade approach. This could be an empty promise to keep the SEC at bay but it might be the sign that the markets are cleaning up their acts.
Ask any addict. At some time, the party stops being fun and it’s time to sober up before something terrible happens.
Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio