Competitive Advantage: Trade Stock With Laser Devices

Every fraction of every second counts in the realm of high-frequency stock trading. To facilitate extremely rapid order entry, trading firms have located their physical technology headquarters as close as they could to where the stock exchange servers are housed. Then, they installed microwave and even millimeter-wave order transmission systems capable of sending data at rates near light speed just to grab a tiny advantage over the rest of the herd. Hyper-close proximity combined with ultra-fast networks creates profitable trading opportunities for those able to respond to news and get their buy and sell orders to the market first.

The latest wrinkle in this technology arms race is lasers — the kind the U.S. Defense Department uses to keep its most sophisticated military jets in the air. To gain a further advantage on the competition, high speed traders are turning to laser-powered networks to create faster links to the exchanges where stock orders are matched. The idea is to further decrease an already tiny degree of network latency (traffic congestion) in the existing microwave network brought about by such things as weather and atmospheric distortions. The proposed laser networks are expected to allow signals to be sent along a much straighter and more direct path. In theory, this should further speed up network traffic, and allow buy and sell orders to get to the market first.

The use of such laser networks will be more effective if installed along the path between the trading firms and the stock exchanges. A small Chicago-based communications firm is planning to deploy an array of laser-powered data transmission links between the New York Stock Exchange’s data center in Bergen County, New Jersey with the Nasdaq Stock Market’s data center which is 35 miles to the south. Future plans include linking nearly all U.S. stock exchanges in this manner. For stock traders who employ algorithm-driven trading systems, nanoseconds (billionths of a second) can mean the difference between booking a profitable trade and getting shut out.

Of course, the expected benefits derived from these highly-ambitious plans are still regarded by experts as somewhat speculative. The speed differences between proposed and existing networks are already very small in most cities. Moreover, Federal regulatory agencies have expressed concerns about the high-frequency trading crowd’s relentless pursuit of speed as a way to pile up profits. They point to the May, 2010 “flash crash” episode as evidence that unregulated algorithmic trading could create similar shocks in the coming months and years to come. Further crashes may drive the retail investor out of the equity markets altogether. For these reasons, the use of laser beams as a way to trade stocks faster and more profitably is a concept that still needs to be proven viable how interesting it is.

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