How high-frequency traders benefit us all

By Felix Salmon
April 4, 2012
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File under “unexpected societal benefits of high frequency trading”: it’s doing wonders for building IT infrastructure. Sebastian Anthony and Jeff Hecht both have good overviews of the three — count ‘em — fiber-optic cables being laid deep below the arctic sea floor, all in a $1.5 billion attempt to shave 60 milliseconds, or less, off the amount of time it takes to get digital information from London to Tokyo.

None of this would be possible without global warming, of course:

Each cable will be laid by a pair of ships: an ice breaker that leads the way, and a cable ship. Until now it has been impossible to lay cables in the Arctic Ocean, but the retreat of the Arctic sea ice means that the Northwest Passage is now generally ice-free from August to October; a big enough window that cable can be laid fairly safely.

But global warming alone isn’t enough to make the economics make sense: standard cable ships aren’t rated for icy waters, so polar-rated ships have to be retrofitted for the job instead, at vast expense.

And yet three different companies have managed to make the economics work, even while offering only tiny decreases in latency: according to Arctic Fibre, the speed of the London-Tokyo connection is going to be reduced from 188ms to 168ms, a reduction of just 20ms.

Everybody will benefit from these cables, not least because they will bypass the current “choke points” in the Middle East and in the Luzon Strait between the Philippine and South China seas. But most of us are unwilling to pay for insurance against a ship dragging an anchor in an inopportune location. High-frequency traders, on the other hand, are willing to pay a lot.

The leaders of the project will need to persuade telecommunications companies to buy a piece of the capacity created by the cable. Telecom companies will make that decision largely based on demand from financial companies.

“What we’ve seen is just because you have a diverse path does not mean that you can necessarily sell that capacity for much more than the current market price,” Mauldin said.

I’m a little bit unclear on exactly how these cables are financed, and what the mechanism is whereby telecommunications companies sell ultra-fast connections to financial-services companies. But clearly it’s advanced and predictable enough that the economics make perfect sense for more than one player.

It’s lucky, then, that laying cable under the arctic makes a key financial connection noticeably faster. That cable would serve a very valuable purpose even if was a little bit slower than current connections — but in that event, no one would have any incentive to lay it. Are there any examples of people spending a lot of money to lay big fat pipes which are slower than what already exists but which simply expand the total amount of bandwidth available? I suspect the economics in that case would be much more difficult.

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