The neutrino arbitrage
Nick Dunbar has a good column today on how derivatives have followed physics from being clean to being messy. Once upon a time, both physics and derivatives had beautiful, simple models: quantum electrodynamics and Black-Scholes, respectively. But nowadays they’re both vastly more complex.
Physics has moved on to quantum chromodynamics, where complex interactions dominate the simpler ones and models get gnarly, while derivatives have found themselves in a world of counterparty risks and debit valuation adjustments and credit support annexes. Put them all together, says Dunbar, and the result is that the “derivative trading books at major banks lurch around like aircraft in a thunderstorm”.
All of which makes me very happy to see Bruce Dorminey’s column about a rather exciting possible application of high-energy physics to global finance. Remember the $1.5 billion being spent on transarctic fiber cables designed to cut a bit of latency between London and Tokyo? Here’s an even better idea: why not get rid of fiber cables entirely, and use neutrinos to transmit information, at the speed of light, right through the center of the earth?
At the very least, this could provide a fantastic revenue bump for physicists working at extremely expensive particle accelerators in a world of fiscal austerity. In order to make this happen, you’d need to either build your own accelerator, or lease some capacity from an existing one. The sums involved are both big enough to make physicists salivate, and small enough that the private sector could raise the money quite easily:
Learned says a one-way, earth-traversing setup might be constructed for as little as a $1 billion.
It also might be possible for a neutrino-communications startup to buy time on an existing accelerator, says Learned, in order to create and point a neutrino beam-line in the needed direction. Otherwise, private particle accelerators would have to be built from scratch.
But Haug contends that if a group of particle physicists had the right plan for the technology, Wall Street money “would be there” to make it happen.
If this was successfully implemented, price information from Sydney could reach New York in just 40.2 milliseconds, compared to the 84.4 milliseconds it takes to send that information on fibers around the surface of the earth. The difference is more than enough time for traders in New York to make real money arbitraging securities listed in both cities.
Indeed, it wouldn’t even need to be a Wall Street bank building this technology. Back in the 1850s, Paul Julius Reuter built the company I work for today by leveraging state-of-the-art low-latency technology: the undersea cable between Calais and Dover. Maybe David Thomson can do the same with neutrinos. He might even be able to find jobs for a few of those physicist-quants laid off by Wall Street in recent years.