Companies Pitch Shortwave Radio to Shave Milliseconds Off Trades

(Bloomberg Businessweek) -- High-frequency traders will famously do almost anything to get the latest market data and send their buy and sell orders a few milliseconds ahead of the competition. They blasted through mountains to build the most direct fiber-optic routes possible between exchanges in a competition that transformed global markets and was made famous by Michael Lewis’s book Flash Boys. Soon, pinging light through glass fiber at more than 124,000 miles per second wasn’t fast enough—the glass slows things down—so traders moved on to microwave transmitters that send signals through the air.

But that has problems, too. Microwaves travel only roughly as far as the eye can see before they peter out and need a signal boost. Now two rival market telecommunications companies have signed a pact that they say will give traders more access to experimental wireless signals which can travel across oceans.

To do that, signals need a longer wavelength—known as a shortwave rather than microwave—that bounces between the water and atmosphere. It’s an imperfect solution. The waves can handle only a fraction of the data that fiber can, carrying about a kilobit per second vs. gigabits. And some signals can be lost.

Raft Technologies Inc., a startup based in Tel Aviv, says the trade-offs are worth it. Raft says it can send data over shortwave from Chicago to Frankfurt in 31.4 milliseconds, which it says is about 4.5 milliseconds faster than the best available fiber route. That’s an eternity in an industry that tends to measure improvements by the thousandth of a millisecond. The company says the signal is about 85% reliable, compared with 100% for fiber. Clients can use a fiber line in parallel as a fail-safe measure.

GTT Communications Inc., which runs the dominant transatlantic fiber line, said in a statement that it has “the lowest latency transatlantic capacity service”—that is, the fastest—“and we are committed to maintaining our leadership position in this market.”

Raft has been serving clients for a year and half and is working with McKay Brothers International, which specializes in microwave antennas, to expand its reach. The partnership will beam information on Chicago Mercantile Exchange futures contract trading to London data centers. McKay, founded and run by two Harvard Ph.D.s in physics, will then distribute these signals over its own data platform, known as Quincy, while combining its own network of microwave hops with Raft’s transoceanic leap.

Companies Pitch Shortwave Radio to Shave Milliseconds Off Trades

The customers will be algorithmic high-frequency traders, who use computers to scour market data to find and then exploit tiny discrepancies in prices. “The obvious strategy is pure arbitrage,” says Haim Ben Ami, Raft’s chief executive officer. The milliseconds matter because the gaps can be so fleeting, disappearing as soon as someone else with a faster computer and quicker connection spots them. The competition is so intense that legal battles can break out over the placement of trading firms’ antennas within a few feet of each other near data centers.

Ben Ami says it’s likely some hedge funds and others have already been using shortwaves over their own private networks. A couple of years ago, a ham radio enthusiast spotted an apparent shortwave antenna tower outside Chicago that’s been linked to trading companies. “You can imagine several large algo trading firms tried to develop this technology,” he says. “But of course, they don’t offer it as a service.” By offering the system more widely to anyone who can pay, Raft and McKay are “leveling the field,'” says Raft’s business and market growth manager, Tomer Mann.

Don’t expect big defections from transoceanic fiber connections just yet. The bandwidth limitations on shortwave impose significant constraints on modern high-frequency strategies , according to Christina Qi, founding partner at Domeyard LP, a hedge fund. “You cannot carry sophisticated signals or full book feeds with shortwave radio transmission as you would with microwave transmission,” she says, referring to the rich data on other traders’ orders to buy and sell that are needed for more complex trading strategies. “But it’s a technology that we’re keeping an eye on.”

In the midst of a global pandemic and economic crisis, it may seem strange to sign a deal to build an expensive network to do nothing but move more market data another imperceptible moment faster. But Ben Ami says he’s never seen as much demand. Traffic on Raft’s network soared 3,500% from February to March as clients tried to capitalize on markets’ volatile price swings.
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