High speed or high frequency banking is a fact of life now and I am glad to say I predicted it and some of its associated issues in the mid 1990s. Technology has moved on rather though, so it’s long past time for an update.
Getting the distance between computing elements as small as possible has been one of the key factors in making chips faster, but the distances between chips and between computers are enormous by comparison. Now that trading computers execute many billions of instructions per second, even tiny extra transmission times can make a significant difference in the precise time at which data that will influence a trade instruction is received by a bank computer, and a consequent trade initiated. That can make a big difference in price and hence profits.
We are about to see the first exaflop computers. A light signal can only travel a third of a nanometre in free space in the time it take for an instruction to execute on such a machine.
Some data delivery to banks is synchronised to give a degree of fairness, but not all data is included in that, useful data doesn’t all come from a single source, and analyst software isn’t necessarily in the same location as a trading device, so signals holding data or instructions have to travel relatively large distances and that gives a degree of competitive advantage to those banks that pick the best locations and optimise their networks best. Sometimes important signals travel between cities or between buildings in a city. Banks already make free space optical links, send signals over laser beams through the air; point to point links with minimum distance. However, that isn’t feasible between cities. Very straight optical cables have also been laid to solve longer distance comms without incurring any extra delays due to bends.
But the trend won’t peak any time soon. Light travels faster in air than it does in fibre. 3 microseconds per kilometre is a lot faster than 5, so those banks with fibre links would be at a disadvantage compared to those with free space links. If the distance is too high to send a laser beam directly between buildings due to atmospheric absorption, the earth’s curvature or air safety considerations, then there is another solution coming soon. Even sending free space light through the fibre ducts could be faster in latency terms than actually using the fibre, though the practicalities of doing so might well make it near impossible.
Balloons and drones are already being used or considered for many purposes and communications is just another one. Making a network of balloons or drones to divide the journey into manageable hops would speed signals along. There is a trade-off between altitude and distance. Going too high adds too much extra distance, though the air is clearer so fewer hops are needs and the speed of light very slightly faster. There will be an optimum curve that takes the signals reasonably high for most of the journey, but that keeps the total distance low. Drones and balloons can stay afloat for long periods.
It doesn’t stop with just comm-links. Given that there are preferred locations for different industries as far as data sources go, we may well see aerial computing too, doing the processing in situ and relaying a trade instruction to minimise the total time involved. Regulation lags such ideas so that enables the faster more agile banks to use high altitude balloons or drones for long periods before legal challenges force their removal. Even then, using helicopters and planes, hiring office building rooftops and many other strategies will enable banks to shave microseconds or even milliseconds off the time they need to analyse data and instruct trades.
High frequency trading has already introduced instabilities into trading systems and these new potentials will increase instability further still. The extra mathematical and business complexity of using divers parallel networks introduces new kinds of wave interference and emergent behavioural risks that will be as hard to spot as the financial derivative risks that caused the last crash.
While risks are underwritten by taxpayers and banks can keep the rewards, they have little incentive to play safe and every incentive to gamble more and faster, using every new gearing technology they can source. Future crashes could be even more spectacular, and may happen order of magnitude faster than the last big crash.
I spotted some other new banking toys, but they are even more dangerous and I will save those for another blog.