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In finance, faster trading poses new market problems

Supercomputers and new transmission infrastructure guarantees financial trading that's faster than ever before. Is it a smarter market, or is Wall Street playing with fire?
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Written by Andrew Nusca, Former editor on

It wasn't too long ago that stocks on the New York Stock Exchange were traded entirely by humans who scrawled notes on pieces of paper and hollered orders to each other in the chaos that was the Wall Street trading floor.

Now, that floor is empty, its traders replaced by increasingly sophisticated computing equipment located in unmarked warehouses across the river, in New Jersey.

It's a natural transition. With computers, stock trades now occur at a rate of fractions of a second. (Take Nasdaq as an example: an average order takes 98 microseconds -- that's 98 millionths of a second -- to place and confirm.)

In the ultra-competitive world of the financial markets, this is in many ways the holy grail: a competitive advantage limited only by technological advancement and the very laws of physics.

For that reason, financial firms are building these massive datacenters nearly as quickly as stocks are trading.

In an article in the New York Times -- from which I borrowed the above statistic -- this new infrastructure trend is explained in detail.

According to reporter Graham Bowley, it's happening all over the country.

The owner of the Chicago Mercantile Exchange, the CME Group, is building a 428,000 sq. ft. datacenter in the western suburbs of Chicago. A Mississippi-based company named Spread Networks this summer completed an 825-mile fiberoptic network, stretching across central Pennsylvania to connect the South Loop of Chicago to Cartaret, N.J., home of the datacenters of New York's largest financial markets.

(The point of all this? To reduce the round-trip trading time between Chicago and New York by three milliseconds.)

It's hardly a trend exclusive to American financiers, either. Efficiencies are in pursuit for the route between Frankfurt, Germany and London, U.K. And then there's the Hibernia Atlantic-built line across the pond, which in 2012 will slash the time to trade between London and New York to 60 milliseconds.

Rapidly, a massive financial infrastructure -- a physical one, a technological one that costs billions of dollars, with transmission lines and computer racks and electricity bills high enough to make Clark Griswold blush -- is materializing, all over the world.

Orders and strategies swing at a moment's notice, guided by increasingly complex algorithms.

It's a smarter financial system. Or is it?

The problem is that such intelligence and breakneck speed have created an entirely new set of challenges.

Aside from the energy issue -- those supercomputers consume incredible amounts of electricity -- there's also the question of fairness. With financial firms going to such great lengths to shave millionths of a second off trading times for competitive advantage, is it any fairer?

Or has the bar just been raised again -- the cutting edge that much thinner?

The other problem is that safety measures to prevent pile-on volatility must be put in place as rapidly as this infrastructure is being built, to prevent "flash crashes" like the one that occurred in May.

It's a sobering article, and one I encourage you to read. Then ask yourself: are we really getting smarter, or are we playing with the financial equivalent of nuclear weapons -- more powerful than imagination, but catastrophically destructive when out of control?

This post was originally published on Smartplanet.com

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