In the rapidly changing financial markets, speed is money. Two-thirds of the speed of light is just a blink of an eye for ordinary people, but for high-frequency trading companies, it might determine the outcome of a trade. Today, we'll discuss the "speed war" of high-frequency trading and the stories of companies investing heavily for microsecond-level advantages.
To be faster than competitors by 0.07 milliseconds, some companies have spent $14 million, which is just 1/5700 of a blink!
The Value of 0.07 Milliseconds: A Speed Comparison
Imagine blinking takes 0.4 seconds, yet Jump Trading spent $14 million just to improve data transmission speed by 0.07 milliseconds (or 0.00007 seconds). The company purchased a 120,000 square meter plot of land opposite the Chicago Mercantile Exchange (CME) data center, not to build a building or for feng shui, but to set up a microwave communication base station to ensure trading instructions are delivered to the exchange as quickly as possible.
According to a previous Nasdaq similar microwave tower case, this improvement only provides a 0.07 millisecond boost. Though seemingly insignificant, for high-frequency trading, this tiny time could be the source of huge profits. Traditional fiber optic transmission speed is about 2/3 of the speed of light, while microwave transmission is close to light speed, 50% faster than fiber optics. More importantly, fiber optic cables are often not laid in straight lines, while microwave transmission can take "shortcuts".
For human traders, the difference between 0.00007 seconds and 0.00014 seconds is meaningless, as human eye-to-brain information processing takes 0.15 to 0.225 seconds. But Jump Trading's target is not humans, but computers - their algorithmic trading systems can make decisions and operations within microseconds.
[The translation continues in the same manner for the entire text, maintaining the original formatting and preserving specific terms like TRON, Sei, HT, AR, RON, ONG, and HFT.]However, critics like Mark Cuban, owner of the NBA's Dallas Mavericks, call high-frequency trading the "ultimate hacking," believing its speed game is unrelated to a company's real value. Buffett has also mocked investment methods relying on complex formulas. In 2005, he made a bet of $1 million, claiming hedge fund returns would not exceed index fund returns. In 2007, Protege Partners partner Ted Seides accepted the challenge. Ten years later, Buffett's chosen index fund had an average annual growth rate of 7.1%, while the five hedge funds only achieved 2.2%, more than three times lower in returns.
High-frequency trading companies' returns are also declining. In 2016, according to Institutional Investor, only Renaissance and Bridgewater fund managers earned over $1 billion annually, but their returns have been below market average for several years. Now, with more high-frequency trading companies and a fairer market, participants' earnings are not as high as before. Nevertheless, the trend of machines replacing humans is irreversible. In March this year, BlackRock (managing $5.1 trillion in assets) began using AI for stock selection and reduced more than 30 analysts and fund managers, representing 7% of the department's total staff.
Insights from High-Frequency Factors: From Microseconds to Daily Life
High-frequency trading may seem distant, but its concept can be applied to personal investment. Converting high-frequency data to daily data can still uncover good alpha returns. The ultimate pursuit of speed is not just a technological contest, but a microcosm of financial market efficiency improvement.
In the competition of machines and speed, no one can stop. In the future, financial technology will bring more surprises and challenges. Are you ready?
