High frequency trading and the war on latency

Описание: High-Frequency or Algorithm trading is a type of financial trading that uses powerful computers and complex algorithms to execute a large number of orders at extremely high speeds.
Imagine that you are playing a video game where you need to make moves and decisions in milliseconds to win; HFT is somewhat similar, but in the world of stock markets.

The computer swiftly analyzes the market, determining when to buy or sell, and promptly executes these decisions at a rate that is humanly impossible. This often happens in milliseconds, where a millisecond is thousandth of a second.

HFT firms make money on very small price differences, often just a few cents or fractions of a cent. Because the profit per trade is so small, they need to make a huge number of trades to generate significant profits. This means they often trade millions of shares each day.

Regardless of the strategies employed by high-frequency traders, it is crucial for their computers to be very fast and efficient, and the latency—the time taken for data bits to travel the link between HFT’s firm systems and the stock exchange—must be minimized. High-frequency traders go to great lengths to decrease this latency, understanding that even a millisecond edge over their rivals can lead to significantly increased earnings.

Following are the steps taken to reduce latency:

Upgrading transmission equipment: switches and other transmission components and modules contribute to modest levels of latency in a communication network. By upgrading to high performing, low latency, network elements, the overall network latency will be minimized.

Geographical location: An obvious strategy for beating latency is for high frequency traders to locate their computers in close proximity to the exchange. In many cases, they even collocate with the exchange ensuring that the distance between their computer systems and the exchange servers is minimized.

For example, imagine two traders, X and Y. Trader X is situated 1 kilometer away from the exchange servers, whereas trader Y is located within the same building as the exchange, with his computer systems only 10 meters away from the servers.

To determine the one-way latency caused by the optical fiber connecting two points, you divide the fiber length by the speed of light in the optical fiber. If you've completed our OTT CONA training, you know that the speed of light in optical fiber is slower than in a vacuum or air. It is obtained by dividing the speed of light in a vacuum by the group index of refraction of the fiber at the transmission wavelength.

The group refractive index of standard single-mode fiber, provided by a leading manufacturer, is 1.4676 at 1310 nanometers, commonly used for short-reach transmission. Hence, the speed of light in this fiber is 204,401 kilometers per second - which is 300,000 kilometers per second divided by 1.4676.

Using hollow core fiber
To take it a notch further, traders could turn to hollow core fiber technology. This innovation stands apart from traditional fibers, which feature a solid glass core, by having a core that is empty. The fiber's cladding incorporates a periodic arrangement of air holes, establishing a photonic bandgap.

This design facilitates a unique method of light propagation, different from standard optical fibers. Transmitting light through a hollow core guarantees lower latency, lower attenuation and reduced nonlinear impairments compared to standard optical fiber.

The refractive index of a hollow core fiber is approximately 1. Based on our previous calculations, the latency for 1 km of this fiber is 3.34 microseconds, which represents a significant reduction of 1.53 microseconds compared to standard single mode fiber.

This explains why, notwithstanding the high cost of this type of fiber, some traders are implementing it within their trading networks.


To learn more about optical networking and to design high performance networks, join our OTT optical networking classes - including Certified Optical Network Associate (CONA) and Certified Optical Network Engineer (CONE).