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$300M To Save 6 Milliseconds 524

Posted by Soulskill
from the time-is-money-friend dept.
whoever57 writes "A new transatlantic cable (the first in 10 years) is going to be laid at the cost of $300M. The reason? To shave 6ms off the time to transmit packets from London to New York. The Hibernian Express will reduce the current transmission time — roughly 65 milliseconds — by less than ten percent. However, investors believe the financial community will be lining up to pay premium rates to use the new cable. The article suggests that a one-millisecond advantage could be worth $100M per year to a large hedge fund."
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$300M To Save 6 Milliseconds

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  • Arbitrage (Score:5, Informative)

    by Fred Ferrigno (122319) on Tuesday September 13, 2011 @06:10AM (#37384744)

    If you're in London and you know 6ms before anyone else that the price of oil in New York just shot up, you can buy oil right now and then sell it in 6ms for a tidy profit.

  • Re:Gambling (Score:4, Informative)

    by _merlin (160982) on Tuesday September 13, 2011 @06:57AM (#37384936) Homepage Journal

    Adding delay will actually make investors worse off, because quoting will become less competitive. Let me explain this with a contrived and simplified example.

    Let's say I'm a market maker quoting a derivative, a call option on wheat futures for example. I decide what I think the option is worth based on the current price of the future and my guess at volatility, and we come up with a fair price. Let's say that the fair price is $50. The fair price for the option will move when the price of the underlying contract moves. The proportion by which it moves is called delta. Let's say this option has delta of +0.5, so if the price of the future changes by $1, the fair price of the option moves by $0.50.

    In order to make some money quoting it, I need to quote a spread - i.e. buy options for less than I sell them for. Let's say I want to quote a spread of 2% of the fair price, or $1 in this case. I drop our bid in at $49.50 and our offer at $50.50. You, as a wheat farmer or exporter, want to hedge yourself against fluctuations in wheat prices, so you're interested in trading these options. When I'm quoting a 2% spread, you can buy or sell options with a transaction cost of 1% of the fair price of the option, or $0.50 on a $50 option. That's not too bad.

    But remember that pesky concept of delta? If the price of the wheat futures moves around, I need to move my quotes on the option. For example if the price of the future increases by $2, I need to move by quotes up by $1 on the delta +0.5 option, So if that were to happen, I'd be quoting at $50.50 bid and $51.50 offer - note that I'm still only taking a premium of about 1% of the fair price.

    Hopefully you can see that if the price of the future moves around, I need to be able to keep up with it or I'll be screwed over when I try to hedge my options position. If the price of the future moves faster than I can move my quotes, I need to factor a safety margin into the spread I quote to cater for this.

    Suppose you introduce a random delay of up to one second. That means I have to consider the worst case scenario. Maybe I think the price of the future might change by up to $10 in one second. Since this is a delta +0.5 option, I need to factor in a risk of a half of $10, or $5, into the spread I'm quoting, because the price of the future could move by that much before I can move my quotes.

    So factoring in the $5 base move risk as well as my 2% spread that I'm trying to make money off, I'd be quoting $44.50 bid and $45.50 offer. Now your transaction cost has increased to $5.50 over the fair price per trade on the option, or 11%. It's not looking so attractive now, is it?

    Introducing delays won't hurt me as a market marker - I'll just increase my spreads to cover the risk, as will all the other market makers. It will definitely harm you as the person with a need to trade. Lower transaction latencies increases competition between market makers to quote tiny spreads, minimising the transaction costs for people who need to trade. Sure, the money is being distributed differently: instead of more market makers, each with a small slice of the pie, taking a big cut of each transaction, you now have fewer market makers taking a tiny cut of each transaction, competing to get a big enough slice of the pie to remain profitable.

  • by Anonymous Coward on Tuesday September 13, 2011 @07:28AM (#37385108)

    Actually that does happen in the US. Gains on stocks held less than 1 year are taxed at your income tax level and anything held over 1 year is taxed at a flat 15% capital gains rate.

  • by macson_g (1551397) on Tuesday September 13, 2011 @07:56AM (#37385288)
    The collecting asks/bids is called 'auction' and it is already available. The idea of market participants not knowing of each other's orders is called 'dark pool'. They do exists and people use them. If you want to trade this way, you can do it. Whoever goes to this 'corrupt' 'first-in, first-served, executed ASAP' exchanges does it voluntary.
  • by dkleinsc (563838) on Tuesday September 13, 2011 @08:19AM (#37385422) Homepage

    I heard some european head of state (Sarkozy perhaps) suggest that stock transactions be taxed based on speed, i.e. speculators who buy and sell very fast to make a quick buck get taxed a lot, but real investors who're in for the long run and keep their stock for a long time don't. That sounds like a great idea to me.

    This concept actually was first proposed in 1972 by Nobel-winning economist James Tobin, with the idea that it would apply to currency transactions to prevent speculators from rapid trading like the kind you're describing. Basically, the concept is that with such a tax in place, traders would have to hold onto the asset long enough that they could pay for the tax, plus whatever gains they were anticipating, so that meant that they'd have to expect to own something for longer than a few minutes. There have since been discussions of applying the same idea to stocks, bonds, mortgage-backed securities, and other assets.

    The purpose of that tax isn't so much to generate revenue (although this definitely would happen), it's to slow down the markets enough so that the assets could be properly valued rather than people making money on millisecond-level differences.

  • Re:Blame the market (Score:2, Informative)

    by Anonymous Coward on Tuesday September 13, 2011 @10:22AM (#37386920)

    >>> Any corporation created by foreign devils sorry allowed to operate in China must meet specific requirements, like having majority shareholders who are Chinese nationals. Have you actually BEEN to China - apart from the designated tourist areas I mean? Have you gotten the necessary government permits and been assigned the mandatory government interpreter/guide who will make sure you visit ONLY the areas you were allowed to visit?

    You are completely wrong. The recommended corporate structure for foreign friends is WFOEs - wholly foreign owned enterprises. You can't buy land (it's *all* on 70 year leases from the state, even if you are Chinese), but foreign businesses have essentially the same rights as Chinese ones, unless they try to do things illegally and get screwed over when they realize that the laws can actually be enforced.

    As for permits, there's no need for a guide. There are some sensitivities visiting Tibet, and Xinzhang, but you can otherwise go where-ever you want. You need a visa, and you need to alert the police to where you are going (hotels do this for you), but that's no different than staying in Europe, but the enforcement is much laxer - you can stay at unlicensed hotels, if you can find them. You can go literally anywhere. I also knew a guy who drunkenly walked into a military complex, pretending to be an English teacher looking for his school. They politely guided him off the premises, and told him which way to go (it was probably too much paperwork to shoot him, or report him to the cops, and the military probably didn't want to co-operate with another government agency - actually the army is not even technically part of the government, but part of the party which happens to get government subsidies, yes, China has turf wars, they just don't announce them on CCTV, the ludicrously named official TV station).

    There's no government guides. That's North Korea. If you are a visting VIP, you might get minders, I don't know. If you visit a business, they might *pretend* to send you an official guide, to make sure you don't see any of their dodgy practices, but that's not really a legal requirement (not that the government cares either way).

    There's a Chinese saying - "Heaven is high,and the emperor far." The unspoken corollary is "so everyone just does whatever the f*ck they want, as long as it doesn't piss off a more immediate authority". That's China.

Put no trust in cryptic comments.