Here's The Best Place For High Frequency Trading

If any of you oil company executives get a phone call from a financial trading firm who want to rent an oil rig, don’t be surprised. A recent analysis concludes that the best place for high frequency trading in the near future probably is in the middle of the Atlantic Ocean.

“Simply owning or having sovereignty over a certain position on the Earth might turn out to be financially interesting.”

Alexander Wissner-Gross

To exploit the 50-odd milliseconds it takes for information to cross the Atlantic, it turns out that the sweet spot isn’t always at the stock exchange’s door. The best places for extreme high-frequency trading might be an empty lot in Uzbekistan, a barge anchored miles off Chile’s southern coast or on a floating device in the middle of the Atlantic Ocean, according to the analysis.

The analysis,  to be discussed at High-Frequency Trading Experts Workshop 2010 organized by Golden Networking in November and December, tries to pin point the precise locations between the world’s major securities exchanges for gaming at the speed of light.

In today’s markets, computers search for and act on relevant information in a flash, sending orders through fiber optic cables at nearly the speed of light. By buying or selling shares split seconds ahead of the rest of the market, holding stock for mere moments and then doing it all again, high-frequency traders are turning fractions of pennies into piles of dollars, UltraHighFrecuencyTrading.com writes.

To trim the time lapse in this extreme markets, firms will even buy space for their computers as close as possible to an exchange’s computers, a practice called “co-locating” that cuts data travel time, giving some traders an edge.

But to exploit the 50-odd milliseconds it takes for information to cross the Atlantic, it turns out that the sweet spot isn’t always at the exchange’s door. For some assets sold on more than one market, such as the New York and London stock exchanges, the money-making spot is in the middle of the Atlantic Ocean, researchers report in a paper to appear in Physical Review E.

The team figured out primo locations for performing particular trades on the world’s 52 major securities exchanges.

The analysis considers the speed-of-light delay between exchanges, and characteristics of the exchanges themselves, such as volume and frequency of trades.

“‘One surprising feature is that a lot of these optimal positions are in the ocean or other poorly connected areas,” says study coauthor Alexander Wissner-Gross of the MIT Media Laboratory.

“Simply owning or having sovereignty over a certain position on the Earth might turn out to be financially interesting.”

But some choice of spots, such as Los Angeles, are already well-connected, says coauthor and mathematician Cameron Freer of the University of Hawaii at Manoa. For trading some stocks sold on both the New York and Tokyo exchanges, the ideal location is probably already wired.

However, even for hot spots with preexisting infrastructure, it’s unlikely anyone will take advantage of this money-making map anytime soon, according to computational finance expert Michael Kearns of the University of Pennsylvania in Philadelphia.

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