TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Exchanges can trace their origins back to the Middle Ages. Since then, however, technology has transformed the global capital markets, and the speed of trading has accelerated with the adoption of computers to trade, mostly over the last 50 years. Today, quotes and trades travel over microwaves, lasers and optic fibers – often at close to the theoretical speed of light.
Fiber optics, microwaves and lasers replace trading pits
In today’s modern markets, orders, confirmations, quotes and trade data move digitally along a combination of cable, microwave, millimeter wave and, most recently, laser.
As with most aspects of trading, there is a tradeoff with each.
Chart 1: Different data transmission technology
Fiber is the most reliable and has the most bandwidth. Fiber optic cables work by sending light pulses along fiber or glass tubes. Because light slows down in the glass, fiber is “slower” than the alternatives, and it’s best to use it if you need to send a lot of data or detailed data.
In contrast, microwaves — millimeter waves and lasers — all move through the air. That makes them all faster than fiber but are more prone to signal disruptions due to natural events, such as the passage of clouds, rain, mountains. This phenomenon makes them unreliable for a split second or hours affecting market liquidity.
The curvature of the Earth is also a problem. Wireless transmitting requires frequent signal towers high enough to see over mountains and around the globe. In fact, the curvature of the Earth alone makes the Earth slope 100 feet every 25 miles.
Furthermore, wireless transmissions can’t hold as much data as fiber, and the signal tends to fade faster (needing more “repeater” stations to amplify and resend the signal. However, that is where tradeoffs between laser and radio waves begin.
Table 1: Benefits of different types of data transmission technology
Source: Nasdaq Economic Research, A Comprehensive Review on Millimeter Waves Applications and Antennas; Millimeter Wave Propagation: Spectrum Management Implications; Fiber Optic Association; Nasdaq Co-Location Services, Anova, Wall Street Journal, Optics Express
*Anova system uses a combination of laser and mm wave
Both microwaves and millimeter waves are a type of radio frequency signal. Radio signals travel pretty close to the speed of light and around 50% faster than light can move down a fiber cable, so switching to using microwaves can really decrease how long it takes to find out when prices and markets elsewhere have changed (also called “latency”).
The main difference between microwaves, millimeter waves and lasers is their frequency and wavelength. This requires us to get into a little physics.
Frequency measures the number of waves that pass a point in a second; a higher frequency means more waves move in that second. Wavelength tells us how much energy the signal can carry; a larger wavelength has less energy and carries less data, while shorter wavelengths have more energy and carry more data. We can hear this with sound waves. Low tones have long wavelengths and sometimes are hard to hear. High notes have higher frequencies, and some can hurt our ears.
However, we are talking about electromagnetic waves – some of which we can see. Chart 2 shows how the wavelengths change and where they are useful.
Chart 2: Electromagnetic spectrum
Overall, the main latency (speed) difference is between wireless and fiber. Capacity (or bandwidth) then differentiates each of the technologies, too, with higher frequency, giving millimeter waves an advantage over microwaves, but at the cost of shorter distances between antennae.
What about satellites?
We’ve all heard of satellite TV. Why don’t we trade with satellite messages?
It turns out the distance from Earth to a satellite and back matters – and is longer than around the surface of the Earth. However, some say low Earth orbit satellites could work for long distances.
Chart 3: Satellites vs. microwave
Source: A Bird’s Eye View of the World’s Fastest Networks, 2020
How much does time matter?
Even a very short distance, like the distance from Nasdaq to Secaucus (where dark pools sit, pegging peg prices to primary quotes), can matter to certain traders.
- Via fiber, the theoretical fastest speed is around 162us (microseconds).
- Via wireless, that falls to only 89us.
That might not seem like much (it is, after all, a fraction of one-thousandth of a second). But even in an Olympic race, a split second can be the difference between winning and second place – here, it might mean completing an arbitrage or being legged and exposed to losses.
Think of this a different way: There are about 35 million trades a day and only 23.4 million milliseconds during market hours. In short, microseconds can matter. And that’s before we discuss how most activity happens in 1% of the microseconds in the day. That’s why traders doing strategies where latency is important choose to use wireless technology. And the advantages and disadvantages of each are why millimeter wave, microwave and lasers exist.
But it’s also important to remember that to a human optic fiber is very fast, too – and it’s accurate and can handle large bursts of activity with less backlogs. That’s why it’s used for the SIP.
Just like for the past hundreds of years, it’s likely that the race for lower latency will continue. However, the reality is that if you’re using wireless now, you’re already pretty close to the theoretical limits of the speed of light, and you’re aware of the tradeoffs you’re already making to get there.
Phil Mackintosh is Chief Economist at Nasdaq. Nicole Torskiy, Economic Research Senior Specialist, contributed to this article.
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