[Update, November 18, 2014:
check episode 2 with the Latent answer to this post]
There’s a thin grey line
Between the black and white
It’s evidently hard to find at night
Depeche Mode, Alone
Times have been intense since Part III (a lot of work to do not related to HFT). I heard some people were “jumpy” because I put public data on a map, but others were quite friendly. I thank those who pointed out the mistakes I made. I am not a journalist, nor am I a whistleblower. I just wanted to see the EU microwave networks as I am trying to work on the “nature of market”, the topic of a Ph. D. for which I am trying to find a grant. French King François Hollande once said “finance has no face” (as the Ceres statue at the top of the CBOT in Chicago) but by mapping the microwave networks it’s possible to give high-frequency trading a face. A blog is not an academic space, and even if I am trying to be as accurate as I can (that’s not so easy, trust me), I’m trying to maintain a sense of humor.
That being said, during my investigation (which was more a diverting hobby than a full-time job), I had never thought to come across some stories that could be turned into a plot for a TV series on HBO or Netflix. The small world of HFT microwave networks is full of surprises. One of them is the only network I didn’t talk about until now: Latent Networks. Thanks to Latent I have learnt a lot about how nature (i.e. waves) is a tradable product for the high-frequency competitors. This episode was quite hard to write (I am on a grey line here) and the devil is in the (technical) details – if you are not familiar with the microwave world, I advice you to read my previous “HFT in my backyard” posts. Attention must be paid.
FROM MALTA TO CYPRUS TO PANAMA
I came to know Latent Networks when I discovered Cartoradio, the website of the Agence national des fréquences. With Cartoradio I started to map the towers in North of France. There was nothing special about Latent – they received a first license in France on February 5, 2013. Since I had never heard about the network, I downloaded the official list with the contact details of all the radio companies active in France. All the HFT competitors are transparent in the sense they have a postal address and offices with people working there. The first intriguing thing about Latent is that the company is incorporated in the Republic of Malta, and I thought it was quite exotic to find a HFT network in a tax haven. I asked some people in the industry about Latent and answers were evasive (but I realized later that some knew more than they told me first, I think they were waiting to read my first posts before giving me more data).
At this time (around mid-July), I found the firm in the official Malta Registry of Companies but the only information available are the name of the firm and the company ID; however, if you spent a dozen of dollars you can buy the “certificate of registration”, where I thought I could find names… but instead of names, I suddenly jumped from Malta to Cyprus and Panama. In short: Latent Networks Limited was incorporated in Malta on September 4, 2012, and located in Sielma, Malta. The secretary of the firm is a man with a Polish name, Krzysztof Kubala, who works for a firm called Taxways Group. The Malta address of Taxways Group is the same as the Latent one, but the main office of Taxways is located in Warszawa. There is another company involved in the Latent certificate of registration, called Alter Domus (such a lovely name for a tax haven specialist).
The best are the two shareholders of Latent Networks Limited: the first is Invest Group Limited, also located in Sliema, Malta, along with Latent and Taxways; the second (and main) one is Batlaw Holdings Limited, a firm incorporated in… Cyprus. If you search on the Cyprus public Department of Registar of Companies, you quickly learn that one of the directors of Batlaw is Krzysztof Kubala, the man behind Taxways in Malta, who appears to also be the CEO of Invest Group; what’s more, the Cyprus Batlaw secretary is another Polish person, who has connections with Taxways, Invest Group and Latent in Malta. You are lost? Look forward to the next move: on November 23, 2012, a few weeks after Latent was incorporated, the Batlaw shares were transferred from Cyprus to a company named Amicalle Corp., in… Panama. This a new kind of network. A SuperMontage. If you register to the Registro Publico de Panama, you learn the shareholders of Amicalle Corp. are two different firms, Dubro Limited SA and Aliator SA, and both these firms have the same shareholders, two other firms named Cheswick Inc. and Eastshore Inc. If you try to know who is behind Cheswick and Eastshore, you find a lot of directors, secretaries, etc., who also are directors, secretaries, etc., of hundreds or thousands of other firms. Ladies and gentleman, welcome in Panama! All those firms are located in East 54th Street, City of Panama, which is a tower, a new kind of tower in the HFT microwave world:
No doubt that those who created Latent Networks really love tax havens. Panama is a dead-end. I suspect the myriad of firms in this tower to be managed by Mossack Fonseca & Co, a big law firm which “is one of seven that collectively represent more than half of the companies incorporated in Panama”, according to Wikipedia. Back to Malta, I realized that at the same address in Sliema there are other firms connected to Latent: NGN Europe Limited, incorporated a week after Latent in September 2012, owned by Latent; and two others companies named Latency Engineering Blue Limited and Latency Engineering Green Limited. I am not paranoid at all, but given the Malta-Cyprus-Panama-Warszawa network, one may wonder why a high-frequency microwave network needs a worldwide SuperMontage. I thought such sophisticated configurations were made for drug cartels, mafias or banks. The Latent SuperMontage would be perfect in a novel à la John Le Carré.
THE NEWGIG “SCAM“
I was more interested in finding guyed towers in Belgium than investigating the rough areas of tax havens. One informant told me to look at a firm called Newgig, saying it may have connections with Latent, but I didn’t pay attention. It was a mistake: two weeks ago, when I was gathering up all the data I had, I finally checked out Newgig, only to understand why someone wrote me about the firm with these words: “they were pure scam artists – as in, criminal fraud”. Wow. The Newgig story is worth reading indeed– and a good opportunity to go deeper into some complex issues.
Newgig Networks LLC was a Las Vegas company created by Carl Petrosky and Jake Zoldan in 2009, according to Zoldan profile; early 2012, the founders “jumped into the microwave industry when they smelled money”, according to a person who crossed their path. Around 2011-2012, in the US, a lot of people were trying to set up microwave networks by connecting the different market venues, the most important route being the New Jersey-Chicago one. Alex Pilosov’s Windy Apple Technologies network was the first to be achieved mid-2010; Marty Snyder’s Communication Infrastructure Corporation (CIC) was working on different routes too, along with other firms (check this interesting 2012 article). Newgig decided to come on board and appointed Aviat Networks in the US and Nexxcom in EU to build two networks – New Jersey-Chicago, Frankfurt-London. But things went wrong mid-2012. The rest of the story can be found in the Superior Court of the State of California records and there – and it’s quite interesting.
The story: Newgig pre-sold the bandwidth of the two networks to trading firms; the money was supposed to pay the suppliers mandated to build the networks (Aviat and Nexxcom). On March 31, 2012, Newgig and Nexxcom ”entered into a agreement involving the construction, implementation and activation of a wireless network between United Kingdom and Germany“, according to Nexccom’s “Cross complaint for breach of contract” filed at the Superior Court of California later this year. But around June 2012, Newgig failed to pay the first invoices sent by Nexxcom. Nexxcom “is informed and believes that in July 2012, Newgig was financially overcommitted to other projects, including that Newgig was 100% over-budget”. According to Nexxcom, at this time one of the two founders of Newgig admitted that they were “100% over-budget, many months behind schedule and incurring penalties from customers that hey had pre-sold services”; Newgig also admitted “that the project was running into trouble as the route passed through Pennsylvania and New Jersey”. Thanks to the Federal Communications Commission (FCC) website (FCC is the American telecommunication regulator) and with the data available in the Court records, I have been able to easily draw the Newgig path:
It seems Newgig got tripped up by the famous Allegheny Mountains, discussed by MacKenzie, Beunza, Millo & Pardo-Guerra in “Drilling Through the Allegheny Mountains”. The Nexxcom cross-complaint states that instead of using microwave, Newgig “elected to use a fiber optic network in addition to wireless networks to fix the problem” and admitted “that this solution created additional unforeseen costs”. What a network… The idea behind a microwave network is not to use fibers, as microwave is faster than fiber; by failing to build a true microwave network, Newgig could not offer anything to the trading companbies which paid deposits to use a faster network. A lot of people I talked with are convinced Newgig never intended to really produce the networks. As a microwave industry veteran told me: “They admit to ‘taking deposits’ [i.e. advances paid by the trading firms], which means that the scam was their normal mode of operation. My impression is that they collected a ton of money as deposits and just ran away”.
Whatever the case, Newgig went bankrupt in May 2014 (the firm even had difficulties to pay their lawyers). But the most interesting in the Court records and the bankruptcy filings is that you have all the details about the network they were supposed to build and sell in Europe. The total network construction was estimated a little more than $5,000,000 (that’s consistent with the price Custom Connect paid to set up their network); sites acquisitions were estimated $1,000,000; spectrum/radio licenses were estimated $180,000 (By the way: I learnt that in the US frequency licenses are nearly free; that means the US regulator doesn’t consider waves – a common good produced by nature – as a real product for sale; that’s quite amazing to see that in one of the most capitalist countries in the world there are things which are not tradable). Above all, there is the map of the network which-never-existed. I’m not sure it would be legal to reproduce it here; besides, the Court records are are in low-definition and you can’t barely read the map, but it’s possible to foresee that from Basildon the network would have crossed the channel from Dover to Calais and crossed over Belgium with paths further to the north than the 2014 competitors routes.
Last but not least: if you spent a few dollars, you can access the names of the 49 creditors of the deceased firm. An impressive lost: tower operators, microwaves contractors, cable operators (Hibernia Atlantic), fiber operators, exchanges (NYSE Euronext), markets data centers (Equinix), etc., and… car companies: Jaguar Land Rover, BMW and Mercedes Benz – the Newgig people loved big cars? More interesting, there are two trading firms: Dutch company Flow Traders and New-York based Tower Research Capital (also know as Latour Trading). I assume the two firms paid deposits to use the Newgig networks. I was wondering why my posts about the microwave networks received a lot of visits from Tower Research Capital (apart from their explicit name): Tower Research Capital is the main creditor of Newgig, and I can understand that if you pay a $1,500,000 deposit to be faster than others and you get nothing, there is a reason to be on edge.
CHICAGO IN BELGIUM, AGAIN
The Newgig affair was interesting but I found no connection between Latent and Newgig. I think some people were assuming the name NGN Europe Limited looked like Newgig Networks but that’s very speculative. I was not obsessed by Latent when I was trying to map the networks (I only thought the tax havens SuperMontage was quite unusual) but by sheer coincidenceI I finally found something. At some point I decided to check all the French licenses having cross-border authorizations (France-England and France-Belgium) as I wanted to be sure I wasn’t missing an unknown network. That’s how I found a document you can’t bring to light by searching for the name ”Latent“ on the Arcep website. The document is here. This is the last French license granted to Latent Network on February 29, 2104, but the application was not submitted by Latent; the applicant name is ‘Global Colocation Services LLC’. In other words, this is a very well known firm from Chicago named… Getco.
Global Colocation Services (GCS) is a subsidiary of Getco. Nowadays Getco is known as KCG since the firm merged with Knight Capital last year (Knight collapsed on August 1, 2012 because of a little problem with one of their smart order routers). Getco has been one of the first Chicago high-frequency trading firms, founded in 1999 by Daniel Tierney, a former trader on the CBOE, and CME ex-broker Stephen Schuler. I was quite happy to find Getco in Europe because along with Jump Trading’s founders, Tierney and Schuler also were on the famous platform (the “tower”) erected above the CME pits I talked about in Part I (I was honored to learn my post about the Great Fed Robbery was “bookmarked” in the internal Getco wiki in 2013).
But what’s the connection between Latent and Getco? I didn’t think Latent was Getco. I can’t imagine KCG would need tax havens (all you need in the US is in Delaware, no?). I googled the name “Global Colocation Services” in France and Belgium and realized GCS was incorporated in Belgium (Brussels) on October 25, 2013, and in France (Paris) on November 25, 2013. No doubt these two firms were created to manage the Latent licenses. Here is proof: I found the name “Global Colocation” in the French telephone directories, and when I read the postal address I just laughed.
I knew very well this place, in Dunkerque, North of France, even if I never went there. Remember the chart I talked about in Part I which compares the tall Jump tower in Houtem and an other tower in Dunkerque. The “Global Colocation” address is located on this tower, known as Tour du Reuze, where most of the competitors (Vigilant, Optiver, McKay, Latent) have dishes to cross the channel:
The “Tower of Reuze” is very small compared to the Jump tower in Houtem, but there is an interesting story about it. The tower was designed by a Belgian architect and built around 1974 using reinforced concrete and smoked glass. It’s pretty heavy: 27,000 tons, equivalent to four times the Tour Eiffel (!), which means that it’s rather impossible to destroy. The Tour was supposed to be a 3-star hotel with 126 rooms and a luxurious panoramic restaurant. But as far as I know the restaurant never existed, the rooms were transformed into apartments and the building quickly became in bad shape. Some residents consider it as an “ugly architectural wart” (see there). The building and the apartments were so “rotten” that the real estate developer who acquired the tower decided to restore it a little bit and to sell the whole building for €1,700,000 in December 2013. By digging a little you learn that some apartments didn’t even have internet access until recently. Here is a photo of the Tour du Reuze, with a dish pointing to the UK (owned by a HFT competitor?):
And here is the panoramic space designed to be a restaurant – one competitor told me the space is “stinking of urine”:
The only luxurious things there are dishes. It is of interest to see some state-of-the-art microwave networks working with one microsecond accuracy are installed in such a poor place. Last year, a few months after I paid a visit to NYSE-Euronext’s facility in Basildon (the most spectacular there is the emptiness), I had the chance visit to the Euronext control room in Paris, where dozens of very big screens show market activity. When I left the office I walked a few meters and I came across a phone booth where a young woman and two very very young near-naked children were sleeping. The contrast was striking between a very rich technological world and a very poor human world. I had the same feelings when I was reading discussions about the future role of high-frequency trading in the Nigerian market, Nigeria being one of the poorest countries in the world. In Tour du Reuze, sophisticated trading firms use wireless to silently send flow of orders at the speed of light above the head of people who barely have access to internet. We live in interesting times. That being said the rents for the HFT dishes surrounding the panoramic space are not cheap, and that’s good news: that proves high-frequency trading may have a social benefit;)
Let’s get back to Latent Networks. The fact Getco/Global Colocation Services is taking over the Latent frequencies can be confirmed by visiting the official UK radio regulator website. On the Ofcom website there is this map allowing you to find the radio operator licenses. But there is another space called “Spectrum trading”. Before high-frequency traders can use microwave networks to trade whatever-you-want, the network providers have to book and pay for frequency licenses. In the UK a license is granted for a path between two points/towers. This license is a tradable product in a sense that if a radio operator doesn’t need it anymore, the “Spectrum trading” space allow them to re-sell their licenses to who is willing to buy it. As a product of nature, waves are tradable – it’s the market after all.
A few days after I found the French license with both the name “Latent Networks” and “Global Colocation Services”, I realized that Latent sold two UK licenses to Getco on March 31, 2014. The two licenses are those Latent Networks acquired to cross the channel from Tour du Reuze in Dunkerque to Dover in the UK (that’s consistent with the French license). Two weeks ago the Ofcom website was down for server maintenance but when it came back… what a surprise it was to see that on September 23, 2014 Latent sold other licenses to Getco:
I assume that’s the reason Global Colocation Services LLC was incorporated in the UK too. If you compare the Latent licenses numbers with those purchased by Getco, you quickly understand that Latent has sold to Getco the whole path from Tour du Reuze to Basildon NYSE’s data center (for once I’m sure these definitive paths on my map are 100% accurate here;). Here is the Latent-Getco network from Germany to Basildon. I know some towers are missing in Belgium but there is no available public data in my country, so I don’t know where Latent may have installed dishes between Tour du Reuze in Dunkerque and Incourt in Belgium (I left the Latent tacks corresponding to some old towers not used anymore):
DIRTY BUSINESS AROUND THE CHANNEL
Once again all this doesn’t prove that Getco is behind Latent – Latent just sold UK licenses to Getco, period. But I thought it was quite strange as there are two kinds of competitors in the HFT microwave world: trading firms like Optiver of Flow Traders, which build their own network for themselves, and providers like McKay Brothers or Custom Connect. These sell bandwidth to customers (trading firms, hedge funds, banks, etc.) but they don’t re-sell frequencies, paths or licenses to trading firms. The Latent case is therefore quite unusual: the network is not a provider selling bandwidth to customers, and it’s not a trading firm. I didn’t find public data showing that Latent sold UK licenses to other firms than Getco. Anyway, the fact the first licenses Getco acquired from Latent in March 2014 was those needed to cross the channel was interesting to note. More than I expected.
During my investigation I came across an absorbing public document found on the Ofcom website. This a statement made on December 13, 2013, at an Ofcom stakeholders‘ meeting (here stakeholders are operators licensed by Ofcom which are invited to talk about any problems they face). The statement was made by Ian Marshall on behalf of Aviat Networks. I don’t know Mr. Marshall but as a “Regulatory Manager” of Aviat he wrote several articles on his blog about wireless technologies. The paper untitled “Rules of the Game: Low Latency Microwave in a Multi-Regulatory Environment” is of particular interest. Bear in mind that Aviat Networks is a technical provider for various radio operators, HFT competitors included. “When Aviat Networks helped build the McKay Brothers LLC low latency network between Chicago and New York” wrote Marshall, “there were some technical testing challenges with which to deal. […] As complex as that undertaking was, it turned out to be simple in comparison to the level of regulatory complexity we experienced when we went to Europe to construct a low latency network linking the continent’s leading financial hubs of London and Frankfurt. […] When building a trans-national low latency network, the regulatory bottlenecks will always occur on the border-crossing link. These can be further exasperated if the border is also a geographic challenge such as an ocean.”
Two months after writing this article, Mr. Marshall used the same words at the Ofcom stakeholders‘ meeting in December 2013. Here is the first paragraph of his statement : “Aviat Networks understands that at the present time Ofcom does not impose any build out requirements once a licence has been granted for a point to point link. However, we have become aware that there are a large (>200) number of licences recently granted to Low Latency (High Frequency Trading) organisations that we have very good reason to believe have not resulted in the building of the associated network infrastructure. It is our considered opinion that there is a large amount of speculation occurring here and this ultimately leads to ‘blocking’ on the key routes across the U.K.” Here is the next paragraph, with the Swingate towers near Dover where most of the HFT microwave competitors (Optiver, Vigilant, Jump, McKay Brothers) have put or will put dishes to cross the channel (the red underscore is mine):
All this is very interesting. In short, Mr. Marshall told the UK radio regulator that some HFT competitors have asked for licenses without installing dishes just in order to “squat” frequencies and block competitors. In other words: you ask for a large number of frequencies so that your competitors can’t get them anymore – in this case, you can’t cross the channel, and if you can’t cross the channel, you are not able to build a network between Frankfurt and London. Simple to understand: trading firms need waves; without waves, the firms won’t be the fastests. That’s why there was a “a large amount of speculation occurring” around the channel. Mr. Marshall’s statement is consistent with the “rumors” about “frequency squatting or tower squatting” mentioned by Bloomberg. But there, around the North Sea, rumors were facts. I know for sure that (at least) two competitors have experienced real difficulties to get frequencies to cross the channel, because of the frequency squatting or speculation. One was a microwave network provider; the other one was a proprietary trading firm. So I wondered: who were the squatters? Who tried to speculate on the waves? A few days later an answer popped-up in my mailbox. And it was just staggering.
On August 3 at 23:13, I was quietly going to bed when I received an email untitled “Latent and more”. The mail was sent through paranoici.org, an anonymous remailer used “to hide one’s identity when sending messages by e-mail.” Strange, no? I read the first lines of the mail. “What… the f…” I told myself, wide-eyed. But let’s start with the three last lines: “If you want to know more, send a sign / Happy Hunting / Kangaroo Pin”. The only way someone would have known what I was working on was through Twitter. I posted one or two tweets about my investigation, and I was sure none of my informants in the industry wouldn’t have sent me an anonymous mail. The “kangaroo” thing was odd. The signature being “Kangaroo pin”, I suspected my anonymous informant to be a Jump Trading employee. Why? Because what a kangaroo does? He jumps! So I posted a cryptic tweet to the kangaroo but it was stupid. Really stupid. The kangaroo was not a Jump employee at all. One HFT competitor read my tweet and wrote me that I had been mistaken, adding that one person behind Latent Networks wears a kangaroo pin on his jacket. Wow. The “kangaroo pin” was not a signature, it was a clue. The kangaroo was one of the Latent people I was searching for. Incredible.
But the most astonishing in the anonymous mail was the first paragraph. Take a deep breath: “Look up [the kangaroo]. [The kangaroo] used to work at [the Firm]. [The Firm] sells a lot of microwave gear into the HFT vertical. [The kangaroo] had access to a lot, if not ALL of the routes of every HFT company out there. [The kangaroo], while in the employ of [the Firm], started a company himself, called Latent Networks Limited. [The Kangaroo] stole the paths of these companies, and then he registered for frequencies in order to squat them. His main and probably only customer is Getco. The ‘rumor’ is that Getco bought some channel licenses from Latent Networks Limited.“
Wow wow wow. Let’s take a break. My first aim was to map the EU microwave networks. By working on these networks I just wanted to understand the way high-frequency traders deal with nature. I searched for public data and tried to understand this small world with the help of people from the industry who kindly and fairly talked to me. One of these networks was quite unusual so I decided to dig more, but I would have never imagined I would receive a mail accusing a firm incorporated in Malta-Cyprus-Panama to speculate on the North Sea waves. As anyone familiar with the HFT world I knew the stories about some employees accused to have stolen trading codes from a firm to take them away (the Sergey Aleynikov case being the most well-known), but I never thought it would be possible to misappropriate frequencies in order to speculate on them. These were harsh accusations.
The last two sentences of the mail were quite accurate: Getco is a customer of Latent, and the “rumor” about the channel licenses are facts confirmed by the Ofcom public data. But there is nothing illegal here: Latent may have acted like a high-frequency trader by quickly buying a rare product (waves) before reselling it to who was willing to but – it’s the market after all. But the words “ALL of the routes of every HFT company” are not accurate. The Firm the kangaroo worked for is not the only one providing technical services to the microwave networks (there are others), so I was very doubtful the kangaroo could have known all the paths of all the microwave competitors. Not impossible, although not likely. But what about the accusations of theft? My first thought was: it’s bullshit, someone is trying to confuse me – this is a joke.
Two weeks ago I was about to write “Latent may have speculated on the channel licenses but front-running is not illegal here.” But ten days ago, two months after I spoke about the kangaroo with my informants, one of them decided to talk and blowed my mind. This competitor told me that as a technical provider, the kangaroo “took away” a path from him in order to register it in the name of his new firm called Latent Networks. “Taking away” is not “stealing” though (I can’t go into these sensitive details), but what I learnt from this competitor was not unrelated to the allegations made in my anonymous email. I couldn’t believe it.
There is more but as Ludwig Wittgenstein once said, “what we cannot speak about we must pass over in silence”. The way I talked with people in the microwave industry during my investigation was very fair. I’m not a prosecutor but by digging as far as I could, I came to hear about details I can’t share here out of respect for the people I talked with. Just let’s assume I may know what happened around the channel before Getco acquired the Latent licenses. From what I know, considering that at least two HFT competitors had difficulties to get frequencies between France and the UK, and considering the speculation on the channel waves, I have one question in mind: which was the price Getco paid to buy the channel licenses previously purchased by Latent?
THE KANGAROO AND ME
I won’t publish the name of the kangaroo and I won’t publish the name the firm he worked for before moving to Latent Networks. I know the kangaroo knows that I know who he is, but the most interesting was to study the way some microwave networks deal with nature (waves, fog, water), not to hunt an obscure firm stashed in Panama – but I think I now have the stuff to write a full TV series. When the anonymous email came in my mailbox I was both amazed and furious. Furious because I would have preferred to find the name of the kangaroo myself, as the investigation was quite fun! (Three days after I conducted a close examination of the Ofcom public data concerning Latent Networks – the Polish connection, the kangaroo, the name of the Firm, all this was very easy to flush out.) I was amazed not only because of the allegations, but because of the name of the kangaroo. “No… wait… that can’t be true”, I told myself. Here is why I couldn’t believe my eyes.
In April 2013, two months after the release of my first book, I decided to work more on high-frequency trading and asked for an authorization to attend the Trade Tech Europe 2013 conference in London. The first day was fully devoted to high-frequency trading, with some interesting moments I related in this post (FR). At the end of the day I gave a short “speech” about anthropology and HFT because the Trade Tech organizers allowed me to attend the entire conference if and only if I would give a talk (I couldn‘t afford to pay the requested €3,000). The day after, while discovering the different booths, a manager from the Dutch regulator AFM came to me and had very kind words about my rubbish talk (we discussed about finance, Michel Foucault and the Panopticon), and a French physicist told me about his view on Nietzsche and Toynbee. But the first person I talked with that day was an appealing man wearing elegant glasses. We gently talked about epistemology and he told me about his job. The appealing man with a Polish name, whom I never met again, was working for a firm providing technical supports to the HFT microwave networks. I don’t remember the pin, but the man was the kangaroo.