When you think about it, it really is one tangled, small cottage industry. Everybody knows everybody.
Everybody knows what everybody is doing, and nobody talks.
One of my informants.
This is the final episode of the “HFT in my backard” series, season 1. I have been too busy to post it before (I work on HFT in my spare time). What’s more, I realize that I accumulated so much data that I really can’t write about all the stuff I have now on my desk about those microwave networks used by high-frequency trading firms. The first part of my book was titled 6, then I added the second part 5, and I think that given all the data I got, I could easily write a new sequel titled 4 about the networks but I’m afraid that I don’t have the time for that. This final episode is more a like a medley (“Miscellanea”) about various topics than a conclusion. With an interesting cliffhanger.
FACTS AND INACCURACIES
This investigation on microwave was possible mainly because a lot of public data is available online. Aside from the towers I visited (mainly in Belgium) and some tips I had from people working in the industry, public documents are cool but using them doesn’t mean that you have found “the truth” – here the truth means: knowing exactly where the competitors have installed dishes, and which are the exact paths they designed to go from a tower/data centre to another. By checking the Ofcom website (UK) or the ANFR website (France), you can learn about the frequencies reserved by competitors here and there, but that doesn’t mean they really have put dishes here and there, so you have to compare the licenses with planning applications (if they are online), and so on. Some countries are quite transparent (UK), but others are dark pools (Belgium). Besides, even if a competitor has both a frequency license and a granted permit for a tower, that doesn’t mean he’s really using the location – perhaps he moved on elsewhere, etc. Sometimes you have to speculate, and trading is all about speculating. Sometimes you are right but sometimes you don’t, sometimes you make money but sometimes you lost money… and the same is true with the microwave networks. What’s more, some of them are still in progress, and others are trying to get better paths than they had before. They move, so it is quite difficult to have a definitive map showing the real paths – by the way, I have found that the first meaning of the word trade, back in the 14th century, was path.
What’s more, when investigating the networks you have to deal with a lottttt of technical details and I know that may have been mistaken on some of technical facts. All this to say that even with good public data and fair discussions with the people from the HFT/microwave industry who gave me some tips, it’s very difficult to be sure about the true and definitive routes the competitors designed to get data from London to Frankfurt, and vice versa. The most interesting here (from an anthropological point of view) is the way HFT shapes geography and how firms have to deal with nature to achieve the best paths, being faster than competitors.
THE CHANNEL AGAIN
I talked a lot about the channel in the previous episodes (the difficulties you may have to cross it with microwave; the speculation on frequencies; etc.), so let’s start with the sea. As I wrote in Part II, the old military Houtem tower purchased by Jump early 2013 (which was the very beginning of the series) enables the firm to have dishes far higher than competitors who don’t have the chance to own such a tall tower. Thanks to this mast, Jump can go straight to Basildon by going through Ramsgate and bypassing the old RAF Swingate tower (they save approximatively more or less 6 kilometers, i.e. more or less 20 microseconds).
I realized later that when I started to work on microwave, at the same time the BBC released a short movie about Basildon and the microwave networks, with some pictures of the HFT dishes lost in the fog of Swingate :
The last photography is interesting : this is a boat crossing the channel. I have been told that big container ships may block the microwave signal between France/Belgium and the UK. A lot of boats navigate the channel daily, coming from (or going to) the Rotterdam port. Here is a snapshot from marinetraffic.com, showing some ships around the channel (on Tuesday 9, 2015, 8:30 CET):
With the tall Houtem tower, there is little chance that the Jump signal could be blocked. By contrast, some competitors may have problems with these boats. It appears that Jump isn’t/will not be the only firm to cross the channel by bypassing Swingate. Other competitors are in the ranks –Optiver and McKay Brothers, at least:
Both Optiver and McKay have Ofcom licenses in Dunkerque (France) and around Ramsgate (UK) (Vigilant also has a license in Ramsgate), so I bet all the firms will use this route one day to cross the channel (if they don’t, they will probably have difficulties to beat Jump). In Dunkerque, Optiver seems to want to install dishes on one of these “chimneys” owned by the Polimeri Europa France (a petrochemical industry firm):
Two kilometers away, McKay acquired licenses at an elevator owned by Arcelor Mittal (a steel company):
This other photography shows the bottom of the elevator, with a boat waiting for commodities.
This boat is not really tall, but what would happen if a very tall boat comes to rest in front of the McKay dishes – which seem to be between 70 and 80 meters high? That said, boats are not the only bothersome obstacle – a swarm of birds may also disrupt the signal. Here is a snapshot (given to me by a HFT firm) showing that noise may take precedence over signal. If you have more noise than signal, your microwave network is dead (that’s why HFT firms always need fiber as a backbone).
INFORMATION TRANSMISSION AND HISTORY
The fact McKay put dishes on an elevator is quite amazing (if you know a little the history of the Chicago commodities markets, then you are aware that the industrial history of the grain elevators around the Windy City is related to the history of telegraph). Much could be written about the microwave networks in the US and about those used by HFT firms between New Jersey dans Chicago. Thanks to this map (from Laughlin et al., 2012), it’s possible to see how HFT is reshaping the line-of-sight microwave networks. The New Jersey-Chicago-Washington corridors are clearly visible:
I didn’t investigate these networks but on this blog there is an good story about the first microwave network built between New York and Chicago, it was in 1949:
Technologies have changed: in 1949 you needed 34 towers between two cities, but in 2015 the best HFT providers/firms use 22 hops only:
That’s interesting to see that a firm like Auburn (Data Systems) needs more towers than the first network build in 1949 (the firm was one of the first applicants to license frequencies, but one of the last networks to turn up). There are other amazing stories about the US networks: here you can read about the new communication mast the city of Mahwah, New Jersey, erected in 2014 to allow both McKay and Auburn (among others) to install dishes. In this official document we learn that, in 2013, the township received several “bids for placement of communication equipment on a 30 foot pole extension”. Auburn proposed $64,000, Jump offered $35,000, Anova $35,000 but the winner was “a data company” firm named Wireless Holdings Network, who offered to pay a $246,024 (!) annual fee to put dishes there. Before that, the pole only made $40,000 a year, so we have the definitive proof here that HFT has some real social and public values. I don’t know who is behind Wireless Holdings Network, but it seems the firm is affiliated to SMG Holdings, and SMG Holdings has a subsidiary named Anova-Tech, and Anova provides laser networks between some of the exchanges in New Jersey. How interesting is that. Even if laser is as fast as microwave, laser networks have higher bandwidth but they are more affected by weather (if a dense fog laser beams won’t travel more than a few hundreds of meters). If Wireless Holdings Network/Anova agreed to pay a huge annual fee to the township of Mahwah, is it because they put laser antennas on this tower? Or only because they wanted to be sure to be on this tower, so they paid the price? – pure speculations again.
In Randolph (New Jersey), McKay had dishes on a tower where Auburn wanted to be too, but the township of Randolph refused the Auburn planning application, so Auburn was jealous and sued the township, arguing that if the city of Randolph approved the McKay installation there were no reason to refuse Auburn’s one. The Battle of the Dishes. There are other stories, but the United States of America are not my backyard, so I didn’t really work on. That said, there is this interesting story about HFTs exploiting a loophole at the CME data center (Aurora, Illinois). Wall Street Journal‘s Scott Patterson wrote about the case in May 2013, and a lawsuit was filed against the CME in 2014. In short, “some customers experience a latency of a few milliseconds between the time they receive their trade confirmations and when the information is accessible on the public feeds”, told a CME spokeswoman. The fact HFTs receive information before other participants is much debated – markets have different polices about that: Eurex (Frankfurt), for instance, sends trade confirmations publicly to all the participants, not only (i.e. before) to the firm who sent the order. Here, the CME loophole gave a 1 to 10-millisecond advantage to HFTs, and with microwave data can travel between Aurora and New Jersey in more or less 4 milliseconds, meaning that an algorithm could decide to trade on Nasdaq thanks to information coming from Chicago but not even public in Chicago. This chart that shows the evolution of the response time between the CME and the Nasdaq:
According to one of my informants, “the sharp current-day response is largely a consequence of the fact that the CME seems to have substantially reduced the unpredictable delay between the timestamp at the match and the print at the exchange gateway” (meaning that the CME probably – but partially – succeeded in resolving the loophole issue). “This likely puts pressure on the economic viability of second-tier microwave networks, while increasing the value of the fastest networks”.
FREQUENTLY ASKED QUESTIONS
Before “concluding” this first season with the recent microwave moves around my backyard, a quick Q&A session – as I received a lot of emails asking about various issues about the networks. Obviously, I don’t have all the answers (this goes without saying) but sometimes I have leads.
- Why don’t we find the name of big HFT firms like Virtu on your map?
I don’t know. Probably because they don’t build their own network (unlike Optiver or Flow Traders). They probably use microwave network providers. Call McKay Brothers, or even Custom Connect.
- Are you on the McKay Brothers payroll?
Well… no. Some readers (mainly people from the HFT industry, I think) were wondering why I was so kind with McKay Brothers. I don’t think I particularly praised McKay Brothers but 1) as a microwave network provider, McKay is the most transparent firm: they publicly publish their “real” latencies, and above all their parent sister company, Quincy Data, also makes public the products they sell (for instance: data about the Bond Futures traded at the Eurex exchange, in Frankfurt); other companies (such as network provider Perseus, who resells bandwidth of the Jump network) also publish latencies, but not with the required accuracy – what’s more, there is no details about the data/products involved. 2) Although the firm has offices in Oakland, McKay is also a French company, with offices in Paris, and as a French I defend the French industry;) 3) That being said, I am fully transparent: I knew Stéphane Tyc (the co-founder of McKay Brothers) before investigating the microwave area (I was a kind of “go-between” between him and Nanex’s Eric Hunsader when Stéphane published a white paper about the Fed Robbery in 2013) but that doesn’t mean I advertise McKay Brothers’ network. 4) Stéphane Tyc has interesting ideas, about best execution and transparency in reporting trades, even if its “libertarian-style” (my words) does not always please everyone.
- Is it possible to hack the microwave signal?
I am doubtful.
- What about the pirates?
This investigation was mainly about geography, nature and speed. But I know French regulators Arcep/ANFR checked some sites in September 2014, they wanted to be sure that the ones who asked for frequencies really installed dishes here or there (they have legally 18 months to do it before the license expires). It seems that for instance CIC has no dishes in France. In Monts des Cats (where Custom Connect and Flow Traders are), 14 links/licenses are not used (meaning operators asked for frequencies but did not put devices – a kind of tower/frequency squatting?). This field inspection allowed the French regulator to “clean up” a little the licenses (they will inspect other HFT dishes next June) and confirmed that Custom Connect has a direct path between Mont des Cats and Dover (the longest path crossing the channel, i.e. 106 kilometers).
- Why some HFTs need to get information a few milliseconds before other traders?
This is the $0,001 question. First answer: it’s all about data, as price is an aggregate of informations coming from various locations, and some products seem to be more sensitive to latency than others. Other answers: I’m working on that.
- What about the different London locations?
I did not detail the London metro area before. In and around London (the Basildon-Slough route), the networks use millimeter wave (whose frequency range is different than microwave). There are different locations in London: Basildon, Slough, The London Stock Exchange and Thomson Reuters LHC (add Interxion). The London metro networks are quite dense, and my map is far from being accurate (I just picked up some paths on the Ofcom website), more work would be required to have a full map of those networks (and I won’t do it).
- How much Getco paid Latent to cross the channel?
In Part IV I wrote about the fact Getco (under its Global Colocation Services subsidiary) purchased some paths to Latent Networks, including the Dover/Dunkerque route. Given the speculation on frequencies around the channel, I was very curious to know the amount, so I wrote Ofcom and I got a kind answer, saying that they don’t know the prices of the trade – it’s private matter between the buyer and the seller only. We’ll never know.
- Are there other existing, or future, microwave networks in Europe?
Yes. A company named 12 Horizons said in June 2014 to have build a microwave network between Frankfurt (Eurex) and Zurich (SIX). The network seems real (sometimes companies make announcements but it’s only for advertising – for instance, Anova announced to have built in 2013 a laser network between London and Frankfurt but this is not true). I vaguely searched for data about the towers in Germany and Swiss but nothing relevant. What I know is there are old military microwave towers in this corridor, so I would’t be surprised to learn that they are now used by high-frequency traders. In this McKay Brothers presentation, you can see some possible future microwave routes (in dashed lines).
BOATS, PLANES AND PROJECT EXPRESS
In Part V I speculated about the future of transatlantic transmissions. Building a wireless network between Europe and the US is not a simple task but some are really working on that – floating islands? tropospheric ballons? (Amazing fact, by the way: some years ago, Island’s designer, Josh Levine, had imagined a system with a couple dozen Cessnas flying in circles with microwave repeaters on their bellies; the Cessnas would be so high [~ 5,000 feet[ that they would have line-of-sight of more than 100 miles between them. It would have been a challenge to keep the planes in the air but, according to Levine, “so, so much faster and cheaper than all these microwave towers”). I bet that we’ll learn about some wireless transatlantic networks sooner than expected (check for example this article about SpaceX). The deployment of wireless networks all around the globe is a fascinating issue. “As the planet wires itself and its computers ever more tightly together in an ever-lower latency web of radio links and optical fiber, it no longer seems like a particular stretch to float an Electra hypothesis in which computational nodes and their interconnections assume a global role comparable to that now filled by the biological organisms”, Greg Laughlin rightly writes by extending the “Gaia hypothesis” invented in the 1970s by James Lovelock (“organisms interact with their inorganic surroundings on Earth to form a self-regulating, complex system that contributes to maintaining the conditions for life on the planet”). This is a major point being from anthropology.
There is no wireless transatlantic network for now. In Part V I speculated about the new Hibernia Project Express cable, supposed to save ~6 millisecond between Europe and the US. This cable has been long announced and it’s now in progress. We know that the landing station in the UK is in Brean, but I have made a mistake about the location of the station. The photography I previously published is not the Hibernia landing station, but the one of Vodafone:
I have been duped by the fact Jump, Vigilant and now New Line Networks reserved microwave frequencies around the house. I don’t know where is the exact location of the Hibernia station but that is not important as the company won’t allow customers to pick up circuits at the landing station and re-reroute them via microwave. As far as I know, the Express cable will be first offered between the NY4 data centre in Secaucus (New Jersey) and the LD4 data centre in Slough (UK) – that’s all. Customers won’t be able to use microwave between the landing station in Brean and the Slough facility. That means all the competitors who booked frequencies between the two locations will have to wait a little bit:
THE NEW LINE NETWORKS CLIFFHANGER
It is a shame that I can’t share all the stuff I have accumulated during this 6-month investigation on the HFT microwave networks in Europe. I’ll keep a close eye on those networks (mainly because it’s quite amazing to map the HFT world). Before writing this last episode, I had never thought that a new competitor would show up: New Line Networks (NLN). I talked about it in a previous post and I just want to add a few commentaries. New Line Networks is a joint-venture between Jump Trading (under the name World Class Wireless) and KCG (via their Geodesic Networks subsidiary). “KCG Holdings, Inc. (NYSE: KCG) announced today that its subsidiary, Geodesic Networks, LLC, and World Class Wireless, LLC have created a joint venture, New Line Networks LLC. New Line Networks will explore opportunities to leverage infrastructure investment, including re-selling network bandwidth to industry participants and third party vendors. Through this venture, New Line Networks will bring together complementary network and communication infrastructure while simultaneously providing additional data transmission bandwidth to the marketplace” said the announcement on February 12, 2015. The fact two major HFT firms from Chicago come together to build a new network is an unexpected event.
NLN first move was to buy all the UK licenses of Communication Infrastructure UK in February 2015. That’s intriguing because Communication Infrastructure was one of the first microwave network here (at least they reserved a lot of licenses) and later the company was purchased by Perseus, in March 2014. Have in mind that Perseus resells the Jump network bandwidth to customers, so I was betting that if Perseus took possession of Communication Infrastructure, that was because they wanted to have their own network, so that they wouldn’t have to use the Jump one anymore. Are we to understand that Perseus abandoned this project? If not, why they sold all the Communication Infrastructure licenses to New Line Networks? The NLN second move was in March 2015: they bought 104 Ofcom licenses to Jump. With both the Communication Infrastructure and Jump licenses, New Line Networks has potentially a full network once they put dishes on all the towers – at least in the UK, I didn’t find the name “New Line Networks” on the French public websites (yet?).
As shown in the map above, the NLN will use the now famous Houtem tower in Belgium (with a path going to Ramsgate and then to Basildon); NLN purchased some paths going to Brean, even if the Hibernia Project Express cable won’t allow microwave there, and that’s the reason why NLN also has paths going to Sennen, Cornwall (see Part V). The fact NLN will use the Houtem tower may explain why Jump purchased it for $5,000,000 – this was not cheap, but now it’s time to monetize the tower via New Line network? Pure speculation, again.
I have been told that the New Line Networks sales representative are touring the small world of HFT, hunting for customers. NLN is now a direct competitor of Perseus and McKay Brothers (and Custom Connect). What is most surprising here is that two HFT trading firms are now selling microwave communications to their HFT competitors, whereas McKay claims to be “private and independent. Not affiliated with any trading firm or exchange”, as said on their website (bold is mine). I don’t know what to think about that – are they trying to “nick” McKay’s clients? A veteran in the HFT microwave world told me that “any kind of alliance between HFT firms is very surprising… as this is not how industry works”; another admitted that “the New Line Networks move to create a cartel is very disconcerting”. “Cartel” may be a strong word, but perhaps not so far from the truth. I don’t know, but this is an unexpected cliffhanger.
The most interesting is that all the Jump and Getco founders started electronic trading on a platform/tower erected above the pits of the CME in 1998-1999 (Part I), where for the first time there computers and algorithms could really compete with human traders, screen to face, with the help of Globex. If (for some people) the high-frequency area started in 2007, we may say that the prehistory probably was in Chicago at the end of the 1990s, when some the first HFT firms were arbitraging computerized prices (on the tower) and human prices (in the pits). Some of them did it by using radio headsets: a trader working for the firm was dealing in the pit and transmitted the pit prices to another “trader” who was dealing on Globex. Without headsets, without radio waves, arbitrage was impossible. The Chicago futures pits will close on July 2, 2015, but some former pit traders are now behind state-of-the-art microwave networks, here in my bakyard, searching for tall towers to get data as fast as possible with the help of waves, trying to “arb” prices between London and Frankfurt. That’s how an anthropologist roamed the countryside, listening to the sound produced by the wind caressing the guys of the towers, a continuous sound not so far from the one you can hear in the data centers where electronic pits are now established – the breath of the computers being cooled. Trust me or not, but there is poetry in HFT. Now it’s time to move on. The next series will be about monks, because they erected towers long before the US Army built a phallic mast in Houtem. This is called steeples.