Tuesday, November 29, 2011

New Dimensions for Trading Algorithms

Speculator: Fast forward to the future of trading

Blink and you may miss this amazing investment opportunity

It’s what science is for, I guess. In recent weeks two separate news items came together to produce a true Eureka! moment.

Hibernia Atlantic is spending $300 mn to lay a new underwater cable between London and New York that will accelerate financial transactions to 59 milliseconds, about 10 percent faster than the current 65-millisecond voyage.

Hibernia Atlantic expects to be able to charge hedge funds and similar traders 50 times the rates of its rivals, because it estimates that every millisecond saved can boost a fund’s annual bottom line by $100 mn.

This is not new technology. The data cannot go faster than the speed of light through the fiber-optic cable; indeed, they only travel at two thirds the speed they would in a vacuum.

The pioneers simply drew the route for the Hibernia Express on a globe instead of a flat map, so the path takes the shortest route between the two cities. It might or might not be significant that the Titanic was steering the same course.

One wonders whether, when Adam Smith spoke of the invisible hand of the markets, he really envisaged a market with no human hands involved at all, one where my algorithms speak to your algorithms, each second-guessing a human agency that is nowhere to be seen.

Money maker

Regardless of the answer to that question, if this is the way of the future, we must confront the more fundamental question: how can we make money out of it?

News of the faster cable inspired Speculator to float a new company, New York Securities Instantaneous Neutrino Yield Dispatcher (NYSINYD). Our business plan is breathtakingly simple: neutrinos go at the speed of light even through solid rock.

By building particle accelerators and detectors under New York and London we can shoot data directly between them in a straight line 2,500 miles through the Earth at maximum light speed, giving us a theoretical data speed four times that of the Hibernia Express.

Allow for some relay problems, and let’s assume it only doubles the transaction speed: that still means, if hedge funds would pay 50 times the going rate for a 10 percent speed increase, they would pay at least 500 times more for doubling the speed.

Faster than light

But then the second news item appeared: the clever guys at CERN in Switzerland sent neutrinos to Italy – and they traveled faster than light! Time to reconfigure the prospectus, not least since one explanation for this is that the neutrinos breaking the speed limits go into another dimension en route.

It is fitting that Italy should inspire our synergistic alliance of creative physics and finance: money often disappears into other dimensions there, as indeed it does between the City of London and Wall Street.

It’s also possible that information traveling faster than light will arrive before it leaves, adding a whole new – and probably legal – form of insider trading because the concept is certainly faster than Dodd-Frank.

We considered changing the name of the firm to Now You See It, Now You Don’t, evoking the most inventive of modern banking rules, but decided just to stick with NYSINYD. Buy now and the money will leave the account before you have made your decision!

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