High-Speed Stock Traders Turn to Laser Beams

This is why we have the Hadron collider; the europeans want to find if there is somethimg faster than light, so they can control hi-speed trading. Aivars Lode

Anova to Use Laser Devices for Fast Communication of Market Data

By SCOTT PATTERSON

As high-speed stock traders push to trade ever faster, their newest move involves harnessing a technology that U.S. military jets use to communicate as they soar across the sky: lasers.

In March, a small Chicago communications company plans to switch on an array of laser devices linking the New York Stock Exchange's data center in Mahwah, N.J., with the Nasdaq Stock Market's data center in another New Jersey community, Carteret.

The lasers, perched atop high-rise apartment buildings, towers and office complexes along the 35-mile stretch between the communities, are the first phase of a grid intended to link nearly all U.S. stock exchanges this way, zipping market data and rapid-fire trades.

It is the latest salvo in the "race to zero," traders' term for their efforts to whittle away the difference between the speed their orders travel at and the speed of light. Zero, the point at which that difference would disappear, has become a kind of holy grail to computerized traders, for whom nanoseconds—billionths of a second—can spell the difference between profit and loss in their algorithm-driven trades.

In recent years, so-called high-frequency trading firms, which account for about half of U.S. stock trading, have adopted first custom-built fiber-optic cables, then microwave and later millimeter-wave transmissions. Networks built on all three technologies operate today, tying together exchanges around the U.S. Internationally, fiber-optic cables laid across the oceans link America's markets with Europe's and Asia's.

Now come lasers.

"This is a never-ending race," said Michael Persico, founder and chief executive of Anova Technologies LLC, the company behind the plan to link the NYSE and Nasdaq data centers in New Jersey by laser.

Computerized trading firms will be able to take advantage of this technology by placing their servers—the machines that spit out their buy and sell orders based on algorithms—at the exchanges' data centers.

Anova also is working on a deal with the New York Stock Exchange under which the NYSE would offer its technology to the exchange's trading clients, according to people familiar with plans of the exchange, which is owned by IntercontinentalExchange Group Inc. Nasdaq, part of Nasdaq OMX Group, already offers its clients a wireless network, one based on microwaves.

Some question whether Anova's lasers will provide a meaningful speed improvement over networks that are already in place, since microwave and millimeter-wave order transmissions also travel at near light speed. "The difference between networks is getting very small in the metro areas," said Stephane Tyc, co-founder of McKay Brothers LLC, an Oakland, Calif., company that provides fast trading networks. Still, firms such as Anova continue pushing to boost traders' speeds by increasingly tiny slivers of a second.

High-speed, computerized firms today trade everything from stocks to oil futures to government bonds, including securities whose prices move instantly when the government releases economic data such as jobs reports. To pare precious fractions of a second off the time it takes to transmit such data, Anova and other communications companies place networking equipment at a data center on 1275 K Street in Washington, physically close to government agencies.

In the latest tactic, some high-speed traders obtain news releases directly from distributors, avoiding the tiny time lag involved in going through the financial news media.

Federal regulators are wary of algorithmic traders' relentless push for speed, worried about the potential for future market shocks such as the "flash crash" of May 6, 2010—when heavy selling and waves of high-speed traders fleeing the market triggered wild stock swings—and the loss of more than $460 million in 45 minutes by electronic-trading firm Knight Capital Group Inc. in August 2012.

"We must think about why this technological arms race is happening and whether it poses any threats to our markets," said Kara Stein, a commissioner of the Securities and Exchange Commission, in a speech in November. "And we should candidly assess the costs and benefits to both investors and businesses."

The Treasury Department's Office of Financial Research in December labeled high-speed trading a "key source of operational risk across all markets."

Defenders of high-frequency trading say the millions of orders its practitioners churn out support the overall financial markets by providing liquidity, meaning the ability to buy or sell without moving prices much.

And rapid-fire traders can serve this function better with greater speed, defenders say. The argument is that the ability to jump in and out of positions more rapidly enables high-speed traders to place more-aggressive bids and offers—and these, in turn, help all investors get the prices they want.

"Speed makes markets way more efficient," said Peter Nabicht, a former high-speed trader who is now a senior adviser to Modern Markets Initiative, a trade group.

As the push for speed grows, it is increasingly expensive for traders, banks and brokerage firms to keep pace. Market players world-wide spent about $1.5 billion in 2013 on technology to increase trading speeds, nearly double the amount spent in 2009, according to estimates by research firm Tabb Group.

What regulators could do if they wanted to slow the race isn't clear. The SEC is considering whether exchanges should set up "kill switches" that could shut down a rogue trading algorithm threatening market havoc.

The competition revved up several years ago when Spread Networks LLC, a company backed by former Netscape Chief Executive Jim Barksdale, spent an estimated $300 million to build a fiber-optic network to transmit orders between Chicago and New York markets. Fiber-optic networks already existed, but Spread's, by using more-direct routes, claimed to shave about three milliseconds—thousandths of a second—off an order's round trip between New York and Chicago. Trading firms ponied up millions of dollars a year to use the network.

Ordinary investors barely noticed the advent of Spread's network in August 2010, but it was a significant event for high-speed firms. Getco LLC, which used the network, saw its expenses shoot up, in part because of the fees charged by Spread, according to a regulatory filing.

Getco acquired Knight last year and now is called KCG Holdings Inc. KCG and Spread both declined to comment.

Spread's lead didn't last. Several companies set up chains of microwave dishes between financial-market data centers in Chicago and New Jersey. These could send orders slightly faster than signals sent through fiber-optic cables, which fly at about two-thirds the speed of light.

Next, several companies, including Anova, started to use millimeter waves, with shorter wavelengths. They can carry more information than standard microwave transmissions. But they don't travel as far, so they have to be reinforced with relay devices at more points.

In all, about a dozen microwave networks, some owned by trading firms, have been set up between the New Jersey data centers and Chicago.

Nasdaq offers one such network to its trading clients, from Strike Technologies LLC, a company whose ranks include former U.S. and Israeli military engineers. Strike says the network can send data between Nasdaq's New Jersey data center and CME Group Inc.'s in Aurora, Ill., in 4.13 milliseconds. The NYSE's possible arrangement to offer Anova's laser technology to clients would be similar, said the people familiar with the exchange's plans, who said they expect a deal in the coming weeks.

While faster than fiber-optic cable, microwave and millimeter-wave systems are vulnerable to rain, wind, solar activity and even flocks of birds, which can disrupt signals. That matters to firms that are trying to execute thousands of trades a minute on dozens of different markets.

At Anova, a major provider of millimeter-wave technology, Mr. Persico worried that some system could come along with better speed or reliability. He looked for a technology with a level of consistency telecom insiders call "five nines"—signal transmissions that are up and running 99.999% of the time.

In 2011, Mr. Persico read an article in a trade journal describing how a Silicon Valley company called AOptix Technologies Inc. had designed military technology using lasers to communicate in battlefield conditions. His first thought: "I wonder if they can put those on a tower?"

The technology traced back to the 1990s, when two scientists designed a method to gather images from outer space that corrected for atmospheric distortions. They developed technology for telescopes with flexible mirrors that could adjust thousands of times a second.

Soon, they realized the technology could also be used to transmit data using lasers. They formed AOptix and contracted with the U.S. government to provide communication devices for military aircraft.

Mr. Persico asked AOptix whether its laser system could be used to send stock-market data. The company was confident it could, because stock data would only have to move from one fixed spot to another.

"Finding a tower isn't hard for us, because we can find airplanes" with the lasers, said the CEO of AOptix, Dean Senner.

Mr. Persico wasn't the only one who thought of adapting the lasers for stock orders. Several Wall Street firms also reached out to AOptix. After weighing offers, AOptix signed a deal with Anova in December 2012, partly, it says, because Anova had backing from a large Wall Street bank. The bank's identity couldn't be learned.

Mr. Persico set about securing rooftops and other spots to place his lasers between the New Jersey communities housing the NYSE and Nasdaq data centers. Anova said it has dozens of trading firms waiting to try the lasers when they go live.

He said the technology is expected to be largely free of weather-related consistency issues. The flexible mirror system weeds out atmospheric distortions, and a stabilizing system—first designed to let planes use the lasers while in flight—helps keep the devices in contact.

The stabilizing system also means the devices can be put in spots where other technology, such as microwave dishes, can't go. That lets the lasers send signals along a straighter path and thus speeds up transmissions, Mr. Persico said.

One firm that plans to use the system is XR Trading LLC of Chicago. It is a "very compelling technology," said XR's president, Matthew Haraburda. He said if it behaves as intended, it could be "a huge development" in trading technology.

Not that it will be the end of the race for speed, though, or will stop traders from trying to think up new ways to move their orders along quickly. Some dream of a replacement for the fiber-optic cables across the Atlantic and Pacific. The idea: Turbocharge intercontinental trading by floating balloons carrying microwave dishes over the ocean.

Brazil Drought Jolts Commodities' Prices

How bad is the drought in Brazil? Or this is convenient commodity manipulation? Aivars Lode

SÃO PAULO, Brazil—Brazil's worst drought in decades is decimating crops but breathing new life into battered commodity markets.

It hardly has rained in some of the South American country's top farming regions since the start of the year, a period when precipitation is usually the heaviest. Traders, analysts and government forecasters who were calling for record harvests in coffee, sugar and soybeans as recently as December are cutting production estimates, triggering a spike in futures prices that may translate into higher costs for consumers later in the year.

Futures prices for the arabica coffee variety are up 67% since the start of the year. Raw-sugar prices have risen 8%. Soybeans, which have been affected by drought in some areas and too much rain in others, also are up 8%.

The withered coffee trees and parched sugar-cane fields stand in contrast to the bumper crops that have weighed on commodities in recent years. Soaring prices in markets in which Brazil is a key supplier show how quickly global commodity markets can swing from concerns about oversupply to fears of a shortage. The situation in Brazil also could presage a period of price volatility following an era of relatively low and stable prices on many raw materials that benefited companies and individual consumers, analysts say.

Brazil is the world's biggest grower and exporter of coffee and sugar. For soybeans, it was expected this year to surpass the U.S. as the top producer for the first time, though that is now unlikely because of the weather, analysts say.

"So far this year, the weather [in Brazil] has been the largest surprise for [commodity] markets across the world," said Adam Sarhan, chief executive at Sarhan Capital, a New York advisory firm.

"When you have a major external effect, especially a drought that you can't quantify, that throws the entire supply-and-demand equation" out of whack, he said.

The big gains in coffee, sugar and soybeans have helped propel the S&P GSCI commodity index 3.8% this year. The S&P 500 stock index is up 1.4%.

"The weather is creating a lot of interest in some of these markets, and it's creating a lot of opportunities" for investors, said Jack Scoville, vice president at Price Futures Group in Chicago.

Supply concerns in commodity markets haven't been isolated to Brazil's agricultural sector. U.S. supplies of natural gas, which is used to heat and generate electricity, have been stretched by a harsh winter and gas prices are up 10% this year.

Investors pulled $24 million from agricultural-commodity funds in February, though that was down from an average monthly outflow of $97 million last year, according to EPFR Global.

Even after this year's gains, prices for most commodities are well off the peaks hit in recent years. Sugar prices were twice as high three years ago, while soybean prices would need to rise another 25% to match their summer 2012 levels. Growers outside Brazil are predicting healthy crops in both markets, which could offset reduced production from the drought.

Some analysts say prices have risen too much and that it is too soon to know the drought's effect on Brazil's crops.

"Short term, it looks overblown," said Robbert van Batenburg, director of market strategy at brokerage Newedge. "I could see some form of pause in the massive upswing in the near term."

Still, Brazil's bad weather has put an end to forecasts of several more years of record output and global surpluses in the coffee and sugar markets. Brazil is the source of about one-third of the world's annual coffee crop, more than one-fifth of the sugar output, and about one-third of soybean output.

Now, some analysts are lowering their expectations. Copersucar SA, Brazil's biggest sugar exporter, said last month that Brazil's main sugar-cane-growing region will produce 32 million metric tons of the sweetener, 8.6% less than it previously expected.

Also in February, agricultural consulting firm Safras & Mercado cut its estimate of Brazil's soybean production to 86.1 million metric tons, down 6.2% from a month earlier.

Commodity-trading firms and Wall Street analysts had projected that the current season's soybean output in Brazil would be larger than the U.S. crop for the first time. Now, many market experts think that isn't likely. The extreme weather could also sap the potential of the upcoming crops.

"You have to worry—is it too dry to plant corn and cotton and the next crop of soybeans?" said Kona Haque, commodities strategist at Macquarie Bank in London. "Arguably it is, and that's brewing further concerns for later in the year."

Prices for arabica coffee, which is prized for its mild flavor and typically used in gourmet blends, have been the most affected by the drought, because Brazil grows more than half the world's supply. In February, prices jumped 44%, the biggest monthly increase in almost two decades.

In mid-January, when the severity of Brazil's dry spell became apparent, Jonathan Camarda, executive wealth manager at Camarda Wealth Advisory Group, bought shares of the iPath Pure Beta Coffee ETN, an investment product that tracks coffee prices.

Some experts say the drought in Brazil is likely to have ripple effects beyond the commodity markets directly affected. Ethanol refiners, which turn sugar cane into fuel, are predicting higher prices later this year, while chicken farmers say they will need to pass along rising grain costs to consumers.

"The drought isn't a direct threat to chickens. The main issue for us is the cost of feed," said Francisco Turra, president of the Brazilian Poultry Association. "Higher costs means higher prices.

Jenkins: Personal Score-Settling Is the New Climate Agenda

It must be Climate change week; now it is described as personal score settling. Aivars Lode

The cause of global carbon regulation may be lost, but enemies still can be punished.

By Holman W. Jenkins, Jr.

Surely, some kind of ending is upon us. Last week climate protesters demanded the silencing of Charles Krauthammer for a Washington Post column that notices uncertainties in the global warming hypothesis. In coming weeks a libel trial gets under way brought by Penn State's Michael Mann, author of the famed hockey stick, against National Review, the Competitive Enterprise Institute, writer Rand Simberg and roving commentator Mark Steyn for making wisecracks about his climate work. The New York Times runs a cartoon of a climate "denier" being stabbed with an icicle.

These are indications of a political movement turned to defending its self-image as its cause goes down the drain. That's how thoroughly defunct, dead, expired is the idea that humanity might take charge of earth's atmosphere through some supreme triumph of the global regulatory state over democracy, sovereignty, nationalism and political self-interest, the very facts of political human nature.

Business World columnist Holman Jenkins Jr. on why climate-change activists are losing the battle for public opinion. Photo: Getty Images

Let's restate more accurately a plan recently announced by Thomas Steyer, a California hedge-fund billionaire whose idea is to make the coming midterms about climate change: He would spend $100 million to flog an issue voters don't care about, to defeat Republicans whose defeat would have no impact on climate change, in order to replace them with Democrats whose election would have no impact on climate change.

Mr. Steyer's thinking is puzzling unless his goal is to make $100 million disappear. If his purpose were to elect Democrats, wouldn't his money go further attacking Republicans on matters of interest to voters? If he wants to move the ball on climate change, wouldn't a better place to start be undoing the damage his fellow climate lobbyists have done to the cause with their hysterical exaggerations, false statements and moral bullying?

He could begin by running ads leveling with Americans about climate science. We know with comfortable certainty that human industry is adding to carbon dioxide, a so-called greenhouse gas, in the atmosphere. An insoluble noise-to-signal problem, though, is how much the human component may have influenced climate change already. And forecasts of future warming depend on theoretical models that are highly speculative and necessarily suspect.

Then there's the political problem: Nothing America could do by itself would make a significant difference. Anything agreed with other countries, given diplomatic incentives, would be an empty gesture designed mainly to benefit incumbent politicians.

Indeed, a rational case for action on cost-benefit grounds is challenging to make at all. Even if it weren't, the nature of human power games, which advocates are powerless to change, means the effort could easily degenerate into a corrupt scramble for climate pork (see America's ethanol and Germany's solar subsidies).

If this sounds like a counsel of despair, think again. The counsel of despair was to rest mankind's hopes on a colossal pipedream. A world-wide social engineering project was never going to happen—luckily, since its results would have been less charming than activists imagine.

After 35 years, it's time to accept that adaptation is the way ahead. The problems of climate change, whatever its causes, are the same old human problems of poverty, disease and natural hazards like floods, storms and droughts. The best hope on offer is the continued accumulation of human wealth and knowledge.

Those who wish to slit their wrists at this point, feel free. But think about this: When human knowhow produces new energy technologies to replace current energy technologies, as it eventually will, we know the new technologies will be lower carbon. Why? Because extracting and distributing fossil fuels is fantastically expensive and becoming more so.

Chevron's CVX -0.31% massive Gorgon gas project in the coastal waters of Australia is expected to cost $54 billion. Exxon, XOM +0.45% Shell and several others are spending $116 billion to get oil from under the Caspian Sea in a remote part of Kazakhstan. Not to be flip, but a battery 10 times more efficient than today's would largely undermine the economics of these projects and make its inventor extraordinarily rich.

But engineering and venture capital (Mr. Steyer's job until he retired a year ago) are hard work and require personal resilience, while the pleasure of climate warriorhood is sitting at your little blog and picturing yourself a moral hero whose opponents deserve to be silenced if not exterminated. In our time, climate activism has devolved into self-medication for the moderately mentally ill (and who's to say this is not a useful service). Anyone genuinely concerned about the climate future might do better to get an engineering or finance degree.