Low Latencies, High-Frequency Trading, and the Non-Death of Distance

10 08 2013

“Reports of my death have been greatly exaggerated.” Mark Twain.

In the last decade, we have heard many declarations to the effect that distance is dead, the world is flat, and one’s geographical location no longer matters in the internet age. This talk is part of what has been called globaloney, the exaggerated claims that globalization has made national borders irrelevant.

The death of distance talk overlooks that fact that while the internet is fast, it is significantly slower than the speed of light, which has big implications for high-frequency trading, where stocks are bought and sold in a small fraction of a second.  Internet lag times are one reason why some traders have decided to locate their servers as close as possible to the departments in Washington that release crucial, market-influencing data. So-called “co-location” favours those firms that have the money to put their server farms in key locations close to the fiber optic cables that also serve the Commerce Department and the Bureau of Labor Statistics.

Laying Fiber Optic Cable in DC

 

 

Check out this CNBC report or co-location in DC.

Note how the server farmer in the CNBC story is located on K Street, the home of much of Washington’s rent-seeking crony capitalism lobbying industry.

Needless to say, this sort of arrangement favours firms that already have significant capital. The bias in favour of insiders is even greater because the cost of buildings in Washington DC is artificially high, thanks to byzantine building regulations that hardly seem appropriate in the capital of an allegedly capitalist country.  It is hard to see any social benefit that comes from high frequency trading and there are some significant potential social costs whenever there is a software malfunction.

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