Business Impact

High-Frequency Trading Is Nearing the Ultimate Speed Limit

A network switch made by the firm Metamako allows a trade order to be placed in the time it takes a photon to travel about 90 feet.

A small black device about the size of a pizza box could be the future of financial trading.

Australian company Metamako’s network switch is able to route incoming information through to trading servers in just four nanoseconds, and can lower the time it takes to execute a full trade—from the time it receives market information from a stock exchange to the time it sends out a “buy” or “sell” order—to just 85 nanoseconds, nearly three times faster than Cisco’s general-purpose networking switch.

The lightning-fast gear is just one link in the high-speed trading chain, of course. Servers have to parse incoming information, make a decision, and send the order back to the switch, before it heads along super-fast cables to an exchange. But Metamako’s hardware highlights the lengths that traders are willing to go to lower the “latency” of every component in their setup. The company figures it sells about 100 units a month at around $20,000 a pop—according to the Wall Street Journal’s piece on the company, that’s pretty affordable compared to many of the components in a high-speed trading rig.

This “race to the bottom” is getting pretty close to the limits of what is possible with known physics—light travels about one foot per nanosecond.

Even relativity can’t get in the way of dreaming of making a fast buck, however. When in 2012 scientists briefly thought they’d detected neutrinos that could travel faster than light, for example, high-frequency traders pondered how they might build a system that would execute trades that would, theoretically, occur in the past.

That kind of thinking tells you everything you need to know about just how speed-obsessed the industry has become. But high-frequency trading has also risen to dominate the world of stock trading— about half of all stock that changes hands in the U.S. is through high-speed trades, according to the Journal piece.

Whether or not that’s a good thing is a matter of opinion. Critics of the practice argue that it skews profits to those who can afford sophisticated setups. High-frequency traders are able to make pennies off of individual trades but execute them millions of times a day, while regular investors are left in the dust. And it could be a destabilizing force, where software gone haywire erases huge chunks of a company’s value in a matter of minutes. This has happened enough that it has a name: a flash crash.

Proponents, on the other hand, argue that reaching the physical speed limits of trading will make markets fairer. Once everyone trades at light speed, or near to it, there will be little advantage to be gained by going any faster.

Until, of course, someone figures out how to break the laws of physics.

(Read more: Wall Street Journal, Wired, “How to Avoid Another Flash Crash” “Trading Shares in Milliseconds”)