Is there any connection between speed of light and stock exchange? Yes, there is, and it can affect world economy - and your salary - greatly.
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High-frequency trades characterized by short holding periods, now represent about 70 percent of all stock trades in the U.S. Even though most of these trades occur in the form of pulses racing down optical fibers, even this pace isn't fast enough for some people.
When an investor in New York decides to buy a stock on the New York Stock Exchange, it takes about 500 microseconds for the transaction to go through. But what if your office were on the other side of the world, in Shanghai? Then the travel time of light moving out across several optical fibers and racing around the globe would have to be figured in. In fact, the delay now would be at least 40 milliseconds, nearly 100 times longer than for the investor in New York.
The rapid buying and selling of securities by exploiting momentary price differences in far flung markets is called arbitrage. If, for example, some traders are buying shares of a company for $100 in New York and other traders are selling shares of the same company for 98 in Shanghai, then an agile middleman could snap up shares in one place and sell them in the other. To maintain an edge over other traders, it is crucial to be able to deliver information as fast as possible.
The latency disadvantage of globally distributed markets can't be entirely erased by technology, but the comparative lag times for international stock trades can be lessened by employing intermediate trading points. Scientists proposed to blanket the world with computer stations positioned along the paths between all of the major stock markets. Securities trading companies could put semiautonomous computers at these strategic crossroads. Programmed with sophisticated buying and selling instructions these computers would act much more promptly to price signals coming from remote markets than if the signals had to travel all the way to the home office.
Faster technology has long been a part of stock transactions. In the early 19th century carrier pigeons brought the fastest information about any kind of breaking news that could affect stock prices. Later came telegraph and telephone networks. Then computers speeded up transactions in a big way.
A recent example is the dedicated fiber optical line built between New York and Chicago. According to Forbes Magazine, the fiber - 1320 kilometers long if measured by distance or 13.3 milliseconds by the clock - improved the latency between those cities by three milliseconds, enough to justify the cost of running the fiber. The hundreds of computers linking the financial markets would speed things up, allowing faster decisions and more money in the pocket. ■