Tuesday, February 21, 2012

In the past, I’ve written about the cost of latency and how reducing latency can drive more customer engagement and increase revenue. Two example of this are: 1) The Cost of Latency and 2) Economic Incentives applied to Web Latency. Nowhere is latency reduction more valuable than in high frequency trading applications.  Because these trades can be incredibly valuable, the cost of the infrastructure on which they trade is more or less an afterthought.  Good people at the major trading firms work hard to minimize costs but, if the cost of infrastructure was to double tomorrow, high frequency trading would continue unabated.

 

High frequency trading is very sensitive to latency and it is nearly insensitive to costs. That makes it an interesting application area and its one I watch reasonably closely. It’s a great domain to test ideas that might not yet make economic sense more broadly.  Some of these ideas will never see more general use but many ideas get proved out in high frequency trading and can be applied to more cost sensitive application areas once the techniques have been refined or there is more volume. 

 

One suggestion that comes up in jest on nearly every team upon which I have worked is the need to move bits faster than the speed of light. Faster than the speed of light communications would help cloud hosted applications and cloud computing in general but physics blocks progress in this area resolutely.

 

What if it really were possible to transmit data at roughly 33% faster than the speed of light? It turns out this is actually possible and may even make economic sense in high frequency trading. Before you cancel your RSS feed to this blog, let’s look more deeply at what is being sped up, how much, and why it really is possible to substantially beat today’s optical communication links. 

 

When you get into the details, every “law” is actually more complex than the simple statement that gets repeated over and over. This is one of the reasons I tell anyone who joins Amazon that the only engineering law around here is there are no unchallengeable laws. It’s all about understanding the details and applying good engineering judgment.

 

For example the speed of light is 186,000 miles per second right?  Absolutely. But the fine print is that the speed of light is 186k m/s in a vacuum. The actual speed of light is dependent upon the medium in which the light is propagating. In an optical fiber, the speed of light is actually roughly 33% slower than a in a vacuum. More specifically, the index of refraction of most common optical fibers is 1.52. What this means is that the speed of light in a fiber is actually just over 122,000 miles/second.

 

The index of refraction of light in air is very close to 1 which is to say that the speed of light in air is just about the same as the speed of light in vacuum. This means that free space optics -- the use of light for data communications without a fiber wave guide -- is roughly 50% faster than the speed of light in a fiber. Unfortunately, this only matters over long distances but its only practical over short distances. There have been test deployments over metro-area distances – we actually have one where I work – but, generally, it’s a niche technology that hasn’t proven practical and widely applicable. On this approach, I’m not particularly excited.

 

Continuing this search for low refraction index data communications, we find that microwaves transmitted in air are again have a refraction index near 1 which is to say that microwave is around 50% faster than light in a fiber. As before, this is only of interest over longer distances but, unlike free space optics, Microwave is very practical over longer distances.  On longer runs, it needs to be received and retransmitted periodically but this is practical, cost effective, and is fairly heavily used in the telecom industry. What hasn’t been exploited in the past is that Microwave is actually faster than the speed of light in a fiber.

 

The 50% speed-up of Microwave over fiber optics seems exploitable and an enterprising set of entrepreneurs are doing exactly that. This plan was outlined in the Gigaom article from yesterday titled Wall Street gains edge by trading over microwave.

 

In this approach, McKay Brothers are planning on linking New York city with Chicago using microwave transmission. This is a 790 mile distance but fiber seldom takes the most direct route. Let’s assume a fiber path distance of 850 miles which will yield 6.9 msec propagation delay if there are no routers or other networking gear in the way. Give that both optical and microwave require repeaters, I’m not including their impact in this analysis.  Covering the 790 miles using microwave will require 4.2 msec. Using these data, we would have the microwave link a full 2.7 msec faster. That’s a very substantial time difference and, in the world of high frequency trading and 2.7 msec is very monetizable. In fact, I’ve seen HFT customers extremely excited about very small portions of a msec. Getting 2.7msec back is potentially a very big deal.

 

From the McKay Brothers web site:

 

Profitability in High Frequency Trading (“HFT”) is about being the first to respond to market events. Events which occur in Chicago markets impact New York markets. The first to learn about this information in New York can take appropriate positions and benefit. There is nothing new in this principle. Paul Reuters, founder of the Reuters news agency, used carrier pigeons to fill a gap in the telegraph lines and bring financial news from Berlin to Paris. The groundbreaking idea of the time was to use an old technology – the carrier pigeon – to fill a gap. What Paul Reuters did 160 years ago is being done again.

 

Today, we are revisiting an old technology, microwave transmission, to connect Chicago and New York at speeds faster than fiber optic transmission will ever be able to deliver.

 

This technology is emerging just two years after Spread Networks is reported to have spent 300 million dollars developing a low latency fiber optic connection between Chicago and New York. Spread’s fiber connection will soon be much slower than routes available by microwave.

 

The Gigaom article is at: http://gigaom.com/broadband/wall-street-gains-an-edge-by-trading-over-microwaves. The McKay Brothers web site is at: http://www.mckay-brothers.com/. Thanks for Amazon’s Alan Judge for pointing me to this one.

 

                                                                --jrh

 

James Hamilton

e: jrh@mvdirona.com

w: http://www.mvdirona.com

b: http://blog.mvdirona.com / http://perspectives.mvdirona.com

 

Tuesday, February 21, 2012 3:41:23 PM (Pacific Standard Time, UTC-08:00)  #    Comments [14] - Trackback
Hardware | Services
Tuesday, February 21, 2012 11:27:58 PM (Pacific Standard Time, UTC-08:00)
But don't microwave networks suffer from rain fade? Seems like that wouldn't be a good fit for HFT. Maybe they run over both fiber and microwave networks for redundancy.
todd
Wednesday, February 22, 2012 4:55:47 AM (Pacific Standard Time, UTC-08:00)
With enough error correction and avoiding pushing the data rates too hard, its amazing how well it can work in even very poor environmentals. I suspect they would backup with fiber to protect against outage from equipment failure, natural disaster, etc.

--jrh
Wednesday, February 22, 2012 9:03:12 AM (Pacific Standard Time, UTC-08:00)
So how tall do the towers between NY and Chicago need to be to have line of sight, given the circumference of the Earth?
Dr. Kenneth Noisewater
Wednesday, February 22, 2012 11:02:10 AM (Pacific Standard Time, UTC-08:00)
You were asking "So how tall do the towers between NY and Chicago need to be to have line of sight, given the circumference of the Earth?"

It's not done as a single hop. There are repeater stations along the way.

--jrh
Wednesday, February 22, 2012 11:32:04 AM (Pacific Standard Time, UTC-08:00)
Wouldn't good old copper cables be competitive? Signal propagation speed is 0.95-0.97*c. Yes, they take longer to build, but between New York and Chicago it shouldn't be too hard to build or find some.
Wednesday, February 22, 2012 2:59:39 PM (Pacific Standard Time, UTC-08:00)
Simon asked if copper would work as well as Microwave. Yup, absolutely.

--jrh
Thursday, February 23, 2012 12:12:09 AM (Pacific Standard Time, UTC-08:00)
Really interesting! This makes me think of Neal Stephenson's recent talk, where he mentions building a 15km tower.

http://www.youtube.com/watch?v=TE0n_5qPmRM

You could make new backbones using microwave above the clouds.
Thursday, February 23, 2012 5:47:03 AM (Pacific Standard Time, UTC-08:00)
Thanks for pointing to the Neal Stephenson talk Brett. I'm a big fan of his work so I watched the talk. I would have liked to see more technical detail on the 15km high structure but the talk did raise a bunch of good ideas mostly around less incrementalism around technology.

--jrh
Friday, February 24, 2012 2:26:56 AM (Pacific Standard Time, UTC-08:00)
Also, neutrinos are still interesting. They seem to be pretty fast (although not faster than c, alas :-), and you can shortcut the curvature of the earth. Probably not that big a deal for Chicago-New York, but... And note that I have no idea if and when neutrino-based communication will become practical.
Friday, February 24, 2012 5:05:38 AM (Pacific Standard Time, UTC-08:00)
Neutrinos are hard to produce and even harder to detect making them a real challenge for cost effective communications where production and detection is pretty much all we do. Where they have a chance to compete and win is in the communications with the US and Russian nuclear submarine fleet. Today the only way to communicate with a submarine hundreds of feet below the surface of the water is ELF (Extreme Low Frequency). The bit rates possible with ELF are incredibly poor. Neutrinos pass through water without a problem so might offer a high bandwidth communication opportunity with the hidden ballistic missile submarine fleet.

I don't see the technology usable for commercial communications in the near future but I agree neutrinos are interesting.
Friday, February 24, 2012 8:45:24 AM (Pacific Standard Time, UTC-08:00)
Right, though since we're talking about the financial industry, "cost-effective" may be relative. But as I said, even if it could be made to work at finite cost, the potential savings don't seem to be that great. If my calculations are correct, you'd only save two of the 1191 kilometers between JFK and ORD - see https://sites.google.com/a/leinen.ch/simon/software/tunnel
Friday, February 24, 2012 8:59:44 AM (Pacific Standard Time, UTC-08:00)
Good point on "cost effective" not always applying to finance Simon :-).

--jrh
Thursday, March 01, 2012 8:53:36 PM (Pacific Standard Time, UTC-08:00)
109 Terabit Per Second Optical Fiber Transmission

http://www2.nict.go.jp/pub/whatsnew/press/h22/110310/110310_e.html
Jibi
Saturday, March 03, 2012 9:05:49 AM (Pacific Standard Time, UTC-08:00)
Yes, you're right Jibi, bandwith you can solve with technology or parallel links. Latency is a harder nut to crack in that we we can't beat the speed of light in a vacuum.

James Hamilton,
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