Location, location, location

Paul Raven @ 08-11-2010

Why would anyone in their right mind consider building a server farm in deepest darkest Siberia, or the middle of the Indian Ocean? Possibly because the intersection of geography and information flow means such locations would give you a slight yet crucial edge in the high-stakes imaginary-money game of high-frequency trading [via SlashDot]:

The insight of the MIT researchers, Alexander Wissner-Gross and Cameron Freer, is that some automated traders–or at the very least, their server farms–will be best positioned in-between certain exchanges. Since some trading strategies capitalize on price fluctuations between separate exchanges in different parts of the world, the optimally located server will receive information from those exchanges at precisely the same moment, gaining that millisecond advantage over the competitor. In some cases that pefect location is the midpoint between the two exchanges, but not always–it depends on whether the exchanges’ prices move at the same speed or not.

Wissner-Gross and Freer rounded up the locations and price-speeds on the 52 largest global exchanges, and plotted a map of the ideal locations for traders who would want to be perfectly positioned between any given pair. The map, which appears today in an article in the journal Physical Review E, dictates that some traders’ servers will be ideally positioned in central Africa, others in the remotest forests of Canada, others in the middle of the Indian Ocean, and still others in Siberia. This all assumes, of course, a proper infrastructure in place–in the short term, Freer tells Fast Company, it might make more sense to approximate these locations, rather than invest in installing a server farm underneath the ocean.

Brilliant… yet another way for compulsive gamblers to squeeze more profits out of the aether (not to mention shades of Ian McDonald’s Dervish House – which, if you haven’t read it yet, should be added to your stack of pending reads with immediate effect). But according to New Scientist, this might actually represent the last possible way to grasp advantage in the automated trading system:

“This shows that the technological arms race to extract every penny from high-frequency mechanical arbitrage will soon reach its ultimate limits,” says physicist and hedge-fund manager Jean-Philippe Bouchaud, based in Paris. “Maybe the buzz around high-frequency trading will then calm down.”

We can live in hope, I guess.

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One Response to “Location, location, location”

  1. ConfidentlyDubious says:

    Brilliant idea, setting up the server farms dealing with high-frequency trading in remote and desolate locations. So we can input their coordinates in some long-range missile guidance system and wait, with a finger on the “Fire!” button, for the very first symptoms of the next economic collapse. Finally a good use for all those creepy weapons.