Spread Networks

[scandal 951]

This is a spread-trader's wet dream. They have literally bored through mountainsides and evicted people from their homes throughout OH and PA to get the most direct possible route from LaSalle St. to Cartaret NJ. It's a direct line, other than a slight dip around the western end of Lake Erie.

Here's an image of the new 13.3ms path compared to the existing > 16ms paths. Awesome, for anyone interested in spending 7 figures to arbitrage the S&P futures in Chicago against the equity baskets in NY.

Wall Street's Speed War

Christopher Steiner,

Forbes Magazine dated September 27, 2010

Two years ago a hotshot trader approached James Barksdale looking for money for a rather quixotic venture: to dig, from scratch, a superfast fiber-cable route for sending trades between Chicago and New York. It would be nearly as straight as the crow flies and create a new critical link for speed-obsessed traders. Barksdale, now 67, was familiar with high-concept ideas from his days as chief executive of Internet browser Netscape and at&t Wireless. But this was a bit much.

"At first I said, Come on, you're pulling my leg," he recalls, wondering how you would plunge through mountains at a reasonable cost. But as he pondered it he realized, "If it wasn't a tough problem, somebody else would have already done it."

Barksdale helped finance the company, the brainchild of trader Daniel Spivey, 40, and became chairman. Barksdale's son, David, a mergers-and-acquisitions lawyer, became chief executive. The result was Spread Networks of Ridgeland, Miss., which spent the last two years secretly digging a gopher hole from Chicago to New York, usurping the erstwhile fastest paths.

Spread's one-inch cable is the latest weapon in the technology arms race among Wall Street houses that use algorithms to make lightning-fast trades. Every day these outfits control bigger stakes of the markets--up to 70% now. "Anybody pinging both markets has to be on this line, or they're dead," says Jon A. Najarian, cofounder of OptionMonster, which tracks high-frequency trading.

Spread's advantage lies in its route, which makes nearly a straight line from a data center in Chicago's South Loop to a building across the street from Nasdaq's servers in Carteret, N.J. Older routes largely follow railroad rights-of-way through Indiana, Ohio and Pennsylvania.

At 825 miles and 13.3 milliseconds, Spread's circuit shaves 100 miles and 3 milliseconds off of the previous route of lowest latency, engineer-talk for length of delay.

Three milliseconds is three one-thousandths of a second. Does that really matter? "That's close to an eternity in automated trading," says Ben Van Vliet, a professor at the Illinois Institute of Technology. "This is all about picking gold coins up off the floor--only the fastest person is going to get the coins."

That's a far cry from what used to be considered the ultimate in low latency--an open phone line from a trading floor in New York to one in Chicago. Later came fiber-optic networks routing information at the speed of light between the country's two financial hubs.

Daniel Spivey earned his trading chops at the Chicago Board Options Exchange. He became one of the exchange's first remote marketmakers in 2005 when he set up shop in his hometown of Jackson, Miss. to trade options for the s&p 500 index. In 2007 Spivey contracted with a New York hedge fund to devise a low-latency arbitrage strategy, wherein the fund would search out tiny discrepancies between futures contracts in Chicago and their underlying equities in New York.

Such popular arbitrage strategies demand screaming speed between Chicago and New York on what's called dark fiber, the industry term for unused fiber-optic strands that can be sold or leased. The entirety of the strand's bandwidth belongs to the leaser, who supplies his own lasers, which can cost more than $5 million, to light the line and transmit information.

Spivey composed the program for the hedge fund, but he couldn't execute it. He needed the market's lowest latency path, on which no space was available. Piqued, Spivey spent ten months researching the feasibility of building a new and faster line before he approached Jim Barksdale, who was born in Jackson, Miss. and still resides there.

Spivey and David Barksdale immediately set out on a series of road trips, meeting with county boards, state highway commissions and private landowners. "It's not always an easy pitch; some people don't want fiber optics in rural Ohio," says Spivey, who scrawls calculations on a paper pad and ponders things like the refractive index of particular fiber-optic lines.

By March 2009 Spread was moving dirt. Soon it had 125 construction crews working at once. Some dug ditches next to state roads while others bore tiny tunnels beneath streams and rivers. In the Allegheny Mountains of Pennsylvania, crews ran rock saws until they glowed white in the winter air. In farm country, workers would make 3 miles a day. In the granite and schist of the mountains, a good day was 100 feet.

Worried that competitors might build their own version, Spread ran on stealth until near completion. "We kept a lid on things by staying away from the big investment banks until late," says David Barksdale.

The last splice came in July. Spread won't disclose cost, but Jason Cohen, the chief operating officer of Allied Fiber, which is building a nationwide network, says laying cable through easy terrain runs $200,000 per mile. Half of Spread's route, however, is through tough virgin terrain, pushing forbes' estimate of its cost toward $300 million. Jim Barksdale put up all of the capital other than $75 million financed by outside investors.

Spread Networks won't talk about its pricing or clients, except to say it hasn't sold out yet. But its title as low-latency king means it can charge eight to ten times the going rate, says Donna Jaegers, a telecom analyst at D.A. Davidson & Co. Allied Fiber charges $1.2 million for a 20-year Chicago-to-New York lease plus $235,000 a year for server space and maintenance.

Big algorithmic traders have to ante up, no matter the cost, says Najarian. Chicago proprietary houses such as Getco, Wolverine and Citadel, he says, are undoubtedly up and running already. So, too, he reckons, are New York banks with their own algorithmic trading desks, such as UBS, Goldman Sachs ( GS - news - people ) and Morgan Stanley ( MS - news - people ).

One Web hoax has a path even faster than Spread's: boring through the earth from Chicago to New York, avoiding the planet's pesky curvature. Spivey laughs, "They're probably working on that already."

[^_^ 5,021]

Interesting!

[Ban Hammer 13,218]

Interesting!

yeah, interesting that they tossed people outta their homes for this.

[scandal 951]

yeah, interesting that they tossed people outta their homes for this.

Aw, but they're all Cleveland Browns and Pittsburgh Steelers fans, so who gives a **?

Seriously, I don't think anyone actually would have been evicted. More likely they were offered $$ to allow the fiber to be routed through their barns and alfalfa fields. Everybody happee

[SuperDuper! 230]

Yes, very interesting. And Charles doesn't realize that those "evicted" from their homes were paid a hefty price to leave town.

Fast trading and manipulation of the market can't have anybody standing in the way of its progress!

[Ban Hammer 13,218]

Aw, but they're all Cleveland Browns and Pittsburgh Steelers fans, so who gives a **?

Seriously, I don't think anyone actually would have been evicted. More likely they were offered $$ to allow the fiber to be routed through their barns and alfalfa fields. Everybody happee

your first paragraphs said they were evicted.

They have literally bored through mountainsides and evicted people from their homes throughout OH and PA to get the most direct possible route from LaSalle St. to Cartaret NJ.

Yes, very interesting. And Charles doesn't realize that those "evicted" from their homes were paid a hefty price to leave town.

were that true, they probably never needed to be evicted...

[scandal 951]

your first paragraphs said they were evicted.

That's called "poetic license", aka "don't believe everything you read"

You should read the article I clipped (if you haven't already). They mention that they did face resistance from farmers who didn't want fiberoptics running through rural Ohio, but ultimately it did get built. I'm pretty sure everyone got fairly compensated to get this done.

It is cool. It's dark fiber meaning it's not a matter of just buying capacity, a trading firm would also need to invest in the lasers and expertise to light the waves. That's a very different proposition than just buying a leased line from a telco.

We were talking about this at work and figure it's an investment of somewhere between 10-20million to go live on Spread Networks, and the primary trade you would execute using it is a latency arb between the ES (S&P mini future) and its constituents. That is: at a given moment in time the CME in Chicago is telling you can the price of the S&P future, and at the same instant you compute the implied value of the index by taking the prices of the 500 stocks in the S&P and combining them in the weighted formula of the index. The stock prices come from direct feeds from the equity markets - Nasdaq, NYSE, Arca, BATS which are all in northern NJ. You run the comparison at one end or the other: either in NY or Chi, and when you spot a price discrepancy, you buy (sell) the future and simultaneously sell (buy) the constituents. It's a pretty straightforward risk-free arb (you're nearly always fully hedged), nothing very sophisticated in the algo. However being a few ms faster than the other guy at doing this lets you win that race over and over again. Each trade may net a few nickels(* more poetic license for you there, Charles) but all those nickels add up and can justify that $15million spend. It's also potentially useful in the FX markets, when arbing the CME currency futures against the cash FX prices in NY, same basic concept just a different asset class.

[Ban Hammer 13,218]

why not just move the traders from chicago to nyc? and that's not poetic license.

[Darnell 8,478]

Chicago has better food - who would want to move?

Ya, I can see the FX benefits - those can 'spread' quickly.

You can have it good, fast or cheap. Pick 2.

Spread Rocks !

GoGoGadget FasterTradesForSome !

[Ban Hammer 13,218]

Chicago has better food - who would want to move?

i see your better food and raise you nyc's gecko.

[^_^ 5,021]

yeah, interesting that they tossed people outta their homes for this.

Actually, what I found interesting (but left unsaid last night) is that I was in Carteret a few days ago and the place is in the middle of a serious boom. It used to be hood and part of it still is but it's going the way of JC in terms of rapid-fire gentrification. Not a bad place to buy some cheap commercial property if one had the disposable cash.

BTW - this new route shaves off 3 milliseconds of latency.

That may sound not like much to you and me but those trader-types are freakin' nuts.

Edited September 29, 2010 by Legacy member

[Ban Hammer 13,218]

That may sound not like much to you and me but those trader-types are freakin' nuts.

don't say that too loud, gecko might bite your ankle and raise your car rates.

[^_^ 5,021]

don't say that too loud, gecko might bite your ankle and raise your car rates.

I have two fully paid off cars. The gecko can kiss my ###

[Darnell 8,478]

Cool - The Group-On Founders have set up a VC fund for Chicago/Illinois-based high tech ventures.

Fast Wire Paired with new VC Fund? Whoop !

GoGoGadget MoveToChicago !

[Ban Hammer 13,218]

I have two fully paid off cars. The gecko can kiss my ###

but now they don't work as he chewed up the wiring.