Microwave Network (Trading)

A microwave network, in trading, is a chain of radio towers that carries market data and orders between distant financial data centres faster than fiber-optic cable can. Radio waves travel through air at very nearly the speed of light in a vacuum, while light inside a glass fiber travels about a third more slowly, and a line of towers can follow a straighter path than a buried cable. The time saved is a few thousandths of a second, which is decisive for the fastest trading firms.

These networks are part of the low latency infrastructure built for high-frequency trading since about 2010. The best-known route links the futures markets of the Chicago Mercantile Exchange, whose data centre is in the Chicago suburbs, with the equity markets housed in data centres in New Jersey. Others connect London with Frankfurt and link financial centres in Asia.

The delay over a route is its length divided by the speed of the signal:

• $t$ is the one-way travel time.
• $d$ is the length of the path.
• $c$ is the speed of light in a vacuum, about 299,792 kilometres per second.
• $n$ is the refractive index of the medium: about 1.0003 for air and about 1.47 for the glass in optical fiber.

Over a straight-line distance of 1,180 kilometres, roughly that from the Chicago area to northern New Jersey, a signal in air takes $1{,}180 / 299{,}700 = 3.94$ milliseconds. In fiber, at about 204,000 kilometres per second, the same distance would take $1{,}180 / 204{,}000 = 5.78$ milliseconds, and since cables follow railways, roads and other rights of way, the real fiber path is longer. The most direct fiber route between the two areas, completed in 2010, offered a round trip of about 13 milliseconds. Microwave networks later brought the round trip to between 8 and 9 milliseconds, close to the physical limit of about 7.9.

Microwave links work by line of sight. Dish antennas are mounted on towers and tall buildings, each pointed precisely at the next, with hops typically a few tens of kilometres long, limited by the curvature of the earth, terrain and the reliability required. At each tower the signal is received and sent on, and the equipment is designed to add as little delay as possible at every hop. A long route needs dozens of sites.

Building one involves leasing or buying tower space along a path as close as possible to the geodesic, the shortest line over the earth's surface, and obtaining radio licences for each hop from the national regulator, which in the United States is the Federal Communications Commission. Competing networks have fought over the best tower positions, since a route that is a few kilometres shorter is a few microseconds faster. At each end the network connects into the exchange's data centre, where firms using colocation receive the signal through a cross connect.

• Capacity. A microwave link carries far less data than a fiber. Bandwidth is measured in megabits per second instead of the gigabits available on fiber, so only the most time-sensitive data is sent by radio, often in compressed form.
• Weather. Heavy rain, snow and atmospheric conditions weaken or interrupt the signal, an effect called rain fade. Firms keep a fiber path as a fallback and switch to it automatically.
• Cost and access. Networks are expensive to build and maintain. Some are private to one trading firm, and others are run by vendors that sell capacity to several clients.
• Geography. Line-of-sight radio cannot cross oceans. For intercontinental routes, firms have turned to shortwave radio, which bounces off the upper atmosphere, alongside submarine cables.

The main use is to carry price changes from one market to another ahead of slower participants. Index futures in Chicago and the shares and exchange-traded funds that track the same indices in New Jersey move together, and futures often move first. A firm that learns of a futures move a millisecond or two before others can update its quotes in the equity markets before they are hit, or trade against quotes that have not yet adjusted. This supports market making, index arbitrage and other strategies that depend on the freshest market data.

For short distances between data centres in the same metropolitan area, firms also use millimetre-wave radio and laser network links, which offer more capacity over shorter hops.

Microwave networks are a frequent example in arguments about the social value of speed. Critics describe the spending as an arms race in which firms pay large sums to beat each other by microseconds with little benefit to investors, and some have proposed changes in market design, such as trading in a frequent batch auction, that would remove the advantage. Defenders reply that faster links keep prices in different markets aligned and allow market makers to quote tighter spreads, because they are less exposed to being caught with stale prices. Exchanges and regulators have focused on ensuring that access to data-centre connections is offered on equal terms, while leaving the long-distance links to private competition.