Can balloons really enable HFT, or is it just hot air?

Hugh Cumberland is solution manager, financial services at Colt

As the high-frequency trading arms race continues, some firms are exploring the idea of using lighter-than-air balloons as a faster way of transmitting data. Hugh Cumberland examines whether the concept is commercially viable.

With the ability to support trading speeds up to 50% faster than fibre, you could be forgiven for thinking that microwave is the ultimate tool for high-frequency traders. But in the never-ending hunt for competitive advantage, plans are being drawn up to squeeze even more advantage out of microwave technology. One provider has proposed a network of lighter-than-air balloons, capable of creating a transatlantic wireless trading route to transmit prices and executions across the Atlantic Ocean.

Microwave lines are currently used to transfer data between some of the most important trading routes in the world. Colt’s microwave network, for example, extends from Frankfurt to Basildon, relying on fixed towers to transmit the signal at super-fast speeds. But with the route between London and New York presenting logistical challenges, connectivity providers are seeking new solutions.

Using balloons may appear outlandish but many market watchers dismissed microwave as fanciful when the technology first emerged. Those commentators have been left red-faced as some firms are now seeing tangible returns from microwave’s ability to send data across the shortest distance – line-of-sight – between two points. Trading desks have reported hits on their order fill rates as competitors have introduced microwave services, with evidence confirming that whoever is first (or joint-first) to market will gain a significant competitive advantage.

Yet despite microwave’s success, is it realistic to think that a network of balloons can physically support all the technology required to transmit data in the same way that they can be transmitted between two fixed towers?

First the technical challenges: even if barriers such as the difficulty of supporting the equipment can be overcome, which is questionable, there are other physical limitations that will impact on the transatlantic round-trip. Depending on whether balloon or satellite technology were deployed, many issues would have to be addressed, such as the curvature of the earth, signal reflection over large expanses of water, and interference from aircraft and other balloon or satellite systems. This is not to mention the actual physical signal transit path, which can be affected by meteorological conditions.

That said, the demand for such a service is real. As things stand, it’s not possible to use microwave directly across the Atlantic, and using balloons as a means of getting signals from A to B is not an entirely untested concept. The reality check is the scale of the technology required. Assuming 50 kilometre hops, you would need something like 80 balloons in place. That’s quite an estate to install, operate, manage and maintain.

There’s no denying that the required investment to build such an offering would be sizeable. In order for traders and brokers to benefit, service providers will need a robust business case to make the argument for the investment required showing a healthy return on investment within a 12-18 month period.

Potential barriers aside, it’s important to note that since markets began, brokers and traders have always sought out ways to be faster and/or closer to the market. Three hundred years ago the equivalent of ultra-low latency would have been employing a faster runner between the City of London’s coffee shops. Proximity was achieved by opening a coffee shop as close to Change Alley as possible. As the market evolved, latency across the Atlantic was challenged first by the clippers and then the big liners, before telegraphy took over. Plus ça change, plus c’est la même chose. Centuries later, trading customers still want the fastest route to market, no matter how the technology evolves.

Connectivity between the healthy pools of liquidity in North America and Europe is currently only practical using fibre technology, so customers will continue to push for faster transmission methods. The size of the prize, particularly in the more lightly regulated and genuinely more global treasury markets, will continue to create demand: but whether the prize is sufficiently large to tempt technology providers to risk capital on relatively untried balloon technology remains to be seen.

Yet in many ways, the technology is secondary. Today the discussion is centred on balloons, but tomorrow it could be solar powered planes, drones or even low earth satellites. Regardless of the latest fad, if there is a new way to create a faster route across the Atlantic that gives both providers and customers an acceptable return, then you can bet providers will be investigating it and investing in it. And as we have learnt through microwave’s success, nobody can afford to rule out a technology before they’ve taken the time to gauge its full potential.