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Why are High Frequency Traders Afraid of Sharks?

Nov. 16, 2012
Investing
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In High Frequency Trading (HFT), speed is extremely important. A few milliseconds could result in millions of dollars worth of profitable trades. It is far better to be faster than more reliable when it comes to transmitting financial data because when financial data is obtained at a speed faster than the competition, high frequency traders are set to earn rich rewards hundred percent of the time.

How do sharks affect all this?

HFT: How it works

Advanced algorithms and high-capacity mainframe computers go through large volumes of financial data to identify split-second trading prospects that usually involve price discrepancies.

HFT is all about technologies and computers that make faster and faster trades. These computers are looking to capitalize over ten-thousandth of a cent by making hundreds of thousands of trades. HFT makes up 55 percent of US equities trading. It does have its critics, but traders can make profits even when the price of a security is stagnant (the trade rebate, for example).

 (Forgot what high frequency trading is?  Check out our HFT 101 article.)

Milliseconds are Precious in HFT

U.S and European HFT firms are willing to pay big amounts to make stock trading faster by a few milliseconds. High frequency traders want to be connected at high speeds to financial markets in big city hubs such as New York, London and Tokyo.

The cost to lay the foundation for this blistering quick communication line is astronomic. A fiber-optic submarine cable costs as much as $400 million and it only serves to save high frequency traders five milliseconds – the time for a honeybee’s wing flap. But these milliseconds are worth their weight in gold.

Why Sharks Spell Trouble for High Frequency Traders

Sharks pose a problem because they cause damage to the lines of cable that high frequency traders rely greatly on to execute their trades. A shark attack can be frightening for a trader because of the potential delay in financial data transmission.

Why are these cables prone to shark attacks?

The sharks get attracted to the electromagnetic field around these transatlantic fiber-optic cables. For a shark, the electricity signals that food is around the corner and this is what tempts these big fish to take a bite. When they do so, the sharks cause a lot of damage.

The average cable repair is a lot of work and very costly too with bills coming to over $150,000. The repair work comes with inherent risk and is technologically complex. In addition to biting the cables when they are first laid, the sharks will attempt to do the same when the repair work is being completed. The sharks observe the electric fields and they get the idea that the cables are either distressed fish or they contain them.

More than the repair bills, missed opportunities due to trading being stopped will really hurt high frequency traders. It puts to shame the millions that HFT firms spend on developing faster cables to gain access to ultra-fast trading data.

Sharks no longer pose a threat?

The first time that the ‘shark problem’ was identified was in 1985 when shark teeth were found entrenched in a trial cable near the Canary Islands. However, it was later discovered that gnawing sharks could be thwarted by wrapping a line with double layers of steel tape.

The best way to avoid shark attacks is to ensure that fiber-optic cables are not placed in shallow waters (less than a mile deep). Even when they are positioned as such, if they are wrapped in steel or buried numerous feet into the sand it will prevent sharks from getting attracted to them. The good thing is that high frequency traders can be rest assured that shark attacks on fiber-optic cable are a rarity these days.

The unpredictability of a shark attack remains

There are of course other, potentially more major threats to the transatlantic cables such as natural disasters and extreme weather events: earthquakes, volcanoes, ship anchors, fishing lines and jagged ridges. The innate danger with shark attacks creates just yet another unpredictability that can cause sudden dreaded failures in communication lines.