INTRO

As soon as the summer sun returns to Belgium, there is a natural human migration from Francophone Wallonia to the west coast sea in the Flemish part of the country. Here, à la mer du Nord, people relax on white sand beaches and ride the famous quadracycles called cuistax. The Belgian west coast is the (maritime) backyard for many, and so I could not refuse accompanying the two local members of my family for a week à la mer du Nord. For once, I decided not to take dozens of books with me, just one debated paper entitled “Can Brokers Have It All?”, but the sun was so hot that I decided to drink mojitos on the beach.

The only tour I did was in Veurne, a small typical Flemish city where I tasted some local beers. A week later I was back in Brussels, and on July 16, 2014, Bloomberg released this story about a prop trading firm from Chicago purchasing an old tower for €5.000.000 in…Veurne. What a coincidence! I’ve researched and written about high-frequency trading (HFT) since 2012, and am quite aware of the microwave networks used by some fast players, but I did not know that as of January 2013 Jump Trading owned a tall tower in Belgium – in my backyard. Belgium being in the middle of the problem, geographically speaking, I decided to investigate the presence of microwave networks owned or used by the big HFT players here in Europe for my holiday homework. If Jump has a tower, competitors are all around – it’s just a matter of where . My question about the towers was “Can I Have Them All?” and thus my investigation, perhaps obsession, began. I discovered too many things to discuss in a single post, so I’ve split my story into five parts. This first part we’ll call “Mapping the HFT Microwave Networks” – even if “How I Became an Expert in Potato Fields” would be as accurate.

FROM CHIGAGO TO BELGIUM, A BRIEF HISTORY OF TOWERS

The first part of my book, 6, was mostly about the rise of the HFT machines in the pre- and post-REG NMS era. Charting the surge of Electronic Communication Networks such as Island, I realized the history of Chicago markets in conjunction with the ascent of these technologies was more interesting than Wall Street SOES bandit stories. Hence the second and last part of the book, 5, was focused on Chicago, particularly the transitions from the old human trading pits to the computerized ecosystem now (co-)located in huge data centers.

The history of exchanges in the Windy City is a true case study for anyone interested by the computerization of commodities and financial markets. I wrote about the arrival of the telegraph in Chicago; the first telegraphic “tweet” arrived in Chicago just three months before the first organized exchange, the Chicago Board of Trade (CBOT), was created in April of 1848. I even found the phrase “flash orders” in some 19th century Chicago newspapers, used to describe the practice of traders using fast private telegraphic lines to buy commodities they knew would rise in price in the next few seconds so that they could resell at a higher price what they had bought seconds before – sound familiar?

There are many other interesting predecessors of modern practices to be found. For instance, long before the existence of microwave towers like the one in Veurne, the CBOT aimed itself to tower. Its first location was the tallest house in the city, and when the exchange was obliged to erect its own building in 1885, it was both the tallest property in Illinois and the first building in Chicago to run on electricity. Frank Norris describes it in his novel The Pit: “The lighted office buildings, the murk of rain, the haze of light in the heavens, and raised against it the pile of the Board of Trade Building, black, grave, monolithic, crouching on its foundations, like a monstrous sphinx with blind eyes, silent, grave,—crouching there without a sound, without sign of life under the night and the drifting veil of rain”.

In the 1920s, members of the board voted to erect a new building to become “the cathedral of capitalism”, and initiated discussions with architects, traders and some of the major telegraph companies in order to find the best way to improve the social space of the pits. The traders weren’t happy with the excess noise, and telegraph companies like Western Union and RCA were lobbying to install a multitude of fast lines. When the 1930 CBOT building was erected on Jackson Boulevard near Lasalle Street, it had more than 4300 kilometers of telephone lines and 240,000 kilometers of telegraphic lines – first step of the rise of the machines. It towered over Chicago until 1965, a faceless statue of goddess of agriculture Ceres adorning the top.

The heart of exchange was the pit, and it correspondingly saw advances in technology. The first pit was patented by Ruben S. Jennings in 1878, and soon the CBOT build different pits without paying fees to Jennings. The inventor tried and failed to sue CBOT, and his patent was invalidated by the judges. Jennings designed the pit so that a trader could see and hear another trader under the best possible conditions. Pits had different steps for that reason; a trader sitting on the tallest steps had a better “skyline”, and an advantage in seeing or hearing a counterpart quickly, and trade faster than the traders in the center/bottom of the pit. It was all about speed.

Height, then, played an important part in facilitating that speed. A trader’s physical height became an advantage, which is part of the reason some traders were former basketball or football players –“taller traders were easier to see”. In the 1990s, some traders wore high heels in the pits to trade faster, and inevitably experienced injuries due to lack of balance. This prompted the Chicago Mercantile Exchange (CME) to impose a ruling making the maximum size of platform heels two inches in November 2000. Standardization of heel height was a way to level the playing field in terms of speed on the floor. Recently, the last European open-outcry pit the London Metal Exchange, or Ring, fined traders for breaking the rule to remain seated while dealing: “Dealers that stand create an unfair advantage and might obstruct the view of other dealers and LME pricing committee members,” said a spokesperson for the UK exchange.

Computers tower above humans in speed no matter how high a person’s heels, so by the 1980s and 1990s, computerization of exchanges was rampant. A story documented by Donald MacKenzie in “Mechanizing the Merc: The Chicago Mercantile Exchange and the Rise of High-Frequency Trading” describes what I believe to be a crucial moment in the transition between human and electronic transactions. After the CME launched E-Mini contracts in 1997, the exchange built a semicircular platform above the pits where the first users of Globex terminals were installed. “So was born ‘the bigs and the littles’,” MacKenzie writes. “The arbitrage between the pit- traded S&P 500 future and the E-Mini, a fifth its size. Pairs of traders would collaborate, one in the pit and one sitting above it at a Globex terminal, communicating by hand signals or radio headsets.” The old hand signals used by human traders since the 1930s – known as “arbs”, they were faster than yelling – now pointed to the sky, as if intended to draw the attention of Ceres. The new god was not a statue; it was a faceless computer, and Ceres Trading was now a HFT firm.

An ex-trader CME S&P 500 pit describes the physical platform to MacKenzie: “When you went to the floor, did you see the almost towers, kind of towering by the S&P pit? Almost gets to the ceiling, and you get a bunch of guys sitting there with terminals? That’s the guys that trade the E-Minis … some of these guys are doing very, very, very well, extremely well.” Note that the ex-trader used the word “tower” here, as many HFT firms started on this platform. Getco’s founders Daniel Tierney and Stephen Schuler were there, but rereading MacKenzie’s article, I realized two other traders were working with Globex terminals on the tower: Paul Gurinas and Bill Disomma. The firm they founded in 1999 was none other than Jump Trading. Even before the advent of microwave networks, it was all about towers. Here is photo of Paul Gurinas working in the pits of the CME.

MICROWAVE & HFT 101

Simply state, traders are algorithms, and exchanges are data centers. Most, if not all traders co-locate at the same distance from an exchange’s matching engine, which matches buyers and sellers. Matching may occur in a few dozen microseconds. In this new HFT ecosystem, information – between two exchanges for example – needs to travel very fast. This has led some HFT competitors to use faster technologies than the usual optic fibers, the most recent of which is microwaves. Microwaves are actually an old technology with what would appear to be significant drawbacks: a dislike for rain and fog, and limited bandwidth of 10% that of optic fibers which necessitates the rewrite of existing algorithms. However, microwaves offer both easier start up and a more direct route. There’s no need to tunnel through mountains as optic fiber operator Spread Networks did to cross the Allegheny Mountains, documented by Donald MacKenzie, Daniel Beunza, /Yuval Millo

and Juan Pablo Pardo-Guerra in this paper.

Just install dishes on towers and find the shortest path between point A and point B, period. Market orders travel faster through the air than they do through optic fibers beneath the ground. The following map displays microwave networks between New Jersey data centers and Chicago (if you want to know more about the New Jersey-Chicago networks, read this paper):

But have in mind that Earth is a sphere. You can go from a point A (a New Jersey exchange) to a point B (a Chicago exchange) but you have to take into account the curvature of the Earth. Even with customized dishes, you have to deal with nature (that’s why as an anthropologist I spent a lot of time to work on these networks: it’s all about dominating nature.) If you want to go far, you need tall towers to bypass the curvature of the Earth. But tall towers are rare – so they are expensive. What’s more, if there is only one tree (or one leaf) between two points/dishes, the network is dead. Paths need to be free of obstacles.

Let’s recap. Microwaves need dishes. Dishes need towers. Towers need to be as close as possible to the straight line between the two points/exchanges. The various competitors have to find the towers they need to build the shortest path between the two points. The fact is: sometimes you can’t install your dishes because someone else is already there (some towers can’t handle a lot of dishes and towers are squatted by other operators – mobile operators, national radio operators, etc. So you need to be smart when you think a HFT microwave network – competitors may have squatted a tower you needed. HFT is hard.

THE MAP

Early July, after the Bloomberg article about Jump and the Houtem tower was published, I realized that my home is very close (four kilometers) to the straight line between two european major points: London and Frankfurt (I am a transparent guy, so I put my home on the map). In a recent presentation in Chicago, McKay Brothers co-CEO Stéphane Tyč showed this map of the microwave networks owned or used by some HFT players in the UK:

You don’t see anything, and there is no name. So I tried to have all the towers, and some names. Finding the towers was easy; drawing the paths is complex because most of the HFT players try different possibilities –Jump had a path between Belgium/France and England before taking position in the Houtem tower, but now they can go directly to Ramsgate, and Basildon. My map shows not only some real paths, but also the various attempts to beat space:

I’ll tell later how I designed the map (and my crazy visit to the Jump tower in Houtem) but in short: 99% of what I have found is public. Just try Big Brother, aka Google (just click on the pins, you’ll find links with all the public files). I also talked with people working in the industry, but they have been fair, helping me to understand this very, very, very small world. They let me do the job. This map is a only web of possibilities, shortest paths being the Holy Grail – besides, some operators jump from tower to tower. In this world, all the operators know where competitors are. There is no secret. I just found where some firms are, or could be, or will be.

You can’t really enter this world with photographies. So I made what all the HFT players do: a Google Earth file, a map with all the towers I could find. Here is the map. Open it, and zoom. Captions will be in the Part V – Part I was just an introduction.

OUTRO

Thanks to Zerohedge & Themis Trading.