Some of the world’s top trading firms have agreed to build a faster data transmission network between Chicago and Tokyo, according to a person familiar with the matter, a move that would accelerate trading between two of the major centers of finance.
The roster of firms in the joint venture – dubbed Go West – includes IMC, Jump Trading, KCG Holdings, Optiver, Tower Research, DRW’s Vigilant division, Virtu Financial and XR Trading, according to the person, who asked not to be identified because the agreement is private. A representative for the group declined to comment.
Go West, the person said, will be made up of existing wireless towers, fiber-optic lines and undersea cables. Firms outside the original consortium will be able to access the network starting in 2017, the person said, adding that the group’s aims include creating a level playing field for all traders and sharing the expense of building the network.
Joining forces to build the network signals a truce in the arms race big traders have waged for years to shave milliseconds off trading times. Possibly six to 10 separate microwave networks that support speed trading operate between Chicago and New Jersey data centers where U.S. stock trading takes place, according to an estimate from Greg Laughlin, a Yale University astronomy professor who has studied the topic. By teaming up, traders can cut their infrastructure costs, pitting their trading strategies against each other instead of just competing on speed.
Laughlin likened the project to earlier infrastructure in the American west, such as the railroads, highways and other initiatives.
“It’s not that different from the Oregon Trail or the Pony Express,” Laughlin said. “Throughout U.S. history there’s been this idea of the frontier and connecting back east with the west,” he added. “Now for the 21st century we have a lightning-fast wireless network that connects one side of the globe to the other.”
Many automated trading firms engage in arbitrage, or betting that gaps in the prices of two similar things will disappear. Such opportunities exist between the U.S. and Japan. For instance, futures contracts on Japan’s Nikkei 225 stock index trade on both Chicago-based CME Group Inc.’s exchange and Tokyo-based Japan Exchange Group Inc.’s market.