A group of high-frequency traders, market makers and service providers calling themselves the Shortwave Modernization Coalition has asked the Federal Communications Commission for access to the shortwave band of the radio spectrum, seeking to shave crucial milliseconds off the transmission of data between major financial sectors.
I’m no expert in FCC deliberations, but reading the public comments shows a well-financed, professional application by the SCM. The band the SCM wants is currently used by amateur transmitters such as citizens-band radio and ham radio, and Federal agencies including the US Coast Guard and Federal Aviation Administration, as well as having a number of niche technical applications. While many current users don’t like the idea of letting high-frequency traders in their domain, they do not appear organized or well-financed, and their objections seem speculative compared to the slick professional study claiming HFTs will not interfere with current users. My amateur guess is this will pass FCC muster, which has led me to ponder the market implications.
The detailed technical analysis of the radio spectrum in the SCM petition stands in contrast to the few casual words slipped in to assert a public interest. SCM says using shortwaves will make markets more liquid and efficient. This is a controversial claim. Shortwaves will speed transmission of data between exchanges, which will make the global financial system more “tightly coupled”. Rick Bookstaber in his best-selling A Demon of Our Own Design argued that tight coupling is precisely what causes financial disasters.
Today, for example, it might take a tenth of a second for trading in Chicago to affect trading in London. That’s not just transmission delays but time taken for information to be decrypted and integrated into the databases that drive trading. The contagion from a flash crash or system failure or credit collapse or other problem in Chicago is not immediate. A tenth of a second isn’t much for humans, but computers can do a lot of processing in that time and circuit breakers, fail-safes and other precautions can kick in to stop local problems from causing global collapses. If the SCM cuts that from a tenth to a twentieth of a second, that could make things worse, not better.
On the other hand, tight couplings are more efficient. It’s also possible to have problems that arise because places are out-of-sync. The SCM might be right that speedier data flows will be better. They just don’t seem to have studied the question carefully.
I promise there are some important considerations for all investors here, but I must slip in a tiny bit of basic physics. Radio frequencies are measured in hertz, or cycles per second, and frequencies from 3 to 3 trillion hertz are used commercially. Low frequency waves require less power and travel farther before attenuating, but they carry less bandwidth. So low frequencies are good for sending a little data a long distance, and high frequencies are good for sending a lot of data a short distance.