Location, location, location … it’s not just the most important aspect of real estate but soon the stock market as well.

 

The longstanding image of traders on an exchange floor buying and selling is giving way to the ultra-fast wizardry of computers conducting thousands of transactions at the blink of an eye. But even in this brave new world of trading by machine, physical location still will play a vital role for those seeking fortunes in the stock market.

 

In traditional stock trading, a broker, or “specialist,” matches buyers and sellers at a price that is satisfactory to both. Generally, a buyer will tell the broker his top price and expect the broker to actually find a seller at a lower price. However, in the age of computerized “flash” trading, a computer program sends out automated sell offers at higher and higher prices until one comes back with no buyer. The program then drops back to the highest acceptable price and sells at what the buyer set as his maximum limit.

 

Physicist Alex Wissner-Gross and mathematician Cameron Freer came to the conclusion in a recently published research paper that the distance between computers used to trade shares will be extremely important, even when sales happen at a fraction of a second. “Traders that can place servers and lay fiber optimally across the globe to cut down on this time delay can therefore gain a crucial time advantage over their competitors,” writes Aaron Saenz at Singularity Hub.

 

He adds: “So, it turns out that if you want to make the most profit on the difference in prices between Tokyo and New York, you want your computer to be somewhere in the middle of the Pacific Ocean.…If you place your computer in the right spot you will be able to get information back and forth between your trading partners and make the best deal.”

-Noel Brinkerhoff

 

Trading Stocks at the Speed of Light – Computers Own Finance, Next the World (Singularity Hub)

Relativistic Statistical Arbitrage (by Alex Wissner-Gross and Cameron Freer, Physical Review) (pdf)

Federal Government Asks for Closed Courtroom to Protect Goldman Sachs Secrets (by Noel Brinkerhoff and David Wallechinsky, AllGov)

How Goldman Sachs Made $100 Million a Day in a Flash (by David Wallechinsky, AllGov)

“High-Frequency” Traders Make Billions Beating Normal Stock Investors to the Punch (by Noel Brinkerhoff, AllGov)