A short story about how to spend $300m

This is the first paragraph from a really neat economics paper by Budish, Cramton, and Shim (QJE 2015):

In 2010, Spread Networks completed construction of a new high-speed fiber optic cable connecting financial markets in New York and Chicago. Whereas previous connections between the two financial centers zigzagged along railroad tracks, around mountains, etc., Spread Networks’ cable was dug in a nearly straight line. Construction costs were estimated at $300 million. The result of this investment? Round-trip communication time between New York and Chicago was reduced … from 16 milliseconds to 13 milliseconds. Three milliseconds may not seem like much, especially relative to the speed at which fundamental information about companies and the economy evolves. (The blink of a human eye lasts 400 milliseconds; reading this parenthetical took roughly 3,000 milliseconds.) But industry observers remarked that 3 milliseconds is an “eternity” to high-frequency trading (HFT) firms, and that “anybody pinging both markets has to be on this line, or they’re dead.” One observer joked at the time that the next innovation will be to dig a tunnel, speeding up transmission time even further by “avoiding the planet’s pesky curvature.” Spread Networks may not find this joke funny anymore, as its cable is already obsolete. While tunnels have yet to materialize, a different way to get a straighter line from New York to Chicago is to use microwaves rather than fiber optic cable, since light travels faster through air than through glass. Since its emergence in around 2011, microwave technology has reduced round-trip transmission time first to around 10 milliseconds, then 9 milliseconds, then 8.5 milliseconds, and most recently to 8.1 milliseconds. Analogous speed races are occurring throughout the financial system, sometimes measured at the level of microseconds (millionths of a second) and even nanoseconds (billionths of a second).

What is the moral of the story? Some infrastructure projects get done really, really easily!

You can get a pdf preprint of the paper here. The authors propose a change in financial market design that they argue would, among other things, stop this bizarre arms race.

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