Laser Communication Goes Commercial: Twice as Fast as Fiber

The distance between the New York Stock Exchange and NASDAQ will soon be "shortened" by half.

Technology company Anova is installing white devices on rooftops between Manhattan, New York, and Carteret, New Jersey. These small boxes, which look very much like the head of Wall-E, are base stations of Anova's laser communication network. They can transmit infrared lasers as thin as a human hair to distances of up to 10 kilometers.

The straight-line distance between the data centers of the New York Stock Exchange and NASDAQ is approximately 55 kilometers. Anova will build 6 to 7 laser base stations along the way to establish the most direct path for trading data, replacing fiber optic and microwave wireless networks.

"In actual use, laser communication will be about twice as fast as fiber optics," Michael Persico, CEO of Anova, told CBN Weekly. He explained that this is caused by the fundamental principles of fiber optics. Since the interior of fiber is glass, the propagation speed of light is limited to about 200,000 kilometers per second, only two-thirds of the speed of laser in air. In addition, laser can propagate in a straight line between two points, while the deployment of fiber optics needs to consider the impact of buildings.

Laser communication will shorten the transmission time of trading data by several milliseconds — a few hundredths of a second. Such a time difference has no impact on the decisions made by human investors, but it is critical for computer-driven high-frequency trading.

Whenever information that affects stock prices, such as corporate earnings reports, housing market data, or CPI, is released, the servers of high-frequency trading companies use pre-written complex algorithms to determine how stock prices will change in the coming seconds, and automatically complete buying and selling within seconds or even fractions of a second. Before the human eye can finish scanning the headline, the investment has already been completed. Since high-frequency trading requires extremely short time, tiny fluctuations in stock prices can provide sufficient profit.

It is not difficult to understand the significance of speed for such traders. Persico, who has over a decade of experience in the financial industry, founded Anova to provide high-speed networks for investment companies. The first network Anova built was a customized fiber optic network connecting New York with Chicago, the securities trading center in the central United States. The network was completed in 2010. Compared with public fiber optic networks that go through layers of routers and switches, the customized fiber optic network for investment institutions reduced trading latency.

This industry is full of competition. One year after Anova's network was completed, another high-speed network provider, Spread Networks, spent hundreds of millions of dollars to dig a fiber optic tunnel through the Appalachian Mountains, with the aim of avoiding detours for the cable and further reducing data transmission time by approximately 1 millisecond.

"This is a race to zero," Persico said.

In 2011, Anova shifted to promote wireless communication technology that does not require laying fiber, establishing a microwave communication link between Washington and Chicago. Microwave signals propagating at the speed of light can deliver macro indicators and policy adjustments released by the U.S. government, such as housing market data and CPI, to investment companies in Chicago and New York at the earliest opportunity.

However, microwave wireless communication has many limitations. The biggest problem is insufficient bandwidth — a single Anova microwave base station has only 100 Mbps of bandwidth. Therefore, although microwave is faster than fiber optic signals, if large amounts of data need to be transmitted simultaneously, it takes longer to wait for the transmission to complete.

Persico does not believe that faster low-bandwidth lines are the ultimate solution. He said: "We expect mobile network speeds to get faster and faster. Financial institutions are the same — they don't want to reduce data transmission."

To increase bandwidth, Anova also introduced millimeter-wave communication technology, which transmits more data in the same amount of time by increasing the signal transmission frequency. Currently, most of Anova's customers use millimeter-wave technology for trading. However, while millimeter-wave technology improves speed, it also brings other problems: its transmission distance is too short, less than 1,500 meters, and it is highly susceptible to weather conditions.

Shortly after Anova's millimeter-wave communication technology was brought to market, Persico saw a news report that the U.S. Air Force had begun experimenting with a new communication technology that uses lasers to transmit data between the ground and fighter jets. He subsequently contacted AOptix, a Silicon Valley startup that provided this technology to the U.S. Air Force, and jointly introduced laser technology to the investment market.

Since lasers can only be emitted in a straight line, Anova needs to install transmitters on the rooftops of tall buildings to increase transmission distance. However, high-rise buildings sway slightly back and forth under the influence of wind. The challenge lies in how to keep the laser aimed at a receiving plate the size of a wok lid during signal transmission, and maintain this throughout the entire transmission process.

The designers installed a stabilization system in the base station and used computers to correct laser deviation in real time, capable of tolerating sway of up to 3 degrees.

Persico told CBN Weekly: "This is much easier than the military's requirements. They need to aim lasers at aircraft flying at near-sonic speeds, and the flight direction of aircraft is not as predictable as the swaying of buildings."

The solution is to add a stabilization system beneath the laser transmitter. The principle of the stabilization system dates back to the 1990s, when two scientists designed a system to avoid atmospheric interference.

Anova's laser communication network can provide 2 Gbps of bandwidth, approximately several hundred times that of the microwave communication network the company previously provided. In addition, the infrared lasers used by Anova are basically unaffected by weather and can transmit data normally in rain and heavy fog.

According to information provided by Anova, in addition to the exchanges, more than 40 investment companies and funds have decided to become the first users of this technology once the network is completed.

"We call laser the end game. How can you provide a speed faster than a laser propagating in a straight line? It's impossible." Persico believes that in terms of communication technology, laser has reached the limit.

However, technology is not the only channel to make high-frequency trading faster.

When U.S. listed companies release earnings reports or major information, they do so through Business Wire and PR Newswire, which then pass the information to financial media such as Bloomberg, Dow Jones, or Thomson Reuters. Finally, investors obtain the information from these financial media outlets to decide how to invest.

But Business Wire launched a business that bypasses financial media and provides information directly to high-frequency trading companies. At the end of last December, ULTA, the largest cosmetics retailer in the U.S., released a poor earnings report. Bloomberg published the news 0.25 seconds after the report was released, but high-frequency trading companies had already sold $800,000 worth of stock before Bloomberg's news went live — the entire trading process lasted 0.05 seconds.

The news that Business Wire directly provided information to high-frequency trading was later exposed by The Wall Street Journal, sparking controversy over whether high-frequency trading is fair. Warren Buffett, the main investor in Business Wire, was one of the skeptics. In an interview with CNBC last year, he criticized high-frequency trading as making "no contribution." At the end of February this year, Business Wire announced it would stop providing earnings information to high-frequency trading companies.

Although the first customer that comes to mind for a laser network is high-frequency trading companies, Persico believes that faster speed technology itself will not eliminate fairness. On the contrary, the high bandwidth of laser communication means the cost of high-speed communication can be greatly reduced, making speed no longer an advantage exclusive to a very small number of companies.

"You won't make other people's computers slower, and you won't make mobile phones faster — the whole world is accelerating. We want to make the entire trading ecosystem faster, so that non-institutional investors can also use the same speed." That is what Persico said. Perhaps, once it reaches zero, it will be fair.