Information Transmission Between Financial Markets in Chicago and New York

TL;DR

This paper documents a 3-millisecond reduction in communication delay between Chicago and New York financial markets from 2010 to 2012, driven by fiber optic and microwave network upgrades, costing over $500 million.

Contribution

It provides a detailed analysis of the technological advancements and infrastructure investments that reduced transmission delays between major financial markets.

Findings

Latency decreased by 3 milliseconds from 2010 to 2012.

Fiber optic and microwave networks significantly contributed to latency reduction.

Total infrastructure costs exceeded $500 million.

Abstract

High frequency trading has led to widespread efforts to reduce information propagation delays between physically distant exchanges. Using relativistically correct millisecond-resolution tick data, we document a 3-millisecond decrease in one-way communication time between the Chicago and New York areas that has occurred from April 27th, 2010 to August 17th, 2012. We attribute the first segment of this decline to the introduction of a latency-optimized fiber optic connection in late 2010. A second phase of latency decrease can be attributed to line-of-sight microwave networks, operating primarily in the 6-11 GHz region of the spectrum, licensed during 2011 and 2012. Using publicly available information, we estimate these networks' latencies and bandwidths. We estimate the total infrastructure and 5-year operations costs associated with these latency improvements to exceed $500 million.