Islands at the Speed of Light

A recent paper published in the Physical Review has some astonishing suggestions for the geographic future of financial markets. Its authors, Alexander Wissner-Gross and Cameron Freer, discuss the spatial implications of speed-of-light trading. Trades now occur so rapidly, they explain, and in such fantastic quantity, that the speed of light itself presents limits to the efficiency of global computerized trading networks.

These limits are described as "light propagation delays."

[Image: Global map of "optimal intermediate locations between trading centers," based on the earth's geometry and the speed of light, by Alexander Wissner-Gross and Cameron Freer].

It is thus in traders' direct financial interest, they suggest, to install themselves at specific points on the Earth's surface—a kind of light-speed financial acupuncture—to take advantage both of the planet's geometry and of the networks along which trades are ordered and filled. They conclude that "the construction of relativistic statistical arbitrage trading nodes across the Earth’s surface" is thus economically justified, if not required.

Amazingly, their analysis—seen in the map, above—suggests that many of these financially strategic points are actually out in the middle of nowhere: hundreds of miles offshore in the Indian Ocean, for instance, on the shores of Antarctica, and scattered throughout the South Pacific (though, of course, most of Europe, Japan, and the U.S. Bos-Wash corridor also make the cut).

These nodes exist in what the authors refer to as "the past light cones" of distant trading centers—thus the paper's multiple references to relativity. Astonishingly, this thus seems to elide financial trading networks with the laws of physics, implying the eventual emergence of what we might call quantum financial products. Quantum derivatives! (This also seems to push us ever closer to the artificially intelligent financial instruments described in Charles Stross's novel Accelerando). Erwin Schrödinger meets the Dow.

It's financial science fiction: when the dollar value of a given product depends on its position in a planet's light-cone.

[Image: Diagrammatic explanation of a "light cone," courtesy of Wikipedia].

These points scattered along the earth's surface are described as "optimal intermediate locations between trading centers," each site "maximiz[ing] profit potential in a locally auditable manner."

Wissner-Gross and Freer then suggest that trading centers themselves could be moved to these nodal points: "we show that if such intermediate coordination nodes are themselves promoted to trading centers that can utilize local information, a novel econophysical effect arises wherein the propagation of security pricing information through a chain of such nodes is effectively slowed or stopped." An econophysical effect.

In the end, then, they more or less explicitly argue for the economic viability of building artificial islands and inhabitable seasteads—i.e. the "construction of relativistic statistical arbitrage trading nodes"—out in the middle of the ocean somewhere as a way to profit from speed-of-light trades. Imagine, for a moment, the New York Stock Exchange moving out into the mid-Atlantic, somewhere near the Azores, onto a series of New Babylon-like platforms, run not by human traders but by Watson-esque artificially intelligent supercomputers housed in waterproof tombs, all calculating money at the speed of light.

[Image: An otherwise unrelated image from NOAA featuring a geodetic satellite triangulation network].

"In summary," the authors write, "we have demonstrated that light propagation delays present new opportunities for statistical arbitrage at the planetary scale, and have calculated a representative map of locations from which to coordinate such relativistic statistical arbitrage among the world’s major securities exchanges. We furthermore have shown that for chains of trading centers along geodesics, the propagation of tradable information is effectively slowed or stopped by such arbitrage."
Historically, technologies for transportation and communication have resulted in the consolidation of financial markets. For example, in the nineteenth century, more than 200 stock exchanges were formed in the United States, but most were eliminated as the telegraph spread. The growth of electronic markets has led to further consolidation in recent years. Although there are advantages to centralization for many types of transactions, we have described a type of arbitrage that is just beginning to become relevant, and for which the trend is, surprisingly, in the direction of decentralization. In fact, our calculations suggest that this type of arbitrage may already be technologically feasible for the most distant pairs of exchanges, and may soon be feasible at the fastest relevant time scales for closer pairs.

Our results are both scientifically relevant because they identify an econophysical mechanism by which the propagation of tradable information can be slowed or stopped, and technologically significant, because they motivate the construction of relativistic statistical arbitrage trading nodes across the Earth’s surface.
For more, read the original paper: PDF.

(Thanks to Nicola Twilley for the tip!)

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10 Comments:

Anonymous namhenderson said...

a kind of light-speed financial acupuncture—, combined with the idea of building seasteads or artificial islands, it seems to give a new twist to the term "urban acupuncture"...

March 30, 2011 7:31 PM  
Blogger Sarah said...

It sounds like the light cones may become the modern financial market's new river mouth- in the ongoing search for optimization, especially financial optimization, it appears that humans will continue to move towards obtaining it at any cost.

March 31, 2011 11:40 AM  
Blogger Branden said...

For what it's worth, there was a 1993 episode of SeaQuest DSV where the ship visited an ocean-floor stock trading center.

March 31, 2011 7:11 PM  
OpenID ndouellette said...

The idea of physically-isolated economic command centers manned by AIs is beautifully (terribly) haunting. It's easy to see how a few centuries of such a world economic order would begin to take on mystic overtones: brotherhoods of human economic savants, setting sail to commune with the machine gods out at sea...

April 01, 2011 12:46 AM  
Anonymous MaximusNYC said...

I recall reading somewhere that Goldman Sachs' big office tower in Jersey City, just across the Hudson River from downtown Manhattan, was built where it was because it was the closest place they could put their server farm to Wall Street -- allowing nanosecond advantages over competitors.

April 01, 2011 3:08 PM  
Blogger Simon said...

This reminds me of Virilio's "A critical transition", where he describes a collapse of space in response to markets(and anything telecommunicational) increasing dependence on time-light. The urban and global implications are astonishing.

April 04, 2011 7:28 AM  
Blogger leederca said...

Are we sure Neal Stephenson didn't write this?

April 11, 2011 11:46 PM  
Anonymous Anonymous said...

You're spelling one of the names wrong: it's "Alexander D. Wissner-Gross"

October 21, 2011 4:31 PM  
Anonymous Dick king said...

Perhaps we can make our communications links with neutrinos?

They may or may not travel slightly faster than light, but they do go from the source to the target in a straight line and don't need to follow the curve of the Earth's surface.

-dk

October 22, 2011 12:48 AM  
Blogger TheStandUpPhysicist said...

The midwest, and west coast of the USA look deader than Africa, interesting...

October 22, 2011 11:55 PM  

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