Traders' Furious Land War Erupts Outside the CME's Data Center
(Bloomberg) -- It was an odd transaction from the outset: $14 million, double the going rate, for a 31-acre plot of flat, undeveloped land just west of Chicago. In the nine months since, the curious use of the space has only added to the intrigue. A single, nondescript pole with two antennas was erected by a row of shrubs. Some supporting equipment was rolled in. That’s it.
But those aren’t ordinary antennas. And the buyer of the property isn’t your typical land investor. It’s an affiliate of a company called Jump Trading LLC, a legendary and secretive trading firm that’s a major player in some of the most important financial markets. Just across the street, it turns out, lies the data center for CME Group Inc., the world’s biggest futures exchange. By placing its antennas so close to CME’s servers, Jump may be trying to shave maybe a microsecond -- one-millionth of a second -- off its reaction time, potentially enough to separate a winning from a losing bid in trading that takes place at almost the speed of light.
It’s the latest, and perhaps boldest, salvo in an escalating war that’s being waged to stay competitive in the high-speed trading business. The war is one of proximity -- to see who can get data in and out of CME the quickest. A company called McKay Brothers LLC recently won approval to build the tallest microwave tower in the area while another, Webline Holdings LLC, has installed microwave dishes on a utility pole just outside the data center.
“It tells you how valuable being just a little bit faster is,” said Michael Goldstein, a finance professor at Babson College in Babson Park, Massachusetts. “People say seconds matter. This is microseconds matter.”
Traders have long fought ferociously to gain an edge, even to the point of wearing ultra-high platform shoes to stand out in the era when they shouted and waved their hands to execute an order. The dubious fashion was mercifully ended in 2000 by CME’s predecessor, the Chicago Mercantile Exchange, which cited a rash of injuries in banning shoes with soles higher than 2 inches.
The battle for speed was later waged over fiber-optic cable and then, within the past decade, microwave technology, which can convey data in nearly half the time.
Jump Trading declined to comment, but in Aurora it appears that it, too, was reacting to competitors in the latest round of jockeying. In October 2015, McKay Brothers, a company that sells access to its microwave network to high-speed traders, leased land diagonal to the CME data center, under the name Pierce Broadband LLC, according to DuPage County property records.
Last month, the county gave McKay approval to erect a 350-foot high microwave tower that could be 600 feet closer to the data center than its current location, records show. Two trading firms, IMC BV and Tower Research Capital LLC, own minority stakes in McKay. Co-founder Stephane Tyc said his firm may never build the tower but it would be part of the firm’s continual efforts to speed transmission time.
Then there’s Webline Holdings. In November 2015, it was granted a license to operate microwave equipment on a utility pole just outside the data center, according to Federal Communications Commission records. Webline has licenses for a microwave network stretching from Aurora to Carteret, New Jersey, where Nasdaq Inc.’s data center is located. Messages left for Webline were not returned.
Last year, the Jump Trading affiliate World Class Wireless purchased the 31-acre lot for $14 million, according to county records. “They paid probably twice as much as it’s worth,” said David Friedland, an executive director in commercial real estate firm Cushman & Wakefield’s Rosemont, Illinois, office. “I don’t see anyone else paying close to that price.”
The license for the transmission dishes is held by a joint venture between World Class and a unit of KCG Holdings Inc., a trading firm that Virtu Financial Inc. is acquiring.
It’s unclear which firm is now closest to CME servers. Trading data first leaves CME computers via fiber cable, and then to nearby antennas that send it by microwave to other towers until it reaches New Jersey, where all the major U.S. stock exchanges house their computers. The moves in Aurora are intended to reduce the time that the data is conveyed through cable.
Sending data back and forth between the U.S. Midwest and East Coast allows high-frequency traders to profit from price differences for related assets, including S&P 500 Index futures in Illinois and stock prices in New Jersey. Those money-making opportunities often last only tiny fractions of a second.
There may be a simple way to avoid the skirmishing among traders. A microwave tower could be installed on the roof of the CME data center to eliminate the need for jockeying around the site. The exchange is indeed looking at allowing roof access, along with CyrusOne Inc., the company that bought the data center last year, CME said in a statement. Traders being traders, however, they may continue to battle, this time for the most advantageous position on the microwave tower itself.
“We are confident the CME can provide an alternate and better solution which offers a level playing field to all participants," said McKay’s Tyc.
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