UBS is using laser beams and 5G to trade stocks in the latest escalation of a technological ‘arm race’
From fiber optic cables to dark fibre and microwaves, financial firms have spent the better part of a decade looking to slice fractions of milliseconds off how quickly they can trade stocks.
But the latest chapter in how firms are aiming improve their trading speed and execute trades more efficiently for their clients reads like something out of a science fiction novel.
UBS has begun in recent months to use laser beams and millimeter waves, also known as 5G technology, to send orders wirelessly for its US equity trading business. The Swiss bank tells Business Insider that the new infrastructure will allow it to send orders quicker and reduce the likelihood inclement weather could impact performance.
The bank said it has been working with the three major equity exchange groups — NYSE, Nasdaq and Cboe Global Markets — to use the technology on their venues. The installation is in New Jersey where the majority of US equity trading occurs between a handful of data centers.
Fiber optic cables are the most common way equity trading orders are sent. Some firms use a more advanced cable, known as dark fibre, while even a smaller subset use microwaves. Laser beams and millimeter waves are the latest innovation. While the technology is not as effective at longer distances, the close proximity between data centers in New Jersey makes it an ideal location.
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UBS already receives market data wirelessly via 5G technology. However, bad weather sometimes interferes with the millimeter waves, forcing the bank to switch to landlines to receive the data instead. By using a combination of 5G and laser beams, which are more durable in rain and snow, the bank hopes to have a more resilient process for sending orders.
“I know the weather in New Jersey better than in New York. When it is raining in New Jersey, I get pop ups from multiple firms because we are switching from wireless to dark fibre,” said Vlad Khandros, the global head of market structure and liquidity strategy at UBS. “With the lasers it should be: What is the post office’s model? Rain. Sleet. Snow. It should be good.”
Maintaining high performance on rainy days isn’t the only motivating factor. Khandros said the bank is constantly evaluating ways to improve how it can execute clients’ orders.
The process goes beyond just meeting regulatory requirements. When thinking about best execution, the bank needs to consider what clients expect and competitors are willing to do.
As a result, firms always need to investigate the newest technology on the market.
“It’s an arms race. If it exists, there is a risk somebody else might buy it,” Khandros said. “So then we feel compelled to buy it to further improve execution quality.”
Still, the bank needs to see results to prove a full investment is worthwhile. Khandros said only a small amount of order flow is being sent via the new infrastructure. The bank will monitor how the new technology impacts speed and its ability to capture liquidity, among other metrics.
For Khandros, the most critical part of any new innovation boils down to being able to demonstrate to clients how it will help drive down their trading costs. The space has gotten increasingly competitive between brokers, Khandros added, as clients hesitate to spend their own customers’ money on unnecessary services or subpar performance.
Khandros said his team is always interested in proof of an investment’s benefits to customers.
“What does this actually do to help the client?” Khandros said. “It has got to be compelling, and I want the data to actually support it.”
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