The speed of light could turn the middle of the ocean into a stock-trading center

When the world's financial giants begin creating vast artificial islands in the middle of the oceans to use as the hubs of stock-trading, it'll all be because of the speed of light.

High-frequency trading is a major - and extremely controversial - part of modern financial practice, in which computerized traders make extremely fast transactions to take advantage of moneymaking opportunities that may only exist for a fraction of a second. Leaving aside the pros and cons of the practice, it is starting to brush up against a roadblock that no amount of financial chicanery can remove, and that's the speed of light.

Since high-frequency trading often depends on the differing prices of a particular financial item in two different markets in distant parts of the world, the practice requires signals to be sent across the world as quickly as possible. When these inequalities can sometimes exist for less than a millisecond, the speed of light is actually a factor in the success of these trades, and certain locations will be able to process the inequalities between two particular markets faster than other locations, simply because their geographic proximity puts the speed of light on their side.

Although there's constant demand for improved fiber-optic cables that can transmit information faster, the trades already travel at about 90% of the speed of light, and an upper limit for further technological innovation is close at hand. According to Harvard's Dr. Alexander Wissner-Gross, the trick going forward will be for companies to make the speed of light work for them.

To that end, he created a map last year that determines the optimal locations to place these high-frequency trading centers for various markets, which basically involves finding the best midway points between various combinations of financial markets. You can see the result in the map up top - the red points are major financial markets, and the blue dots are the various best midway points. He's currently working on figuring out how different firms can best use their existing infrastructure in its existing location by determining which markets can be compared and traded with as quickly as possible, which he believes will give the first firm to adopt this approach a major competitive advantage.

But let's go back to his first idea, because it's seriously intriguing. As it happens, a ton of these midway points are found in the middle of the world's oceans or in remote northern latitudes. These are places where there's no civilization to speak of, and no financial centers either. If the financial incentives are there, it's totally possible that artificial islands could be built in the middle of the Atlantic or in the isolated northern Russian steppes to give the high-frequency trading computers that extra edge.

And, for once, the vagaries of financial markets could actually do people a tangible good, as Dr. Wissner-Gross explains:

"It's instructive to start to think about latency correlations as a new sort of resource. If you're positioned between two major financial hubs, you may be far out of the way, rather far from population centers, maybe economically poor, but because of your unique position, that could be a natural resource."

Via BBC News.