Amid a burgeoning debate about using faster data connections to give some stock traders an advantage, there are growing expectations that a high-speed microwave network may soon link markets in Toronto and New York and that TMX Group Inc. may be the operator.
Brokerage firm ITG Canada has predicted that someone will build a chain of microwave towers between Toronto and the New Jersey market-data hubs for U.S. exchanges.
The reason to go to the trouble is simple: speed.
There are dozens of stocks that trade both on the TSX and on U.S. markets, including Barrick Gold Corp. and Encana Corp. A trader with a faster microwave link could see price changes in one market and act on them more quickly than rivals with slower connections. Such speed edges are a contentious topic now, sparked in large part by Michael Lewis's book Flash Boys and its argument that some traders game the system by using the fastest systems.
For example, if a trader saw first that shares of Encana were falling in Toronto, that trader could buy them in Toronto and quickly sell the stock on the New York Stock Exchange before others knew what was happening. Arbitragers have long profited from such discrepancies, but critics say there is a question of fairness when there is limited access to the faster data.
Expectations are building that TMX is getting close to unveiling its plans for a network. TMX has acknowledged that microwaves are a priority but so far the company has not given any specifics.
"We do know that microwaves [are] an important opportunity out there and we have to bring that to this marketplace, we're just trying to figure out how," TMX chief executive officer Tom Kloet said in a recent interview.
One senior official who spoke on condition of anonymity said TMX Group has been asking people at trading firms to sign non-disclosure agreements before discussing anything about microwave plans.
When asked Monday about any update on the TMX's plans and any non-disclosure agreements, TMX spokeswoman Carolyn Quick said that "at this point, it is premature to comment further on our efforts."
Data transmission is a big business for TMX Group. It makes more money selling data links and related services than it does from the business that most people know it for – stock trading on the TSX, TSX Venture and other markets it owns.
The company's TMX Atrium unit provides high-speed links to 30 markets in North America and Europe. TMX reported $181.5-million of revenue this past year from what it calls information services. That is almost twice as much as TMX reported from trading and clearing of securities such as stocks.
TMX, should it go ahead, may have competition. There are numerous companies that specialize in building fast links for traders. In its report, ITG said "we know of a few participants that have looked" at a microwave network connecting Toronto and New Jersey.
The speed advantage of microwaves is significant. Because of that, the owner would be able to charge speed-focused traders a high price for access. That's especially true if there are only a small number of spots on the microwave network.
A microwave link between the TMX Group's Toronto Stock Exchange data centre in suburban Toronto and the U.S. stock market data centres in New Jersey would be as much as 5 milliseconds faster than a fibre-optic link because microwaves travel more quickly and have a more direct route through the air, ITG Canada estimated in a report earlier this year. That is only 0.005 seconds, but it is more than enough to give a trader a huge advantage over slower rivals.
ITG said in its report, published in January, that a microwave network would likely benefit high-frequency traders.
"If, as we forecast, such a network is built between market centres, the HFT community would have an enhanced ability to trade interlisted stocks based on activity in the other market," the report said.
Space on such a network would be "sadly" limited, and there would not be room for "anywhere near" all the trading flow in the market place. Also, an over-the-air network "likely would not be suitable for many institutional investors whose investment mandates preclude them sending orders across open space."
The report's author, ITG managing director Doug Clark, declined to comment Monday on the possibility of TMX opening a microwave link. He cited "legal reasons."