Economists commonly think about technology as an idea, but in one way or another, the technology interacts with physical forms–and these physical forms affect how the technology is applied and its social effects. In his da Vinci Medal Address, Donald MacKenzie considers some implications of this idea in “Material Political Economy” (Technology and Culture, July 2024).
One classic example he mentions is the conflict that arose some centuries ago, in feudal times, over how the technology of how grain should be milled. Feudal lords typically preferred a centralized system, in which commoners brought the grain to a watermill or windmill owned by the lord, and paid the lord for milling the grain. However, many commoners would have preferred to avoid the payment to the lord, and instead to mill the grain by hand. In turn, feudal lords sometimes sought to destroy handmills, where they could do so. In this setting, the technology choice is obviously not just about efficiency in an abstract sense, but about the interaction of efficiency with preexisting social structure.
As a modern example, I was intrigued by MacKenzie’s discussion of ultrafast high-frequency trading (HFT) for financial firms. He points out that when these firms were being established in the US in the 1990s, “HFT firms were sometimes excluded from trading or faced material barriers that protected incumbents’ slower systems.” But his focus is on more recent developments.
Just how fast is “ultrafast”? Each year, the European futures exchange Eurex publishes data from which we can infer the response times of the fastest HFT algorithms. Eurex’s 2023 measurements suggest a state-of-the-art response time (to a packet of market data that triggers a trading system’s action) of 8 nanoseconds, or billionths of a second. In a nanosecond, the fastest physically possible signal, light in a vacuum, travels only around 30 cm, or roughly a foot. That is not simply a helpful yardstick of HFT’s speed: getting messages to travel as close as possible to the speed of light in a vacuum is an important practical concern in HFT. Fiber-optic cable, for example, is not fast enough, because the refractive index of the glass at the core of such a cable slows laser-light signals to around two-thirds of light’s speed in a vacuum. Where possible, therefore, HFT firms send trading data and orders by microwave, millimeter-wave, or laser-light signals transmitted through the atmosphere, where they travel almost as fast as in a vacuum …
Thus, high-frequency trading is not an abstract technological innovation, but something embodied in the world of material, distance, light, and microwaves. Mackenzie writes:
HFT programmers cannot afford to consider the computer an abstract machine, as possibly presented during their college education. It must be seen as an ensemble of metal, semiconductors, and plastic through which signals pass, and ensuring that they do so as quickly as possible is an all-pervasive concern. For example, the preferred programming language in HFT is C++, which allows “close-to-the-metal” programming, not having to operate through layers of abstraction as with other languages. Since around 2010, furthermore, a conventional computer system, even if programmed in C++, is in many markets not fast enough for HFT. Trading algorithms are directly programmed into the hardware of the silicon chips known as field-programmable gate arrays (FPGAs) … There have been repeated rumors of firms moving beyond FPGAs to fully bespoke integrated circuits …
One result is what MacKenzie calls “speed races.” In the HPT universe, algorithms are programmed to react very quickly to new information. But when the fastest algorithms place orders and react first, and prices change, then the slightly slower algorithms realize that they are reacting to “stale” information. They frantically try to cancel orders, while faster algorithms try to take advantage of their “stale” bigs.
Either the bids for or offers of the underlying shares placed by market-making algorithms immediately become “stale,” as market participants describe them: if, for example, the price of the future has fallen, buying the shares at the preexisting bid price is likely to incur a loss. So market-making algorithms rush to cancel those stale bids as quickly as possible, while liquidity-taking algorithms race to execute against the stale bids before they are canceled. The difference between winning and losing those speed races, the Eurex data suggest, is now measured in billionths of a second.
These kinds of “speed races” are happening every minute. Another physical manifestation of this technology involves the towers and locations for transmitting signal from Chicago-based markets to New Jersey-based high frequency traders.
The need for ultrafast speed makes very specific physical locations exceptionally valuable, and those who own or control them can therefore exact rent. The fiber-optic cables or wireless links that transmit data from one financial trading computer data center to another have to follow as closely as possible the geodesic, the shortest path on the surface of the earth between the two data centers. In 2010, computer scientist Alex Pilosov led the building of the first microwave link for HFT between Chicago, where futures are traded, and northern New Jersey, the site of the data centers where U.S. shares are traded. Pilosov kept a low profile in this work, to avoid alerting potential competitors, but around a year later the owners of the attractively located microwave towers where he had leased space told him that others were also trying to place antennae on those towers. He says, “I was like, ‘Well, I’ll tell you what’s going on but you have to promise me that you have to charge them three times what you’re charging me. And I promise you that they will pay.’ And that’s what happened. That happened.” Similarly, Mike Persico, who built both millimeter-wave and atmospheric-laser links at the New Jersey share-trading data centers, reports that the owners of a tall building close to the relevant geodesics where this equipment could be placed suddenly possessed a very valuable resource. “Sometimes,” says Persico, “these landlords end up with the equivalent of a Willy Wonka golden ticket, because when they purchase[d] these properties, this was the furthest thing from their mind, and all of a sudden . . . it becomes very lucrative.”
Even for an economist, it’s possible to doubt whether the resources invested in ultra-fast trading are improving the economy for the average worker or consumer. But I’ll also add that development of new technologies often takes circuitous routes through different applications, and I wouldn’t be surprised to find that ultrafast communication, over time and as the price falls, turns out to have uses as-yet undreamed of.
