Eighty some years after Wolfgang Pauli first postulated its existence, the lowly neutrino is now on the cusp of being harnessed to facilitate automated high-frequency trading through earth itself. That is, if this weakly-interacting, electrically-neutral subatomic particle can be successfully time-encoded and pointed from one financial center to another.
The idea is that by sending neutrino-based buy-and-sell messages via a 10,000 km shortcut through earth; high-velocity traders could handily beat their competitors.
Most neutrinos are leftover relics of thermal reactions that took place during the Big Bang, some 13.7 billion years ago. Today, however, they’re artificially generated inside nuclear reactors, or in particle accelerators like those at Europe’s CERN outside Geneva and the U.S.’ Fermilab near Chicago.
“To produce encoded neutrinos, you would need an accelerator which you can control, in order to accelerate protons to high energy, then slam them into a target and let the resulting secondary particles decay into neutrinos,” said John Learned, a particle physicist at the University of Hawaii at Manoa. “The higher the energy, the better the neutrinos would point.”
Because neutrinos travel at the speed of light, traders using the technology would on average have a nearly 30 millisecond time advantage, with participating London and Sydney brokerages garnering a full 44 milliseconds.
High-frequency traders are notoriously secretive about divulging trading times even to colleagues within their own firms, since any such time-dependent trading edge can be fleeting. But many programmed trades are now known to take place within milliseconds or less.
“Thirty milliseconds is a lot of time in high-velocity trading,” said former J.P. Morgan Chase options trader Espen Gaarder Haug, an expert in automated high-frequency trading, and a professor of finance at the Norwegian University of Life Sciences near Oslo.
In theory, options trading would provide the most leverage with this neutrino technology, says Haug. But such technology could also bring new opportunities in what Haugs calls “classic international arbitrage,” specifically when dealing with securities that are listed on a number of separate exchanges. As Haug explains, in principle, the trading price on any given security should be the same in two different markets. But in instances when that is not the case, Haug says, a trader could buy the same security cheaper in one market and sell it higher in another, locking in a profit. But the essence of all such arbitrage involves the speed of communication.
The cities with the longest distance between them would provide the biggest time advantage, says Haug, who notes that if successful it’s likely that such neutrino technology would be quickly adapted between every major financial market.
But Haug says financial info-tech companies could also be interested since they would likely be assured of getting a full return on their investment. As he argues, subscribers to financial information services would willingly pay for access to the information generated by the new technology, if only as a hedge against falling behind their competitors.
The neutrinos would carry the time signal extremely precisely, says Learned. The encoding would be sent in one transmission using synchronized clocks on each end. By dividing time into 1000 nanoseconds, Learned notes that it would be possible to have a thousand pre-determined potential messages known on both ends.
“Imagine that I’m interested in 10 different securities and each one would have a 100 different message options,” said Learned. “I would send one of those 1000 messages saying buy this or buy that.”
The time the signal arrived would determine which message is which. To initiate a trade and keep the time advantage, Learned says, one might even install a dedicated microwave link from the brokerage to the originating accelerator responsible for making, encoding and sending the neutrinos.
For two-way communication, there would be accelerators and receivers at both ends. The receiver could even fit in the basement of an office building.
But neutrinos leave no evidence of their paths until they interact. The neutrino’s interaction with a nearby random proton causes it to pick up a charge; become visible and continue on its journey as a charged muon (a subatomic cousin to an electron) with no time delay.
“A detector on the order of a size of a large billboard could be made of slabs of scintillating plastic that give off light when struck by a charged muon particle,” said Learned. “If your three layers of signal counters indicated a [muon] line back towards the originating accelerator, then you know you’ve got a signal.”
If a trading firm in New York wanted to buy or sell shares in Tokyo, says Haug, then almost everything could basically be pre-programmed in Tokyo, such as trade size, market or limit order, and the security’s trading symbol.
CME Group, which operates CME Globex, one of the world’s fastest electronic derivatives trading platforms, would not comment on the potential of this new neutrino-based trading technology. But such radical new technology would surely rapidly impact the 24-hour international Globex platform and markets worldwide.
That is, when it actually sees fruition. Learned says a one-way, earth-traversing setup might be constructed for as little as a $1 billion.
It also might be possible for a neutrino-communications startup to buy time on an existing accelerator, says Learned, in order to create and point a neutrino beam-line in the needed direction. Otherwise, private particle accelerators would have to be built from scratch.
But Haug contends that if a group of particle physicists had the right plan for the technology, Wall Street money “would be there” to make it happen.
