The latency question: Did flash crash trader have split second advantages due to his location?

The advancement of technology has shrunk the world to such a degree that international business can be carried out from any location, in any developed country, at any time, with no bearing on any outcome.

Or has it?

Navinder Singh Sarao, a trader from London, has been the center of a litany of reports this week since the US Commodity Futures Trading Commission (CFTC) announced that he is being accused of using layering and spoofing techniques, effected by extremely precise algorithms, to gain an astronomical £27 million whilst contributing to the 2010 flash crash, several thousand miles away in Chicago and New York.

For those individuals and trading institutions which have invested in ultra-low latency infrastructure in order to be safe in the knowledge that trades will be executed at the same time regardless of location and proximity to trading venues, a question mark has arisen in that Mr. Singh Sarao, who lived and worked in an innocuous, bland semi-detached house in the equally bland West London suburb of Hounslow, was able to execute his disruptive strategies which involved canceling bulk orders and layering, so effectively that he could profit to such an extent whilst prices crashed due to his alleged activities.

How can this be? Surely a major, ultra-modern, highly technologically advanced North American exchange is superior in its operations to the spare bedroom of a 1950s semi in Hounslow?

Proximity, it appears, is yet again being called into the equation. Hounslow is very close to Slough, approximately 10 miles (16km), Slough being home to Equinix’s LD4 server.

LD2 is practically in Mr. Singh Sarao’s doorstep, located on Bath Road, at Heathrow Airport, which, itself is in the London Borough of Hounslow, therefore at the absolute most, would be 5 miles (9km) from Mr. Singh Sarao’s home.

These servers, particularly LD4, host a vast amount of global financial firms’ datacenters, and also carry a large number of electronic financial transactions to and from global exchanges.

His thousands of high-frequency trades could be processed faster than those from dealers in Central London, let alone Chicago or New York, giving him a massive commercial advantage.

Neil Crammond, who in 2002 helped train Sarao in his first trading job at Futex in Woking, Surrey, said he had quickly become one of its most successful traders, and that the family’s home in Hounslow was perfectly located for Sarao’s operation.

Referring to the aforementioned LD4, he told the Daily Mail: “One of the exchange servers is based at Slough. The nearer you are the faster your order travels.”

“He could overtake orders from the City, meaning he was better placed to profit on tiny fluctuations in the market. It’s only nanoseconds but these minuscule amounts of time are literally worth a fortune to traders. Every nanosecond counts.”

When Sir John Betjemen wrote his disparaging poem about Slough, citing the industrialized nature of the town as the “menace of things to come” following its use as a dump for war surplus materials in the interwar years, referring to the 850 factories which were quickly built just before the second world war.

Sir John had clearly not factored in the post-industrial electronic age. Slough’s 1950s-style concrete landscape heralding a contrast between urban blight and its importance within the global, ultra refined electronic trading industry as the location for one of the world’s most instrumental financial markets datacenters.

In a 2014 email to the UK Financial Conduct Authority (FCA), Mr. Singh Sarao said: “I am a trader who changes his mind very, very quickly, one second I’m prepared to buy the limit of 2,000, the next second I may change my mind and get out.”

“This is what is unique about my trading, I trade very large but change my mind in a second.”

Mr. Singh Sarao described himself as “an old school point and click trader,” saying that he used his computer mouse to place each trade, which appears to contradict US allegations he used computer programs to manipulate markets.

Should this be the case, it would be of interest to gauge the potential increase in real-estate values in the London Borough of Hounslow if evidence can be provided to prove that proximity to some of the largest financial datacenters gives a real advantage.

That said, for many seasoned industry professionals, it is hard to imagine surrendering the keys to a plate glass Wall Street institution in favor of the beige, post-war conurbations of Hounslow.

Picture courtesy of the Daily Mail.

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