The Value of a Microsecond

While perusing vendor datasheets, have you ever questioned the inclusion of seemingly insignificant latency specifications? Take a look at Arista's line-up, for instance. Their 7500 series chassis lists a port-to-port latency of up to 13 microseconds (that's thirteen thousandths of a millisecond) whereas their "ultra-low latency" 7150 series switches provide sub-microsecond latency.

But who cares? Both values can be roughly translated as "zero" for us wetware-powered humans. (For reference, 8,333 microseconds pass in the time it takes your shiny new 120 Hz HDTV to complete one screen refresh.) So, does anyone really care about such obscenely low latency?

For a certain few organizations involved in high-frequency stock trading, those shaved microseconds can add up to billions of dollars in profit. The New York Times recently published an article titled The Wolf Hunters of Wall Street by Michael Lewis, which reveals how banks have leveraged low network latency to manipulate stock prices in open markets. (Thanks to @priscillaoppy for the tip!)

The increments of time involved were absurdly small: In theory, the fastest travel time, from Katsuyama’s desk in Manhattan to the BATS exchange in Weehawken, N.J., was about two milliseconds, and the slowest, from Katsuyama’s desk to the Nasdaq exchange in Carteret, N.J., was around four milliseconds. In practice, the times could vary much more than that, depending on network traffic, static and glitches in the equipment between any two points. It takes 100 milliseconds to blink quickly — it was hard to believe that a fraction of a blink of an eye could have any real market consequences.

Essentially, if party A had lower latency to several exchanges than party B, party A could take advantage of the lag time between exchanges when party B places a large order, buying up shares before party B's order completes and inflating the stock price slightly within milliseconds. In computer science, we know this as a race condition. Multiplied by volume and time, these independently negligible gains could generate billions in profit for high-frequency traders.

In order to create a new stock exchange that was immune to such race conditions, the subjects of the article figured out that they needed to ensure that none of its connected customers were "closer" (with regard to latency) than the furthest peer exchange:

The necessary delay turned out to be 320 microseconds; that was the time it took them, in the worst case, to send a signal to the exchange farthest from them, the New York Stock Exchange in Mahwah. Just to be sure, they rounded it up to 350 microseconds. To create the 350-microsecond delay, they needed to keep the new exchange roughly 38 miles from the place the brokers were allowed to connect to the exchange.

As moving their point of presence 38 miles outside the metro area wasn't an attractive prospect, their solution to the need for artificial latency was surprisingly low-tech:

A bright idea came from a new employee, James Cape, who had just joined them from a high-frequency-trading firm: Coil the fiber. Instead of running straight fiber between the two places, why not coil 38 miles of fiber and stick it in a compartment the size of a shoe box to simulate the effects of the distance. And that's what they did.

Yep, they connected peers through a 38-mile spool of fiber mounted in the rack. The photo from the article appears to be of a Corning Optical Network Simulation System (brilliant marketing for "a big ol' spool of fiber").

So as it turns out, microseconds can matter very much in some cases. A strange concept to wrap one's head around, but it really highlights just how much faster than us our networks are.