Episode summary
How the Speed of a Trade Got Down to Nearly the Speed of Light | Odd Lots
Odd Lots
· · 56 min · Hosts: Tracy Alloway, Joe Weisenthal · Guests: Donald Mackenzie
Summary
Donald Mackenzie argues that high-frequency trading is best understood as a sociotechnical arms race, not just a search for smarter algorithms. The decisive shift came when trading moved from human-centered time scales to machine-centered ones: once orders could be executed in milliseconds, microseconds, and then nanoseconds, firms had to compete on wiring length, server placement, and data-center access as much as on market insight.
He traces the modern structure of HFT to electronic order books and fast matching engines such as Island, which made automated trading viable and helped create feedback loops between liquidity, speed, and exchange design. Over time, firms moved from fiber optic cables to microwave links between Chicago and northern New Jersey, while exchanges standardized equal cable lengths inside data centers to manage the competition.
Mackenzie also argues that the economics impose real limits. The profits from speed are substantial but finite, so firms cannot justify unlimited spending. He sees the next frontier in AI as similar: huge investments continue because nobody wants to fall behind, even if returns look increasingly diminishing.
Key takeaways
- Donald Mackenzie says high-frequency trading crossed a threshold when humans could no longer act fast enough once markets moved below a tenth of a second.
- He says Island’s 2 millisecond matching engine helped create the conditions for modern automated trading and liquidity growth.
- Mackenzie says the Chicago-to-New Jersey speed race evolved from fiber routes to microwave links because light travels faster through air than through glass.
- He argues HFT firms can keep racing for speed, but only within an economic ceiling set by the profits available from market structure.
- Mackenzie sees AI as following the same diminishing-returns logic: more spending can buy more capability, but at increasing cost.
Notable quotes
“we moved from a a kind of human- centered form of trading to a machine centered form of trading”
“Island improved on that a thousandfold. So it could execute trades in 2 milliseconds 2000th of a second”
“the fiber optic cable that connects them is coiled so that there's exactly the same cable length for each of the trading firms within that data center”
“You can't get faster than the um the speed of light in a in a vacuum”
“the investments that you make in speed have to be recoupable from the trading profits that you make from your trading”
How the episode opens
Bloomberg Audio Studios podcasts, radio, news. — Hello and welcome to another episode of the OddLots podcast. I'm Joe Weisenthal.
And I'm Tracy Aloway. Tracy, one of the things that I think we like to do on this podcast is sort of deabstract the things that we take for granted in the world. And there are various processes.
We always say this when there's like a blowup or something like that where it's like, oh, if we're having to pay attention to X or Y, there must be something going on. But we don't always have to wait for blow-ups. But like we live in this world where like you click buttons and things happen and you have some intuition of what happens after the button is clicked, but you don't really have a great intuition of like what happens between the button clicking and the thing happening.
Absolutely. I actually don't know how the process of like inputting an equities trade actually works like where it kind of shows up. So that's a big question. And I suspect a lot of people, even people who are in markets, probably don't know like the entire sequence of events. Partly because it's gotten more complicated over the years with like reggg NMS. Do you remember that and stuff like that?
The other thing I've been realizing about trading, obviously the big trend here is high frequency trading, right? And it's just getting faster and faster and faster. When we first started writing about HFT, I guess in the sort of like mid 2000s after the financial crisis,
I remember thinking that it was all about the actual algorithm and finding like a really smart pattern in financial markets to exploit. But the more I learn about it and the more I read about it, I kind of realize it's not really that.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- high-frequency trading
- market technology arms race
- trading latency
- exchange infrastructure
- finance and sociology
Watch the episode
Watch “How the Speed of a Trade Got Down to Nearly the Speed of Light | Odd Lots” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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