Microwave and Fiber Races
The pursuit of speed in financial markets has extended beyond data centers into the infrastructure connecting them. When trading operations span multiple cities or even continents, traders face a fundamental trade-off: they can send orders through conventional telecom networks (which route through many hops, adding latency), or they can invest in dedicated point-to-point communication networks. This choice has sparked an ongoing technological arms race between microwave and fiber optic networks, with implications far beyond trading—reshaping how critical financial infrastructure is built and operated.
Microwave transmission systems and fiber optic cables represent competing technologies, each with distinct advantages and disadvantages. Fiber optic cables provide enormous bandwidth and low latency, but require physical installation and right-of-way across terrain. Microwave systems transmit wirelessly at microwave frequencies, traveling at the speed of light through air but limited by atmospheric conditions and the geometry of the line-of-sight path. The choice between them has become a strategic decision for firms operating across multiple venues.
Quick definition: Microwave and fiber racing refer to the technological competition between microwave wireless networks and fiber optic cable networks for transmitting trading data and orders between geographically separated trading venues, each offering different latency and bandwidth trade-offs.
Key takeaways
- Microwave transmission travels at the speed of light through air, theoretically faster than fiber optic cables which transmit at roughly two-thirds light speed through glass
- Fiber optic networks offer superior bandwidth and reliability but require physical installation and provide less consistent speed advantage over long distances
- Firms operating between multiple venues (e.g., New York and Chicago) must choose between dedicated microwave links, fiber optic cables, or reliance on public telecom networks
- The physical path of microwave or fiber links determines latency—the most direct route is fastest, creating competitive advantages for firms with the straightest paths
- Regulatory and legal issues have arisen around microwave network rights, including frequency licensing and physical routing rights
- The microwave-versus-fiber trade-off has fundamental physics constraints—beyond a certain distance, neither technology can significantly improve latency
The Geometry of Speed
The fundamental advantage of microwave transmission over fiber optic cables stems from physics. Light travels at approximately 186,000 miles per second through vacuum, but it travels slower through material. Fiber optic glass slows light to roughly two-thirds this speed, approximately 124,000 miles per second. This means fiber has an inherent speed-of-light disadvantage compared to microwave propagation through air.
However, this advantage is more subtle than it initially appears. The speed-of-light disadvantage only matters if the microwave path and fiber path have the same length. In practice, they rarely do. Fiber optic cables follow existing infrastructure—they are buried underground, strung along utility poles, and routed through tunnels and along established corridors. These paths often curve and detour rather than following the most direct route. Microwave systems, conversely, can transmit in a straight line if there is line-of-sight between transmitters and receivers.
Consider the route between New York and Chicago: the straight-line distance is approximately 790 miles. A microwave system with a straight line-of-sight path could theoretically transmit this distance at the speed of light through air, achieving a one-way latency of roughly 4.2 milliseconds. A fiber optic cable might follow a more circuitous route, perhaps 850 miles of actual cable, resulting in a latency of roughly 6.8 milliseconds. The microwave system is faster by approximately 2.6 milliseconds—a significant advantage for latency-sensitive trading.
In practice, pure microwave links spanning such distances are uncommon because line-of-sight is difficult to maintain. Microwave signals require clear paths without obstruction from buildings, terrain, or atmospheric disturbances. Achieving line-of-sight across 790 miles would require transmitter towers precisely positioned at regular intervals—a logistical challenge. Instead, trading firms often use hybrid systems combining microwave hops between cities with fiber optic cables in regions where line-of-sight is easier to establish.
The Microwave Systems: Latency Advantage
Several major trading firms have invested in dedicated microwave networks for inter-city communication. The most famous example involved a link between the Chicago Mercantile Exchange (CME) and the New York Stock Exchange. In the mid-2000s, a trading firm invested approximately $300 million to establish a microwave network between these two major venues, shaving approximately 3 milliseconds off round-trip communication latency.
This latency reduction enabled index arbitrage strategies targeting the S&P 500 futures (traded at CME) and the underlying stocks (traded at NYSE and NASDAQ in New York). When futures prices diverged from underlying stock prices by more than the round-trip latency-justified difference, arbitrageurs could simultaneously trade both sides, locking in profits. The 3-millisecond advantage allowed profitable trades that were impossible for firms without this infrastructure.
Microwave networks typically operate at frequencies in the microwave spectrum—around 1-100 GHz. Different frequency bands have different propagation characteristics and regulatory treatments. Licensed frequencies (such as those allocated by the FCC) offer legal protection against interference but require expensive frequency licenses. Unlicensed frequencies (such as 5 GHz) avoid licensing costs but offer less regulatory protection.
The Fiber Optic Response
Fiber optic cable manufacturers and telecom operators responded to the microwave challenge by investing in new fiber routes designed to minimize distance between major trading hubs. Dedicated fiber optic cables now connect New York, Chicago, and other major financial centers via nearly direct routes, dramatically reducing latency.
Historically, fiber optic cables were installed primarily for public telecommunications—connecting cities and serving the general broadband market. These networks followed established corridors and were optimized for long-term cost minimization rather than shortest-path routing. Over the past 15 years, telecom operators have installed new fiber specifically optimized for trading latency, following the most direct routes available through existing right-of-way.
A modern fiber route between New York and Chicago specifically designed for trading might minimize distance by following highways and utility corridors in a relatively straight line, reducing distance to perhaps 800-820 miles and achieving latency around 6.4-6.6 milliseconds one-way. While this is still slower than microwave by a few milliseconds, modern fiber links offer superior bandwidth—easily carrying hundreds of gigabits per second—and better reliability.
The Transatlantic and Global Networks
The competition between microwave and fiber becomes particularly acute in transatlantic trading between New York and London. The transatlantic distance is approximately 3,450 miles as the crow flies, but submarine fiber optic cables must follow seafloor routes that add distance. Some transatlantic cables stretch to 3,800+ miles.
Microwave transmission across the Atlantic is technically impossible—line-of-sight cannot be maintained over that distance due to the Earth's curvature. However, firms have proposed alternative wireless technologies (including satellites and relay systems) for transatlantic communication. Some firms invested in dedicated transatlantic fiber optic cables designed to minimize distance. One of the most famous examples involved a trading firm investing in a specialized transatlantic cable that shaved approximately 5.2 milliseconds off the round-trip latency between London and New York—worth potentially billions of dollars in trading profits depending on strategy.
These transatlantic investments highlight how seriously firms take the speed advantage. A 5-millisecond reduction in latency across a link used for millions of trades annually can be worth hundreds of millions of dollars over a decade or more.
Terrestrial Microwave Networks in Practice
Despite the advantages, building dedicated microwave networks faces substantial challenges:
Right-of-Way Acquisition: Microwave towers require land and permits. Acquiring rights-of-way across populated areas or through privately owned land is expensive and time-consuming. Firms must negotiate with landowners, navigate zoning regulations, and potentially face environmental reviews.
Regulatory Licensing: Microwave transmitters must obtain licenses from regulatory authorities (the FCC in the United States). Licensing processes can take years and offer no guarantee of approval. In some frequency bands, licenses are auctioned, pushing costs even higher.
Weather and Atmospheric Effects: Microwave signals are attenuated by rain, fog, and atmospheric moisture. Performance degrades during adverse weather, making microwave systems less reliable than fiber. Some firms accept this as the cost of the latency advantage; others view it as unacceptable for mission-critical systems.
Line-of-Sight Constraints: Microwave systems require clear line-of-sight between transmitters and receivers. Buildings, terrain, and obstacles block signals. This limits where towers can be positioned.
Power Requirements: Microwave transmitters consume significant power, especially over long distances. Firms must establish reliable power supplies at tower sites, adding to infrastructure costs.
Fiber Optic Advantages and Challenges
Fiber optic networks offer distinct advantages:
Superior Bandwidth: Modern fiber can carry terabits per second, easily supporting high-volume market data feeds and order traffic. Microwave systems, by contrast, are limited to gigabits per second due to frequency spectrum constraints.
Better Reliability: Fiber is less affected by weather and atmospheric conditions than microwave. Once installed, fiber provides consistent, predictable latency regardless of weather.
Lower Operational Costs: Once installed, fiber networks require less active maintenance and power than microwave systems. The per-terabit cost of fiber transmission is far lower than microwave.
Easier Upgrades: Fiber cable capacity can be increased by deploying new optical technology on existing cables without physical infrastructure changes. Microwave capacity is fundamentally limited by available frequency spectrum.
However, fiber has disadvantages:
Installation Time and Cost: Installing new fiber optic cables requires physical construction—digging trenches, boring under obstacles, laying cable. This process takes months or years and costs millions or tens of millions of dollars depending on distance and terrain.
Limited Speed-of-Light Advantage: Due to the fundamental constraint that fiber transmits at two-thirds light speed through glass, fiber cannot achieve the theoretical latency advantages of microwave over short distances.
Right-of-Way Dependencies: Like microwave systems, fiber requires right-of-way across terrain. However, the permanence of underground cables makes negotiations even more sensitive—once a route is chosen, changing it later is extremely difficult.
The Economics of Network Investment
The decision between microwave, fiber, or relying on existing public networks involves complex economic analysis. A firm considering a dedicated network between two trading venues must calculate:
Upfront Capital Costs: Building a new network might cost $10 million to $500+ million depending on technology and distance.
Annual Operating Costs: Maintenance, power, staffing, and licensing might cost $1-5 million annually.
Latency Advantage: The speed gain must be quantified in terms of potential profit impact. For firms executing millions of trades annually, a 1-millisecond latency advantage might be worth $10-100 million annually.
Competitive Lifespan: How long will the latency advantage last before competitors adopt similar technology? If competitors can copy a microwave network in 2-3 years, the payback period is tight.
Alternative Strategies: Can the same profit target be achieved through other strategies (better algorithms, superior market data, better risk management) at lower cost?
Most firms conclude that dedicated networks are only economical for the highest-volume, most latency-sensitive strategies operating between the most liquid trading venues (typically New York-Chicago or New York-London routes). For less critical routes or lower-volume strategies, relying on existing public networks and co-location advantages is more cost-effective.
Regulatory and Legal Dimensions
Microwave network development has faced regulatory challenges:
FCC Spectrum Licensing: In the United States, the FCC licenses microwave frequencies. Obtaining licenses can be time-consuming and expensive. In some cases, frequencies are auctioned, pushing licensing costs into the millions.
International Coordination: Microwave signals can cross national borders. Different countries regulate spectrum differently, requiring international coordination for systems operating across borders or near borders.
Interference Concerns: Regulators require that microwave systems not interfere with licensed users of the same frequencies. Proving non-interference and managing potential interference issues can be contentious.
Environmental and Zoning Reviews: In some jurisdictions, installing new transmission tower infrastructure triggers environmental reviews and zoning hearings, particularly in areas with strong opposition to new infrastructure.
Microwave vs. Fiber Trade-offs
Real-World Examples
The Spread Networks Chicago-New York Microwave Network: Spread Networks invested approximately $300 million to build a dedicated microwave network between Chicago (CME) and New York (NYSE/NASDAQ). The network reduced latency by approximately 3 milliseconds compared to existing fiber optic routes. This advantage was particularly valuable for index arbitrage strategies. The investment was commercially successful enough that the network operator later sold it to McKay Brothers for a reported $500+ million, reflecting the ongoing value of the latency advantage.
Hibernia Express Transatlantic Fiber Cable: Hibernia Express, a transatlantic fiber optic cable jointly owned by trading firms and telecom operators, was designed specifically to minimize latency between London and New York. The cable reduced latency compared to existing cables and was used extensively by trading firms for transatlantic index and statistical arbitrage strategies.
The CME-NASDAQ Microwave Competition: Following the success of the Chicago-New York microwave link, various firms invested in microwave links between other venue pairs. However, not all investments succeeded—some fell to regulatory barriers, others to the rapid improvement of fiber technology, and some to the simple reality that the latency advantage did not generate sufficient trading profit to justify the investment.
Google's Cross-Continental Fiber Investment: While not primarily motivated by trading, Google's massive investment in cross-continental fiber optic cables (part of its broader internet infrastructure strategy) has had the side effect of improving latency for all users, including trading firms. This illustrates how broader technology trends can affect financial market infrastructure.
Common Mistakes
Overestimating Latency Advantage: Firms sometimes assume that a microwave network providing 3 milliseconds of latency advantage will automatically generate profits. In reality, the advantage must be sufficient to cover the investment and operating costs while accounting for the finite lifespan of the competitive advantage.
Underestimating Implementation Challenges: Building a microwave network involves numerous technical and regulatory hurdles. Firms often discover that the actual deployment takes longer and costs more than anticipated.
Ignoring Reliability Concerns: Microwave systems are less reliable than fiber, particularly in adverse weather. A trading firm cannot tolerate frequent outages or significant latency variations. Some firms discovered that the latency advantage of microwave was offset by reliability issues that required costly redundancy.
Failing to Anticipate Competitive Responses: When one firm builds a dedicated network, competitors typically respond by building their own or leveraging improved public network offerings. The first-mover advantage is typically temporary.
Assuming Technology Stability: Latency advantage depends on competitors not finding alternative routes or technologies. When competitors invest in their own infrastructure or when public network improvements occur, the advantage can evaporate.
FAQ
Q: Is microwave transmission faster than fiber for financial trading? A: Theoretically, microwave can be slightly faster due to propagation speed through air versus glass, but this advantage only materializes if the microwave path is shorter. In practice, fiber routes have improved dramatically, and the latency difference is often negligible.
Q: How much does it cost to build a dedicated microwave network? A: Building a microwave network between major trading venues (e.g., New York and Chicago) can cost $100-500 million including tower construction, equipment, regulatory licensing, and integration. Operating costs typically run $1-5 million annually.
Q: Can individual traders build microwave networks? A: Not practically. The regulatory, capital, and operational requirements are beyond the scope of individual traders. Only large institutions or specialized infrastructure firms have engaged in such projects.
Q: Why don't all major trading firms use dedicated networks? A: The investment and operating costs are only justified for the highest-volume, most latency-sensitive strategies. For most strategies, cheaper alternatives (co-location, standard fiber) provide sufficient latency.
Q: What happened to the Spread Networks microwave network? A: It was acquired by McKay Brothers in 2011 and continues operating. The network remains commercially valuable due to the persistent latency advantage it provides.
Q: Can microwave networks be disrupted by weather? A: Yes. Heavy rain, fog, and severe weather can degrade microwave signal quality. Some networks include redundancy (parallel fiber paths) to maintain service during adverse weather.
Q: Are there legal issues with operating private microwave networks? A: Yes. Microwave networks must be licensed by the FCC and cannot interfere with other licensed users. Operating unlicensed networks is illegal.
Related Concepts
- Co-Location and Proximity Hosting: The data center infrastructure that benefits from low-latency networks
- Latency Arbitrage: The trading strategies that depend on low-latency communication
- Market Data Systems: The information flows that benefit from optimized communication infrastructure
- Exchange Technology Infrastructure: How exchanges design their systems to support various trading participants
- Telecommunications and Financial Markets: The broader relationship between communication infrastructure and financial trading
Summary
The race between microwave and fiber optic networks represents a fascinating collision between physics, economics, and competitive strategy in financial markets. While microwave offers theoretical speed advantages through propagation in air, fiber optic cables have evolved to provide superior bandwidth, reliability, and increasingly competitive latency. The decision to invest in dedicated communication networks involves complex economic analysis—only strategies with sufficiently high volume and latency sensitivity justify the enormous capital investment required. For most trading firms, the advantages of co-location and existing public networks provide adequate speed benefits at lower cost. However, for the most sophisticated, highest-volume trading operations, dedicated networks remain a critical competitive tool, representing a willingness to invest billions of dollars annually in microsecond-scale advantages. The evolution of network infrastructure continues to reshape how financial markets are structured and which firms can compete effectively at the highest speeds.