While members of the 99 percent made New Year’s resolutions to shave a few bucks off the grocery bill, turn the heat down, or maybe donate a few dollars to a local food bank, the titans of finance are throwing around some of their newfound booty to game the system even more in their favor. Their 2012 resolution involves a new transatlantic fiber-optic cable specifically designed to give its owners and users a five-millisecond market jump on their competition. In the hyperkinetic world of global trade, a one-thousandth-of-a-second jump on receiving financial news is worth, according to an estimate in the London Telegraph, about $100 million per year to a typical hedge fund. When you do the math, this five-millisecond advantage will translate to billions of dollars per year in profits for clients using the new cable, thus rendering the $300 million dollar cost of construction negligible. And of course, since this money has to come from somewhere, it also translates into a monumental loss for institutions whose trades are based on toxic, last-millisecond data.
To help wrap our minds around this, let’s go back for a second to Nicaragua in 1989, when the country suffered a hyperinflation rate of about 1,600 percent. Back then, an overnight currency revaluation would translate into a two-thirds drop on the cash in your wallet, and a tripling of prices at the market. Hence, the beer that cost me 6,500 córdobas on a Thursday night would cost me 20,000 córdobas the next afternoon.
I was working in Nicaragua helping guide a group of liberal guilt-trip tourists around the country to see the Sandinista revolution firsthand. My job was to wake up before dawn each morning and exchange just enough cash to get us through the day, knowing that our money could lose most of its value if we kept it overnight. On one morning, a major currency revaluation meant I had to carry two shopping bags of currency in order to buy the day’s meals for the group. That morning we traveled to a remote village market, where word of the devaluation had not yet arrived. Hence, everything in the market was selling at one third of the new currency value. When we got there, shortly after the market opened, there were a few hippies loading a weathered Winnebago with hammocks and other resalable goods. They apparently traded their money in Managua at the break of dawn, then hightailed it to the boonies, getting there ahead of the day’s financial news—in essence robbing the market—and pulling away just as we got there.
Get our free emails
I bring up this story because it offers an easy analogy to help understand the international commodities market. A global hedge fund in New York, hitting the currency or commodities trading market in London before news of a currency or commodity revaluation, is essentially pulling the same scam as a bunch of weathered gringos in an old Winnebago ripping off a remote hammock vendor in the boonies of Nicaragua—but on a much more grandiose scale. Instead of scoring a dozen hammocks at 10 bucks off the going rate, a snaky hedge fund could score billions of dollars by hitting the currency market one millisecond faster than news of a devaluation. With all transactions computerized and automated, a millisecond might as well be an eternity, with fortunes being made and lost in this relative aeon of time.
The new cable achieves its five-millisecond advantage by following a new route, scoped out by a team of survey ships measuring the ocean floor, which cuts 310 miles off the 4,051-mile route followed by other transatlantic fiber communication cables. With light in fiber-optic cables traveling at 62 miles per millisecond, the new, shorter cable shaves about five milliseconds off of the transmission time for a computer-generated message, such as “Buy 50 billion yen now.”
The new cable, being built at a cost of $300 million, essentially will provide five milliseconds of what I can only term insider information to clients willing to pay to play on this gamed roulette wheel. Of course, insider information, like when Martha Stewart gets a phone call telling her to buy or sell a stock, is theoretically illegal. But in this case, somewhere in the lawless zone between the continental shelf and the British Isles, everything magically becomes copacetic, as if blessed by a transnational elite immunity.
The cable, called “Project Express,” is being built by Hibernia Atlantic, ostensibly a communications infrastructure company, whose chairman, Ken Peterson, is also CEO of Columbia Corporate Ventures of Vancouver, a director of the Washington Policy Center (a “think tank” and lobbying group for corporate and financial industry interests), and a director of American Capital Strategies, which is the largest US publicly traded private equity fund, specializing in funding corporate buyouts. Other corporate players, who Hibernia Atlantic coins “Express Partners,” will also have access to this inside track—at about 50 times the going cable message rate. Financed primarily financed by the China-based Huawei Marine Networks, Project Express promises to rewrite the rules for international trade. If this insider information is indeed legal, then the market would dictate that everyone who wants to stay in the game would have to pay Project Express tolls in order to play. No doubt other fast cables will soon sprout their tentacles across the ocean, in an ever growing web.
This social waste of spending $300 million to build what is essentially a redundant, albeit infinitesimally quicker, fiber-optic cable raises a plethora of questions. The whole notion of Project Express exposes the reality that financial companies do not “make” money in any real sense of the word “make,” but instead get rich simply by “taking” money that already exists on someone else’s balance sheet, using whatever advantages a gamed system offers.
Hence, spending $300 million to game the system, essentially to know what number the roulette ball will land on while your opponents still sees nothing but a spinning wheel, is a legitimate investment in a global trading system where capital moves as fast as lightning. Counting cards will get you busted in Vegas or Atlantic City, but not in the global currency market where entire national economies rise and fall with the flash of light.