Spread Networks recently spent $300 million to build a fiberoptic cable that will let Wall Street traders shave .003 seconds off their execution times.
What’s the social value of that cable? If you can shave .003 seconds off the time it takes to execute a trade, how much good have you done the world?
Clearly, the full value of the cable resides in its ability to get things done faster. So start with a vast overestimate: Suppose the entire economy is on hold waiting for that trade to be completed. Then, thanks to the cable, we can all get on with our lives .003 seconds sooner and produce an extra .003 seconds worth of output.
In a $15-trillion-a-year economy, that comes to about $1500.
If we assume, more realistically, that just 1/1000 of the economy is hanging fire waiting for this one trade, the social contribution of a .003-second speedup is roughly $1.50. I’m confident it’s even more realistic to replace that 1/1000 with 1/1,000,000 . That gets us down to about an eighth of a cent.
But chances are you’d be willing to pay a hell of a lot more than an eighth of a cent for that extra speed, which is why Spread Networks is willing to pour $300 million into this thing, and why, quite generally, we should expect there to be more invested in such projects than they return in social value.
Continue reading ‘High Frequency Rentseeking’
