The Race for Speed: How Latency Wars Shaped the World of Trading

From carrier pigeons carrying news of battles to laser technology and fibre-optic cables connecting continents, humanity's quest for speed in communication has dramatically shaped traditional financial markets.

Speed matters. It’s multi-million dollar business. And it’s an ongoing race.

The Historical Quest for Speed

The pursuit of information speed isn't new; it has deep historical roots. One iconic example dates back to the Napoleonic Wars. According to popular legend, the Rothschild Bank in London allegedly used carrier pigeons to learn about Napoleon's defeat at Waterloo. Armed with this critical information ahead of the general public, they successfully executed trades, profiting substantially by shorting French bonds.

While historians debate the details, the underlying principle is undeniable: the quicker you receive and act upon valuable information, the more profitable the outcome. And access to timely information gave Rothschild Bank an advantage.

These early efforts sparked the drive to reduce latency. This delay between information being sent and received defines entire sectors of finance, technology, and telecommunications. We’re focusing on the former sector.

Technological Milestones in the Trading World

As time progressed, latency reduction became synonymous with technological innovation. The telegraph's invention in the mid-19th century dramatically accelerated information transmission, enabling financial markets to react swiftly to news across continents. Later, telephone systems further streamlined communications, connecting traders directly and efficiently.

The most significant shift came with the digital revolution in the late 20th century, turning trading floors from bustling pits into quiet, humming rooms filled with powerful computers. Trades moved from vocal outbursts to electronic blips transmitted in milliseconds across the globe.

The Rise of High Frequency Trading

High Frequency Trading (commonly referred to as HFT) pushed latency reduction to new extremes. All of a sudden, technological advancements became a lot more interesting. Speed became a literal currency, with firms investing billions in infrastructure designed to shave milliseconds, microseconds, and even nanoseconds off their communication speeds.

In fact, a highly secretive project that is said to have cost north of $300 million was completed in 2010. It consisted in the construction of a straight-line fibre-optic cable connecting two major financial hubs: Chicago and New York. The straighter the cable, the shorter the physical distance data must travel, thus reducing latency.

It’s worth noting that traders measure success in fractions of milliseconds. After the completion of the cable, this latency was reduced to from 16 to approximately 13 milliseconds.

The 3-millisecond advantage allowed traders to consistently get their market data faster, enabling them to execute trades ahead of competitors who were still using longer routes. Ultimately, this gave them an edge by making the most of price discrepancies and arbitrage opportunities before anyone else even noticed them.

As a result, they paid a premium to access this data highway. Most importantly, this milestone also triggered an intense technological arms race, spurring other firms to invest heavily in alternative technologies like microwave and laser-based communications to achieve even lower latencies.

Physics 101: Getting closer with colocation

Beyond cables, traders now co-locate their servers physically next to exchanges like Nasdaq. By doing so, they reduce data transmission times to mere fractions of milliseconds, effectively skipping the queue to place trades ahead of slower rivals. The financial stakes in these "latency wars" are enormous. Being just one microsecond quicker can translate into millions of dollars.

How can TradFi technological advancements be applied to blockchain technology?

Today, the relentless pursuit of speed continues, with new technologies emerging to push boundaries further. Despite these advancements in TradFi, blockchain-based financial systems still lag significantly behind traditional financial systems (TradFi) in terms of bandwidth and latency.

And this is where Fogo Chain seems to be focusing its value proposition: building its architecture inspired by TradFi performance and using state of the art technology. Essentially, it is pushing boundaries of performance, finance, and physics with a view to bring institutional-grade finance on-chain.

IBRL: Increase Bandwidth, Reduce Latency

At its core, the Fogo Chain maintains full compatibility at the Solana Virtual Machine execution layer. This allows existing Solana programs, tooling, and infrastructure to migrate seamlessly to this new chain. By targeting a design that is compatible with Solana, it’s easier for dApps like Kamino or a protocol like Jito to deploy on Fogo Chain.

It’s a smart and deliberate choice - by lowering the technical barriers, projects already live on Solana can expand to Fogo with minimal effort. We are confident this will play a role in growing Fogees Hub and the ecosystem in general.

Another aspect in building from the ground up is that Fogo Chain focuses on IBRL. Its **whitepaper outlines a three-fold strategy:

• Validator co-location: Consensus happens between validators that are co-located, while enabling geographical dispersion around the globe (to enable a “follow the sun model”), so that consensus occurs closer to where traders occur.

• Validators are curated: this permissioned model incentivises high performance.

• State of the art software: all validator nodes will eventually run on the same software (Firedancer).

On-Chain Institutional-Grade Finance

The current status of blockchain technology is unsuitable for traditional financial systems. If Fogo and its Core contributors are successful in delivering on the Fogo Chain whitepaper, it will become suitable to bring a core part of TradFi on-chain. This will open the door to DeFi 3.0: bringing financial markets on-chain, such as equities and financial derivatives, while matching throughput and speed requirements.

In a world where time is literally money, the battle to increase bandwidth and reduce latency is far from over - it’s accelerating on-chain.