Crypto: For Wall Street’s Most Sophisticated Trading Firms, The Next Alpha...

Physical co-location and nanosecond advantages end as alpha shifts onchain. High-frequency trading firms own blockchain infrastructure.

Opinion by: Annabelle Huang, co-founder and CEO of Altius Labs

For centuries, the world’s traders and speculators have pursued one thing above all else: alpha. Not just returns, but an edge — a structural advantage that lets them capture value before everyone else. In modern times, they’ve achieved this through speed and precision, often beating the competition by mere nanoseconds.

As markets migrate to blockchain rails, however, the nature of alpha itself is shifting. Future alpha won’t come from co-locating servers next to an exchange or shaving nanoseconds off fiber routes. Rather, it will emerge from using onchain infrastructure in unique ways.

High-frequency trading (HFT) firms built empires out of physical ingenuity. Jump bought real estate near the Chicago Mercantile Exchange’s data center in Aurora so it could receive and transmit faster than its competitors. Beyond location, FPGA chips, custom hardware and private fiber networks have all served the same purpose: to give trading firms as many extra advantages as possible.

In that world, alpha was a hardware arms race. The companies that engineered faster connections and smarter routing dominated. As trading increasingly moves into blockchain-based environments, physical constraints dissolve. There is no co-location in decentralized finance, given the decentralized setup. You can’t build your firm right next to, say, a Uniswap server, and even if you could, it wouldn’t matter.

Today’s validators, sequencers and block producers are the blockchain equivalents of the old matching engines at the CME or Nasdaq. The firms that can influence or optimize this layer will gain the kind of structural edge that once came from owning customized trading hardware.

Mastering the new onchain mechanics can take various forms. For example, using the same HFT tricks on a centralized exchange (CEX) and running validators for a decentralized exchange (DEX) enables you to take advantage of price gaps between the two platforms before the public even has a chance to spot them.

Latency arbitrage also has its blockchain analogue in the form of maximal extractable value (MEV), meaning the profit opportunity created by reordering, including or excluding transactions within a block. We’re speaking, in both cases, about a kind of front-running, but the methods rely on completely different

Source: CoinTelegraph