Editor's note: The markets are full of competition. No matter the conditions, you need some kind of an "edge."
Longtime readers will likely recognize today's essay from our founder Marc Chaikin. We published it in the February 27 edition of the Chaikin PowerFeed. It helps underscore that point of having an edge – and the lengths that Wall Street will go to get a leg up over the competition...
The construction workers didn't understand why someone would pay them to do this...
In spring 2009, roughly 2,000 men began digging a tunnel for a fiber-optic cable.
They didn't know the company behind the project. But it paid well. And that was all that mattered.
The tunnel needed to stretch more than 800 miles. It would run from New Jersey to Chicago.
The workers weren't told much – other than to keep their mouths shut. As one digger recalled...
All the time, people are asking us, "Is this top secret? Is it the government?"
I just said, "Yeah."
Managers also told them to report any outsiders who asked too many questions about the project. But the details didn't make much sense...
For one, plenty of fiber-optic lines already stretched across Pennsylvania, Ohio, and Indiana. Those existing ones worked fine. And there wasn't any obvious need for another.
Even weirder, the project's planners were obsessed with keeping the line as straight as possible. Normally, a crew will dig a line around obstacles. But in this case, they had to tunnel straight ahead through rocks, under rivers, and anything else in their way.
It was easy to dig across farmland. The teams could make three miles of progress per day when the land was flat and empty.
Cutting through Indiana and Ohio went quickly. The big challenge was in Pennsylvania...
The Allegheny Mountains run along the western, rural part of the state. The logical approach would be to go around the peaks. But again, this line needed to be straight.
The men used rock saws to cut through the hard limestone. Some days, they only made a few hundred feet of progress.
They finished the line in mid-2010.
Around then, details about the project started to come out...
A company called Spread Networks owned the tunnel. Its key executives were two guys originally from Jackson, Mississippi.
The first was Dan Spivey – a Chicago-based trader who came up with the idea for the tunnel. He reached out to Jim Barksdale to turn the project into reality. Barksdale was the former CEO of Netscape Communications. He made his fortune during the late 1990s tech boom.
In the end, they spent around an estimated $300 million on the project.
Keep in mind that the new cable wasn't much different than existing lines. The only thing that made it special was how straight it was. That made the tunnel three milliseconds faster than the others.
To put that in perspective, a millisecond is one-thousandth of a second. And three milliseconds is about one-fiftieth of the time it takes you to blink your eyes.
Just think about that...
Spread spent $300 million – and more than a year of construction work – to save just three milliseconds.
It sounds ridiculous. But those three milliseconds were incredibly valuable to Wall Street traders...
Spread began reaching out to trading firms a few months before the tunnel was done. It limited access to 200 customers. Each one would have to pay roughly $10.6 million for a five-year lease. Along with equipment, the total upfront cost worked out to around $14 million.
On a monthly basis, Spread's connection was 10 times as expensive as existing telecom lines.
And yet, the company had no problem filling up those 200 spots...
Put simply, trading firms had to pay for access.
Spread's new cable would give its users a massive advantage over anyone using the other, slightly slower routes between New York and Chicago.
As famed trader Jon Najarian explained to Forbes back in 2012, "Anybody pinging both markets has to be on this line, or they're dead."
There's another reason Wall Street paid up...
Spread estimated that Wall Street made about $20 billion in annual profits based solely on price differences between New York and Chicago.
In other words, Spread's $14 million price was just a small fraction of its customers' gains.
Spread made a fortune on its fiber-optic line.
But its advantage in the "speed race" didn't last long...
Within two years, traders discovered microwave-radio networks. These high-tech systems are even faster than fiber-optic cable. Plus, they send data through the air. So they don't come with hefty construction costs.
Spread eventually sold itself for $127 million. That's less than half of what it spent on its tunnel.
The company's demise isn't that surprising. Spread knew that competitors would appear quickly. That's why it kept its tunnel a secret for as long as possible.
The lesson here is simple...
While the technology is always changing, one thing never changes on Wall Street... or anywhere else in the world.
The competition.
Here at Chaikin Analytics, the Power Gauge helps us spot the winners – and losers – amid this endless competition of the stock market.
I built it specifically to help identify the most promising opportunities while also avoiding the danger spots.
Put simply, it's our "edge."
And no matter what tool or system you use... make sure to give yourself some kind of an edge against whatever the market throws your way.
Good investing,
Marc Chaikin
Editor's note: When it comes to an edge, that's exactly what a "secret weapon" at our corporate affiliate Stansberry Research is revealing...
After years behind the scenes, Gabe Marshank – the man behind at least 18 ideas that went on to soar by at least triple digits – is making his debut tomorrow, October 29. And he'll be revealing his next multibagger stock idea.
This is the same kind of strategy that helped billionaire hedge-fund titan Steve Cohen make $100 million on a single trade and buy the New York Mets. Learn more about this big reveal here.
