Recently, I had the opportunity to read a technical story that I completely agree with.
I asked the head of a major high-frequency trading operation if there was any reason to go with FPGA's for trading instead of PCs. His response was worth a million dollars: The bottleneck is no longer with computing capacity, but with the exchange itself.
I happen to know the architect of the Nasdaq's system, and, well, after conferring with him, my opinion is that there's no improvement to the speed of the exchange in sight. So, where does the opportunity lie for high-freq trading desks? Retail flows. Look for a consolidation in the marketplace of the high-freq traders. The flows will be ripe at the major brokerage retailers--the ones that have a high volume of small transactions. The problem is that there are only a few.
How does this impact the chipmakers? Well, as a power user (software architect) of the latest chipsets, I can tell you that the bottleneck is not really in the chips anymore. Maxing out even a laptop's CPU is actually a somewhat difficult task for me to do. The bottleneck is in what's known as the system bus. That wire that connects memory to the CPU is just too long, and the speed of light is starting to become the limiting factor. The fact that the memory chip is 3 or 5 cm apart from the CPU matters.
What does this spell out for the chipmakers? Nothing good. Between this speed of light limiting factor, and the potential loss of a market segment, the chipmakers are up against the wall. Add to that the increasing ease of custom programming FPGA's for specific tasks instead of buying the latest and most expensive 100-core chipsets, and you have several billion-dollar growth stories cut short.
Disclosure: No positions, yet