It took just 45 minutes this month for one of Wall Street’s top trading firms to lose $440 million, a loss that has focused attention on the potential problems associated with high-speed trading. Yet today’s technological challenges are not unlike those faced by traders in the 19th century, whose jobs were revolutionised by the advent of ticker machines.
Even after the introduction of the trans-Atlantic cable in 1865 and the telephone in 1878, brokers still relied on manpower over gadgetry. Market prices were listed on slips of paper, and runners, most younger than 17, would deliver letters between brokerage houses, according to a report by Alexandru Preda at the University of Edinburgh. The new technologies were not seen as reliable. Problems ranged from typographical errors in the closing stock prices listed by newspapers to outright forgery.
In the days after the Civil War ended, traders seeking a timely edge still relied upon foot speed. The fastest man on Wall Street was William Heath, a celebrated runner with a huge drooping mustache, who was nicknamed “the American Deer.” Standing an inch taller than the Olympic sprinter Usain Bolt of Jamaica, Heath was reported by The New York Times to have been “as quick in his locomotion as in his operation.”
In 1867, Edward A Calahan, a draftsman with the American Telegraph Company who previously worked as a messenger on Wall Street, unveiled the first stock ticker. The device, which earned its name from the unique sound it created, featured two wheels of type placed under a glass jar. The ticker printed off company names and stock prices on a narrow strip of paper, which was read aloud by a clerk.
Calahan’s machine was the first step in a major technological revolution of Wall Street, but it was also slow and unreliable. Twice a week, the batteries had to be filled with sulfuric acid, which was carried around in buckets. More important, the wheels of type would not always print in unison resulting in a mash of letters and numbers.
Over the years, other inventors would improve on Calahan’s invention, and its use became widespread. A battery building provided a central power source for brokers and the floor of the stock exchange, and Henry van Hoveberg created an automatic unison adjustment for the ticker.
A young Thomas Edison was hired to manage a ticker repair operation after he was able to fix the machine at the Gold Exchange. In 1870, he circumvented Calahan’s patent and invented a “ticker that was used with improvements by the Big Board from the early eighteen-eighties until 1930 and by the American Stock Exchange until 1960,” according to a 1963 article in The New York Times.
By the turn of the 20th century, hundreds of tickers were at work throughout New York City, from the dining room of Delmonico’s to the bucket shops. Investors were able to track changing stock prices in something like real time, following their ticker machines with a fervor matched today by iPhone users tracking how many friends liked their Instagram photographs. When Daniel Drew, a well-known financier and railroad speculator, died in 1879, “his only possessions were a Bible, a sealskin coat, a watch, and a ticker,” according to the author Peter Wyckoff.
“The ticker, combined with the telegraph and the telephone, made time shrink: the investors couldn't let time pass before placing an order anymore, since this could mean losing money,” according to Professor Preda’s report.
Computerised trading of stocks, which took off exponentially in the 1980s, is often blamed for accelerating the Black Monday market crash of October 19, 1987. Regulators responded the next year by introducing new competition from more computerised trading and electronic exchanges.
But desktop day traders armed with real-time market quotes and business cable channels have been unable to compete with new powerful algorithms run on giant computers. Stock transactions are measured in microseconds, and they can be ordered and canceled faster than the “American Deer” could blink an eye.
After a spate of flash crashes, including the one in which Knight Capital recently lost $440 million, regulators are discussing steps that would reduce trading volume, including a transaction tax. Although not even the strongest critics of high-speed trading are calling for rules to turn back the clock to 900 characters a minute, there is a growing consensus that the potential negative consequences of raw speed need to be addressed for the good of the financial markets.
© 2012 The New York Times News Service
