On January 28, 1790, Representative James Jackson of Georgia rose and spoke in the then very-young House of Representatives, meeting in New York City. Hispurpose:
to denounce high-speed traders.
“Three vessels, sir,” Rep. Jackson thundered, “have sailed within a fortnight from this port, freighted for speculation;
they are intended to purchase up
the State and othersecurities in the hands of the uninformed…
”Jackson railed against
these men, calling them “rapacious
wolves…preying upon the misfortunes
of their fellowmen,taking an undue advantage of their necessities.”
What terrible crime did these men commit? Murder? Treason? Hardly. Jackson and his fellow
Congressmen were debating a proposal by Secretary of the Treasury Alexander
Hamilton that the then-new US
government should assume the old
debts that the states and the
Continental Congress incurred during the Revolution, a proposal
that became known as the Funding
Act of 1790. Traders who had heard
of the deliberations immediately
chartered fast-moving boats to
front-run messengers and began buying
up the old debt, reasoning correctly that
passage of the Act would raise the
market value of the old debt, which was
trading in some cases at 10% or less of its
face value.
Jackson was outraged; he demanded that Congress take action to “save the
distant inhabitants from being
plundered by these harpies.” The
“distant inhabitants” Jackson was
referring to were his constituents in
Georgia; although, in a sense, we
are Rep. Jackson’s distant inhabitants, still
praying to be saved from the harpies. Railing
against informational advantages that
“speculators” possessed was a common
feature of American life from the
founding of the country right up to the
present day. Today, many complain that
“high-frequency traders” who employ mathematical
algorithms have unfair advantages
over those whose algorithms are
not as good, or who have trading systems that
are faster than theirs.
From the outset, there was a deep and abiding
suspicion of the broker, who, for a price, was willing to buy or sell your
stock, bond or commodity. It was a suspicion that these middlemen knew
something that buyers and sellers did not. True or not, these complaints
underscore a larger historical fact: any technology that increased the speed of
information flow was immediately adopted by the trading community in both
Europe and the United States. Traders have employed every known conveyance to
trade faster and cheaper. They were among the earliest adopters of faster
boats, faster stagecoaches and private horse expresses. The trading of securities
was among the very first uses of the telegraph.
The adoption of these high-speed trading techniques
had two characteristics:
1) they greatly reduced the price differences between
markets, and 2) those who were slower to adopt bitterly complained that the new
technologies offered unfair advantages to the participants.
Then, as now, the buying and selling public—and
the government—were desperate to keep up. Congress established the US Postal
Service in 1792 specifically for the “conveyance of information” into “every
part of the Union.” By establishing low rates for the transmission of
newspapers that contained market-sensitive
information, it was hoped that citizens could
be quickly apprised of market-moving events and stay ahead of the “harpies.”
But speculators were far quicker than newspapers.
In 1817, when a ship arrived in New York from London with news that caused a
sharp rise in stocks, three speculators jumped on a stagecoach for Philadelphia
to buy up stocks. Thanks to greatly improved highways, the time to travel between
New York and Philadelphia had been cut to under two days, creating a lively arbitrage
in stock trading between the Philadelphia Stock Exchange (founded 1790) and the
early version of the New York Stock Exchange (founded 1792).
When the stagecoach broke down, they hired
their own coach and arrived in Philadelphia before the broken coach arrived with
the news. They immediately bought stock, and when the mail arrived
the prices jumped in value. Those left out insinuated
that the speculators had paid the stagecoach driver to delay the mail. Traders
quickly set up networks of speedy “private expresses” along the newly-created networks
of turnpikes and expanded postal roads, from New York to New Orleans. By 1825, Postmaster
General John McLean, outraged by speculation in the cotton market, attempted to
convince Congress to shut down these high-speed trading networks and set up a
government system that conveyed newspapers at the same speed as letters to thwart
speculators. “On all the principles of fair dealing,” McLean wrote, “the holder
of property should be apprised of if its value before he parts with it…To purchase
an article at one-half or two-thirds of its value, which is known to the buyer,
but carefully concealed from the seller, is in opposition both to the
principles of law and sound morality.” So serious was the government’s attempt to shut down high-speed couriers that the US Post
Office operated a high-speed horse express from 1836 to 1839 linking New York and
New Orleans that transmitted news reports to journalists on lightweight tissue
paper rather than far more costly newspapers.
Traders, ever desperate for a trading edge,
soon cut the time gap dramatically—they cut out the horse and stagecoach!
In the late 1830s, Philadelphia broker William
C. Bridges operated a private signal station between New York and Philadelphia
which disseminated stock market news to him and his backers (and to no one else).
The signals were transmitted through an “optical telegraph,” which consisted of
a series of boards on a pole, mounted on hills that could be seen by a telescope.
Reports indicated that it could transmit stock information from New York to Philadelphia
in anywhere from 10 to 30 minutes. In the 1830s that was highspeed trading!
Not surprisingly, there were complaints from
New York speculators not part of the scheme, who had up to this time enjoyed a
substantial trading advantage. The locals in Philadelphia were not happy
either.
When the system was shut down after the arrival
of the telegraph in 1846, a local newspaper account recounted that “many mysterious
movements in the Philadelphia stock and produce market were laid at the door of
the speculators who worked the telegraph. No doubt the speculators paid them
well.”
No doubt. Unfortunately, the “organized” trading
community did little to foster transparency. In the early days of its
existence, the NYSE (then known as the New York Stock and Exchange Board)
barred
the public from listening in on its trading sessions
(sessions would not be open to the public until 1869). Competing traders (curb traders,
who literally operated outside) who wanted to trade off the NYSE’s trades were furious
that they could not get proximity to the exchange. In 1837, the NYSE discovered
that the curb traders had drilled a hole in the brick wall of its building in
order to eavesdrop on the trading.
Just as the public was debating how to outwit
high-speed horses, a new technology came on the scene that would transform trading
into a truly high-speed endeavor: the telegraph, which came into use after
1844.
It was the greatest invention of its age. Newspapers
took time to get out and for the most part operated only at fixed intervals.
But the telegraph operated at all hours and could be used for private
communications. It was a high-speed trader’s dream come true. The first
customers were stock brokers
and lottery speculators. On March 3, 1846, the
New York Herald reported that “certain parties in New York and Philadelphia were
employing the telegraph for speculating in stocks.”
Predictably, there was great indignation at the
use of the telegraph to transmit “secret intelligence.” Several early inventors
of the telegraph were persuaded to abandon their endeavors when warned
that they could be prosecuted for circulating
information in advance of the mail. The principal inventor of the telegraph,
Samuel F.B. Morse, was in favor of a hybrid public/private takeover of the entire
telegraph business specifically to guard against speculative abuse. It was all for
naught. Congress ultimately declined to take over the telegraph system, partly
because competition for market-moving information and the limited wires space
then available was intense. That competition emerged not only among traders but
among their biggest competitor: the press.
The early 1800s saw the birth of the modern newspaper
industry, and much of the purpose of those early papers was to get financial
news out more quickly. James Gordon Bennett Sr., who in 1835 founded
the New York Herald, one of the country’s first
“penny” newspapers, emphasized that the emerging press would break the
information monopoly of the few: “Speculators should not have the advantage of earlier
news than the public at large,” he proclaimed.
Suddenly, newspapers had boats. And optical
telegraphs. The Journal of Commerce, founded in 1827 to cater to the financial community,
kept deepwater boats to meet ships arriving from abroad. An optical
telegraph system similar to the private one operating
between Philadelphia and New York operated between Sandy Hook, New Jersey, and
New York City to inform the editors when ships were arriving.
The Journal of Commerce and its rival, The
Courier and Enquirer, even established rival pony expresses that ran between New
York and Philadelphia, and, later, to Washington. Even the pigeons were dragged
into the competition: one group of penny newspaper owners paid $2,000 for a fleet
of carrier pigeons to send news between Philadelphia, Washington and Baltimore.
Traders, however, had plenty of help, for a
price. One news entrepreneur, Daniel C. Craig, made a fortune selling
information on European news to traders. Using a combination of pigeons and
express couriers, he got news from European steamers which had just sailed into
Halifax harbor in Nova Scotia to Boston before anyone else. The information was
then sent to New York via telegraph.
Craig was so effective in gathering information
ahead of others he was later hired by the newly-formed New York Associated Press.
The press was apoplectic about traders and the agents who supplied
them with information. There was particular anger
directed against telegraph operators who were believed to have close relationships
with traders; editorials railed against the telegraph’s potential for falling “in
the hands of bad men.”
Receiving information first was so valuable that
some speculators, at times in cahoots with telegraph operators, were willing to
cut the telegraph wire after the news had been received!
Because telegraph operators were among the
first to receive tradable news, some operators cut out the speculators
altogether and went into business for themselves.
This continued for decades: when the Civil War
broke out, several Western Union employees made a fortune in the gold markets
by leveraging their advance knowledge of war news.
Forty years later, the telegraph was still a
stock speculators’ realm. In 1887 the president of Western Union said 87% of
the company’s revenue came from stock and commodity speculators, and from
racetrack gamblers.
Getting a faster boat across the Atlantic was
even more lucrative for traders. In the middle of the 19th century, it took eight
days to cross the Atlantic, and any person who could get important news across
the ocean more quickly could profit from it. In one extreme example, when it
became known in New York City in 1865 that the South had lost the war,
financier Jim Fisk chartered several ships that were faster than the mail ships
then in use and sailed them to London with orders to his brokers to sell short
Confederate bonds. When the news became known in London that the South had lost,
the price of the bonds went to zero, and Fisk of course made a fortune. Just as
the telegraph had been eagerly adopted by stock traders in the United States,
stock trading and other commercial uses were among the first uses of the and
forth between the trading floor and the offices of brokerage firms. It was an enormous
advance over the telegraph for several reasons: 1) traders no longer needed to
be physically present on exchange floors; 2) it reduced transaction costs; 3) it
enabled the dissemination of continuous, real time information; and 4) it cut
out pesky intermediaries like telegraph operators and newspaper editors.
Not surprisingly, journalists and newspaper editors
began to worry that the ticker might put them out of the lucrative business of
financial news.
Thomas Edison did not invent the ticker, but he
made several crucial improvements, including the invention in 1873 of the
quadruplex, which allowed four messages to travel simultaneously over one wire.
Western Union put this excess capacity to good use: they leased the lines to
private networks controlled by Wall Street firms. The firms were connected to
their branch offices by these private telegraphs in Boston and Philadelphia by
1879, and to Chicago by 1881. These private wires were faster than the “public”
telegram. They were also more reliable and provided confidentiality.
And Wall Street gladly paid up, because getting
access to trading data as fast as possible was, as always, crucial to
profitable trading: by 1894, brokers at the Boston
Stock Exchange knew of trades at the NYSE
within 30 seconds.
The stock ticker also initiated a new wave of
stock market speculation, this time led by working class investors who began
speculating through the newly-created bucket shops, which had also hooked up to
ticker machines. Professional traders, who had heretofore enjoyed an enormous
information advantage, bitterly complained: “indiscriminate distribution of
stock quotations to every liquor-saloon and other places has done much to
interfere with business,”
New York broker John T. Denney said in 1889.
“Any person could step in a saloon and see the quotations.”
Though bucket shops were mostly scams (there
was no actual transfer of stock, so “investors” were merely betting against the
bucket shop operator), many paid top dollar for fast telegraph services; in
1887 the NYSE discovered that one Chicago bucket shop was getting stock
quotations several minutes earlier than the “regular” ticker service, thanks to
assistance from Western Union.
It went on like this, through the development
of the specialist system in the 1860s, the invention of the telephone (first tested
by Bell in 1876; there was a phone on the NYSE floor by 1878), pneumatic tubes
shortly thereafter, the computer in the 1950s, computer-readable cards in the 1960s,
the early development of electronic trading when the Nasdaq began operation in
1971 and algorithmic trading in the 1990s.
It was the same argument: some were getting information
ahead of others, and others were able to execute trades because they had a
faster boat/horse/carriage/telegraph line/computer link/algorithm.
Source : habrahabr.ru
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