Where does real-time trading have its origins?
Perhaps as early as 1815. As the Battle of Waterloo raged, Nathan Rothschild was able to get advanced information on how it was progressing from his network of agents. With the London Stock Exchange on tenterhooks, he learned of Wellington’s victory hours before anyone else, and quickly began dumping stocks onto the market. Other traders, assuming he knew Wellington had lost, followed his lead, drastically reducing the value of stocks. Rothschild then began snapping them up at rock-bottom prices, making himself a fortune when the information that he already knew filtered through to London: Wellington had won.
This celebrated instance of an investor using advanced knowledge to give himself the edge over the stock market has now become the norm. Except that instead of using carrier pigeons, and ships as the Rothschilds had to, the traders and investors of today use masses of data and often complex algorithms via electronic platforms, what is known as High Frequency trading (HFT).
How did we get from there to here?
The 1800s and the Victorian Internet
During the nineteenth century there were four significant technological advances that revolutionised the industry.
In 1844, the first overland electrical telegraph was sent in the USA by Samuel Morse: “WHAT HATH GOD WROUGHT”. With the ability to transmit information across the country within moments, traders could quickly learn yields of grain or wheat, for example, and buy or sell accordingly.
22 years later, in 1866, the first transatlantic cable between New York and London was laid. Enabling the momentary transfer of information across continents, it is also considered by some as the Victorian internet, since early forms of social networking, spam and e-commerce took place along it.
The following year, the stock ticker came along, transmitting rapid snippets of financial information over the telegraph. Until computers took over a century later, the stock-ticker was the pre-eminent form of information technology on the trading floor.
1878 saw another revolutionary piece of technology shake up trading – the first telephone was installed on the floor of the New York Stock Exchange. Communication between buyers and sellers and those in-between was now near-instantaneous.
￼The 1900s and how computers took over the world
Between 1878 and the late 1960s, various technological advances took place, but these were mainly to do with sharpening up the abilities of the various tools already in use, such as the electrical telegraph and the stock ticker machines.
By now though, the financial services industry was taking note of the possibilities offered by computing technology, and it wasn’t long before traders were leaving the floor in droves, and positioning themselves behind monitors instead.
And rumbling away in the background was a technology that would soon transform the entire world.
The internet was approved for commercial purposes in 1995. It completely disrupted the traditional practises of investing – corporate information was immediately available, adding greater transparency to the market; the range of brokerages expanded and fees shrank, and it put far more power in the hands of the individual.
Then, in 1998, came the ATS (Alternative Trading Systems) Regulation, which allowed for electronic trading venues away from regular exchanges. This opened the door for high-frequency trading which in the next century came to dominate the market. Today, around 80% of US stocks are traded on high-frequency platforms.
The 2000s and the rise of social media
By now the velocity of change in the financial services industry was unparalleled. In 2001, such were the advances of technology that a group of researchers from IBM found that electronic trading platforms were able to outperform humans in trades.
Computers were able to interpret patterns, converting them in fractions of a second into usable data, then making instantaneous trades. As it grew in popularity, social media became to be seen as a potentially useful tool.
Twitter, launched in 2006, enabled traders and investors to access real-time information on a huge volume of subjects, though not always with credible insight. In 2013 a Tweet sent from a hacked Associated Press account announced a terrorist attack on the White House. Whilst completely false, in the time before it was officially discredited the markets descended into chaos, with investors only able to watch as millions of dollars were wiped off the Dow by automated trades.
In 2013, SEC (Securities and Exchange Commission) issued new advice that made it clear that listed companies could use social media outlets like Facebook and Twitter to make company announcements. This was a new alignment with the Regulation Fair Disclosure that investors have been alerted with relevant news and followed on from their 2008 updates to allow for company information to be distributed via websites.
Today, an increasing amount of trades take place in microseconds, as traders and investors struggle to find ways of getting ahead. But when invalid, damaging information can be disseminated so quickly, the risks involved will increase just as fast.
Background and context are key and the smart investor will seek equally smart tools.
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London Stock Exchange
Economic History Association
The Rise Of Computerized High Frequency Trading: Use And Controversy – McGowan, M, 2011, Duke University of Law