Betting on the activities of the financial market—what we know today as stock trading—dates back centuries, if not longer. In the 1600s, for example, small groups of people would gather at coffee shops to bid on the prices of commodities, bonds, and stocks, at a time when newspapers were one of the best ways to get that information. With the advent of communications technologies, however, participation increased in these financial tradings, leading to more competition in the market and the need for higher speed to get trades done.
In the 1790s, optical telegraphs—in this case, signaling with semaphores—began to offer the speediest method of conveying financial or other information. These telegraphs [left] would relay a message according to the position of one or more movable arms on top of circular stone towers. Operators would change the positions of the semaphore arms to spell out messages. The towers were spaced within line of sight, up to a few kilometers apart, and could transmit a message from, for example, Lille, France, to Paris—a distance of 230 kilometers—in about an hour. An operator atop each tower would peer through a telescope at the tower “behind,” then set his semaphore and its 2-meter-long arms to replicate the positions he saw.
By 1824, Claude Chappe, who had developed the French optical telegraph network, was promoting the idea of transmitting the prices of goods and services over the optical telegraph. The French optical telegraph operators, les stationnaires, were poorly paid and notoriously susceptible to bribery, which sometimes meant giving unauthorized access to the semaphore codebook. Anyone with a telescope and access to the book could translate the message for themselves. Trading became even more popular with the boom of the California Gold Rush of 1849 and several decades later, the increase in goods such as wheat.
A BETTER CONNECTION
With the advent of the electric telegraph in the late 1830s, messages traveled faster and more privately. Telegraph companies provided ticker services to brokerages for a fee. The stock ticker [below], invented by Edward Calahan in 1867, transmitted stock quotes to brokerages as soon as they were available. The tickers had a 32-character wheel that had to rotate through all the letters and numbers to type and print the stock symbols, which caused a delay in receiving the information. One way for traders to get ahead of the ticker was to employ their own telegraph operator to relay the quotes, or to bribe one to transmit quotes ahead of other customers.
Prior to the ticker, stocks had been traded at set hours rather than throughout the trading day. At the New York Stock Exchange, for example, the hours were set at 10:30 a.m. and 1:00 p.m. The president of the exchange would simply gather the sellers’ shares and auction them to the highest bidder. After the ticker was introduced, trading became an all-day affair.
There were also so-called “bucket shops,” which became popular in the 1880s. These shops were not set up to buy and sell stock; instead, they allowed clients to place bets against the movements of stocks or commodities. They leased private telegraph wires and sometimes tapped the telegraph ticker lines serving legitimate brokerages to learn of prices in advance. Often they might obtain commodity, stock, and bond quotations several minutes ahead of Western Union’s regular ticker service. One method was to have someone on the floor of an exchange telephone the quotes. This was illegal and expensive, but faster than the tickers.
By the 1980s, fast computer trades could take advantage of momentary discrepancies in the prices of a stock or a commodity on exchanges in different parts of the world.
As the volume of trading increased, the advantage of even the slightest bit of speed helped increase the possibility of a profit. Today that advantage, measured in milliseconds, is referred to as low-latency trading. Having access to a commodity’s or stock exchange’s quotation system through a fast connection to a trading platform— which is even faster when it is physically closer to the exchange—can result in even a microsecond advantage to fill an order. It also gives the trader the ability to take advantage of price variations through computer trading.
As an indication of the worth of these milliseconds for traders, Hibernia Atlantic Co., a provider of telecommunications services based in Dublin, is working on what it calls the Project Express. The company will use transatlantic fiber optic cables to reduce signal latency by 5 milliseconds (from 65 ms to 60 ms) for a round trip among the financial centers, including London, New York City, and Toronto. The anticipated cost is US $300 million.
As technology continues to reduce the time difference, every little millisecond will become that much more valuable.
Robert Colburn gratefully acknowledges the assistance of David Hochfelder in writing this article. Hochfelder’s book, The Telegraph in America [Johns Hopkins University Press, 2012], contains a chapter on the stock ticker and telegraph, and their effects on financial markets.