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. Today's technological challenges are not unlike those faced by traders in the 19th century, whose jobs were revolutionized 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, Mr. Heath was reported by The New York Times to have been “as quick in his locomotion as in his operation.â€
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.
Mr. 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 typ e would not always print in unison resulting in a mash of letters and numbers.
Over the years, other inventors would improve on Mr. 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 Mr. 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 lik e 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.
Beyond speeding up trading, the new technologies spurred societal changes and helped women gain access to the market. In the summer of 1903, The New York Times reported that “women have been trading more extensively in stocks than ever before. This may be the results of the improvement of the telegraph and telephone communications in the country and in the mountains or it may be that in the rec ent excitement they have not been as careful to conceal their operations from idle curiosity seekers and gossips.†Women would not be allowed on the trading floor itself for another 40 years.
Over the decades, the ticker sped up and washed over popular culture. Mr. Edison's device spat out about one character a second. In 1886, office workers rained the contents of their tickers on a parade for the dedication of the Statue of Liberty. The glass-dome ticker, which went out of use in 1930, delivered 285 characters a minute.
The New York Stock Exchange introduced new black-box tickers in 1928 that printed out 500 characters a minute, but they were not fast enough to prevent the confusion that arose when the stock market crashed the next year. As brokers panicked, the tickers fell several hours behind rapidly deflating stock prices.
In 1963, a new electronic gray ticker was installed on the New York Stock Exchange that printed up to 900 characters a minute. T hat year, the width of ticker paper was expanded to an inch from three-quarters of an inch to accommodate the new machine's variable speeds.
The gray ticker, which still had a reporting lag of two to three minutes, would be the last mechanical stock ticker. It was replaced by computers that read market data from punch cards, and the reporting time was cut to seconds.
Computerized trading of stocks, which took off exponentially in the 1980s, is often blamed for accelerating the Black Monday market crash of Oct. 19, 1987. Regulators responded the next year by introducing new competition from more computerized 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,†as the celebrated stock runner William Heath was known, 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.
