shareholder research blog update, page-40

Wall Street's Race to the 48-Millisecond Trade

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.

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 recent 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. That 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" 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.



http://au.finance.yahoo.com/news/wall-streets-race-48-millisecond-182205957.html