Chapter 01 – An Illustrated History of Wired Markets

An Illustrated History of Wired Capital Markets

“Progress might have been all right once, but it has gone on too long.” — Ogden Nash

This chapter is based on a number of ever-evolving dinner and lunch talks I have given over many years, all called “Nerds on Wall Street” irrespective of their actual subject. Many financial conference speakers, including those talking to mixed professional/spousal audiences after open-bar events, are deadly dull; hardly anyone really wants to see yield curves over dessert and that last glass of wine. I started collecting photographs about markets and technology in the early 1990s, and tried to mix in some actual informative content. That, along with the natural sensibilities of a borscht belt comic, made me a popular alternative to the yield curve guys. Given the 20-minute rule for these talks, none of them were as voluminous as this chapter. Still, this is not intended in any way to be a complete history of market technology, but rather an easily digestible introduction. I occasionally still do these talks on what remains of greater Wall Street. I am also open to weddings, quinceañeras, and bar mitzvahs, since we all need diversified portfolios these days.

Looking into the workings of modern securities markets is like looking under the hood of a Prius hybrid car. There are so many complex and obscure parts it’s hard to discern what’s going on. If you look under the hood of an auto from a simpler era, for example a ’64 Mustang, you can see the parts and what they do, and have a better chance at understanding their complex modern replacements.

History repeats and informs in market technologies. From the days when front-running involved actual running to the “Victorian Internet era” brought on by telegraphy, we can learn a great deal from looking back at a simpler era.

Many technological innovations and stock trading systems remade Wall Street before computers.

We think that the overwhelming influence of computers remaking the landscape around Wall Street today is something new, but a pair of before-and-after photographs show an even more dramatic technological invasion. Before telegraphy, in the 1850s, the sky over Wall Street was open and clear.

It took only a short time for telegraphy’s compression of time and space to transform the scenery. Here’s what the Street looked like shortly thereafter when everybody had to have it. In its day, telegraphy was seen as the same kind of overwhelming transformation that the Internet is today. In many ways, the telegraph was more dramatic since it was the first time in human history that a message could be sent beyond the horizon instantaneously.

Technological transformations create problems. If we are lucky, more technology solves them.  Changes in markets brought about by technology are anything but subtle: The exchange floor in Tokyo closed down and was replaced by electronics in 1998. Here’s an earlier example, the London Stock Exchange trading floor the day before.

. . . . . . and the day of the introduction of screen trading-the so-called Big Bang-on October 27, 1986. You could have gone bowling and no one would have noticed.

Securities trading floors emblematic of world financial markets are an endangered species.

The trading floors that have been emblematic of financial markets around the world are an endangered species. Brokers and traders who used to rely on fast reflexes and agile elbows and knees now rely on computer programs, tweaked to be milliseconds faster than the next guy’s program.

Clearing the floor and rolling in the machines has a sentimental cost. When markets become technology, the human price of progress is high. Anyone who has been on the floor in New York or Chicago knows our markets are really personal, face-to-face, elbow-to-elbow, and knee-to-knee experiences. People are justifiably worried that when too much technology gets mixed up with markets, we’re going to lose some of the vibrancy that makes them so fascinating.

I have to admit, I’m a little sad when I hear about an exchange floor closing and being replaced by some screen trading system. Let’s face it. Having all those real traders in one place provides a sense of community and continuity. A trading floor peopled with traders and brokers also makes for some colorful moments in market history.

There’s so much technology in modern markets that it’s easy to forget that some of our favorite markets, like the New York Stock Exchange (NYSE), started out as very low-tech places. In 1792, the New York Stock Exchange was a bunch of guys standing around a buttonwood tree at 68 Wall Street shouting at each other on days when it didn’t rain or snow.

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Notes:

1. Jargon watch: Brokers are the “sell side,” while investors are the “buy side.” What they buy is execution services. This includes selling securities as well as buying them. “Bagging” refers to any economic screwing of the customer. Specialists were the central traders on the NYSE, and could easily use any number of shady tactics to their advantage at the expense of the customer (e.g., selling out their inventory to a customer while holding a large sell order at a better price in their pocket). Specialists and market makers have been essentially replaced by computers, first by the fast hedge funds exploiting new “maker and taker” markets. In 2008, the NYSE retired the “specialist” term itself, replacing it with “designated market maker.”

2. An excellent book comparing the development of the telegraph with the modern Internet is The Victorian Internet by Tom Standage (New York: Berkley Classics, 1999).

3. As is almost everything else. See Blown to Bits: Your Life, Liberty and Happiness after the Digital Explosion by Hal Abelson, Ken Leeden, and Harry Lewis (Boston: Addison – Wesley, 2008).

4. Garry Kasparov, “An Interview with Garry Kasparov,” IBM Research: Deep Blue, www.research.ibm.com/deepblue/meet/html/d.1.6.shtml .

5. Feng-Hsiung Hsu, Behind Deep Blue (Princeton, NJ: Princeton University Press, 2004).

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