The Past, Reimagined
By JASON ZWEIG
July 7, 2014 4:45 p.m. ET
Trading on the floor of the New York Stock Exchange has been revolutionized by the telegraph and telephone. Corbis
NEW YORK—The floor of the New York Stock Exchange is one of the most advanced technology centers on Earth.
The perimeter of the cavernous “Main Board” room is lined with telephones, where clerks take orders cascading into lower Manhattan from around the nation. The clerks scrawl the orders onto trade slips, which they stuff into pneumatic tubes that blast the slips across the floor to the horseshoe-shaped trading stations. When the trade is executed, often in a minute or less, the broker’s number is posted instantly overhead on the giant “annunciator boards” that line the walls of the exchange, signaling that he should pick up the telephone. Swarms of “telegraph boys” hover at each trading station, recording every transaction and sprinting to deliver them to the telegraph booths scattered around the floor.
Electricity has brought trading technology to a crescendo. Cyrus Field linked the U.S. to Europe with the undersea trans-Atlantic cable in 1866; stock tickers were introduced in 1867; telephones were installed at the NYSE in 1878. Today, it takes less than 30 seconds for the price of the latest trade to travel the 216 miles between the Boston Stock Exchange and the NYSE. From almost anywhere in the U.S. with telegraph service, an order can be sent to New York and confirmation of the executed trade received back in less than 90 seconds. Trades cross the Atlantic in under five minutes.
Never before has financial information been able to move at such speeds across such distances. Telegraph messages are much more expensive than the post—costing an average of 31.2 cents, while a letter costs two cents. But telegrams are well worth the price for those who need information to travel reliably, fast and far. Unlike messages delivered by post, where the whims of weather, road conditions and equine health can make arrival times unpredictable, the telegraph transmits information with remarkable speed—nearly 100% of the time. Western Union Telegraph Co. has 18,470 offices nationwide and has webbed the nation with 647,697 miles of wire, according to its president, Norvin Green.
As telegraphs, tickers and telephones have multiplied, many stock exchanges have disappeared. Over the course of this century, more than 200 regional exchanges have come and gone. By making price information available everywhere almost at the same instant, the telegraph has shot a bolt of sunshine into the markets, showing traders they could get better prices elsewhere and thereby putting many exchanges out of business.
Viewed this way, a stock exchange isn’t just a place where money changes hands. It is a supplier of information; its members are distributors of information. Prices have themselves become a tradable commodity—and they are most valuable to those who get them first.
To be sure, traders have always believed that the devil takes the hindmost. But the new electrical technologies have accelerated the pace and raised the stakes.
In 1790, when Alexander Hamilton proposed his plan to restructure the national debt, speculators cashed in by hiring sleek ships to sail south, outracing the spread of the news on land. That edge enabled the speculators to buy bonds at distressed prices from holders who were still in the dark.
Around 1835, Boston-based Associated Press reporter Daniel H. Craig began lugging crates onto steamships that had just arrived in Halifax, Nova Scotia, the first port of call from Europe. He immediately read and digested the most important financial news in the European newspapers on board, then recorded it in miniature handwriting on tissue paper. In his crates were carrier pigeons, to whose feet Mr. Craig strapped his tiny paper bulletins. After the steamships left Halifax and came within 50 miles of Boston, Mr. Craig released the trained birds. The pigeons then homed in on the AP office in Boston, delivering the news well before the ship arrived. Some subscribers paid up to $500 for each hour in advance they were able to get the news.
During the Civil War, brokers who weren’t members of the NYSE paid up to $100 per day for a prime position in the annex known as Goodwin’s Room. There they climbed a wooden stool and positioned an eye or ear at the keyhole of the closed door that led to the main board room where trading was underway. They relayed the quotes to their partners in Goodwin’s Room, who then traded on them before other outsiders could.
The stock ticker blew this world away. Invented by Western Union employee E.A. Calahan, it is essentially a telegraph that relays only one kind of message: securities prices.
Mr. Calahan capitalized his Gold and Stock Telegraph Co. in late 1867 with $200,000. He paid the exchange a sizeable sum for the exclusive right to post entry clerks around the NYSE floor to record and transmit the latest quotes, which his tickers then provided solely to his company’s clients. The company grew explosively, thanks largely to a young telegraph operator named Thomas Alva Edison, who tinkered ceaselessly to make the device faster and more reliable. In 1871 Western Union bought half the company for $1.25 million, a 1,150% increase of value in just four years.
The stock tickers of the late 1860s were powered by batteries that required four large glass jars filled with a noxious mixture of sulfuric acid, zinc and carbon. Twice a week, delivery boys for the ticker company lugged pails full of the fluid to recharge the batteries. As many Wall Street veterans still recall, spills and splashes in brokerage offices often ruined carpets, stripped the finish from furniture and corroded the clothing off anyone spattered by the fluid. Today, the batteries are centralized in a power station, making these mishaps a thing of the past.
In recent years stock tickers have blanketed the United States. In 1879, there were 1,574 tickers nationwide; today, there are roughly twice as many. John T. Denney, a broker in New York, thinks the spread of stock tickers to hotels, restaurants, cigar stores and other retail establishments has gone too far. “Indiscriminate distribution of stock quotations to every liquor-saloon and other places has done much to interfere with [nonfinancial] business,” he complained last month.
In 1873, brokers began leasing private telegraph lines to obtain pricing data faster and execute trades earlier. By 1881, a skein of private telegraph lines connected New York to Boston, Philadelphia and Chicago.
In 1883, when a rival ticker service, the Commercial Telegram Co., finally broke Gold and Stock’s stranglehold on the NYSE, the stock exchange was able to charge Commercial $1,500 a month for access to its trading floor. This year, the exchange itself began negotiations to take over Commercial and reorganize it as the New York Quotation Company, a subsidiary of the NYSE.
Among traders, the battle to beat the gun has never been more ferocious.
When recent rogue telegraph companies sprang up, according to Mr. Green of Western Union, “frauds were discovered in delivering to certain parties ahead of others, for which a consideration was supposed to be paid.”
On the floors of the NYSE and its rival the Consolidated Stock & Petroleum Exchange, “scalpers” specialize in trading small lots of shares at high speed “with the intention of undoing the transaction or closing out at a very small loss or profit,” says market analyst George Rutledge Gibson. A scalper, says Mr. Gibson, worries only about getting in front of the next trade and almost always closes out all his positions by the end of the day—meaning his maximum holding period is only a few hours.
The Public Grain and Stock Exchange, a Chicago-based bucket shop—or trading venue that caters to unsophisticated speculators—is said to spend some $200,000 annually to lease more than 100 telegraph circuits. The bucket shop is believed to obtain price quotations several minutes before the conventional ticker has distributed them. According to people familiar with the matter, that often enables the firm’s proprietors to profit by front-running, or trading ahead of, its customers’ transactions. PGSE executives declined to comment.
A source familiar with Western Union’s operations says that approximately half a dozen bucket shops in Chicago alone generate nearly $1 million a year in revenue from tickers and high-speed telegraph circuits for the communications giant. Western Union’s financial statements show a $646,042 “profit on private wires”—more than 10% of the company’s total net income.
According to Mr. Green of Western Union, 46% of the company’s message traffic over the past year has been “purely speculative,” relating to “stock-jobbing, wheat deals in futures, cotton deals in futures, the most active and exacting service there is.” That implies that $7.45 million of the company’s $16.2 million in messaging revenue comes from customers involved in speculation. Mr. Green also includes “pool rooms” in his total.
Mr. Green argues that farmers and artisans have no use for high-speed messages. “The telegraph is essentially an adjunct to commerce and speculation,” he says. “That is the nature of it.”
Wall Street analysts believe that the race to trade faster is bound to slow down eventually. None, however, will hazard a guess as to when that might be.
Source: The Wall Street Journal