speed trading in financial markets

High-frequency trading (HFT) by computer replaced trades on traditional exchange floors a decade ago, and the speed of trading is fast approaching the speed of light. The increased speed of transactions makes it difficult to make money trading equities and bonds. In addition, financial markets are increasingly vulnerable to flash crashes such as the one experienced in May of 2010.

The following timeline, from a Big Read column in the Financial Times, summarizes the accelerating pace of trading since a telegraph cable was first laid beneath the English Channel in 1851. (Much of the early history is left out, including a successful transatlantic cable, laid in 1866 between England and the USA.)

Moments in speed trading

1851 — Paul Julius Reuter begins sending stock market quotations between London and Paris via a cable beneath the English Channel, having previously deployed pigeons to carry stock prices in Europe.

1990s — The rise of electronic marketplaces such as Archipelago, acquired by the New York Stock Exchange, Island ECN, now a part of Nasdaq, and Globex at the Chicago Mercantile Exchange enable algorithms to read market data and automatically execute trades.

2000 — Decimalisation of US stock prices allows investors to buy and sell in penny increments, cutting the price spreads that underpinned profit margins for market-makers and encouraging traders to increase volumes to make up the difference.

Mid-2000s — Exchanges let traders pay to co-locate computers inside data centres, enabling them to receive and act on market data faster than those outside.

2005 — Regulation National Market System in the US increases competition among stock trading venues and turbocharges a race for the fastest technology between exchanges.

2010 — Spread Networks opens a fibre-optic link between New York and Chicago, reducing round-trip latency to 13.3 milliseconds, or thousandths of a second. Speeds are soon eclipsed by microwave networks that convey market data in about 8 milliseconds.

2012 — An electronic trading glitch causes Knight Capital to mistakenly purchase billions of dollars of shares in 148 NYSE stocks, causing more than $400m in losses and precipitating its takeover by Getco, a rival HFT company. The merged company, KCG Holdings, was later acquired by Virtu Financial.

2018 — Go West to go live between Chicago and Tokyo, speeding the flow of futures-market data over wireless towers, fibre-optic lines and submarine cables. It is a joint venture of big trading firms such as DRW, IMC and Jump Trading.

Gregory Meyer, Nicole Bullock and Joe Rennison, “How high-frequency trading hit a speed bump“, The Big Read, Financial Times, 2 January 2018 (gated paywall).



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