Some High Speed Trading History

As the first U.S. Congress met in Federal Hall on Wall Street, rumors spread outside that they might fund worthless Revolutionary War bonds. Reacting quickly, speculators were said to have boarded fast boats for New Jersey (and beyond). Their goal was to purchase cheap war bonds from holders with no access to up-to-date news. The story ends with the speculators making huge money but being vilified as “rapacious wolves” who took advantage of the ignorant souls who owned the bonds.

For us though, the story is about information. Wherever we have financial markets, the speed with which investors secure information has affected their ability to profit.

There are some good speed stories.

Pigeons and Optical Networks

During the 19th century, investors used pigeons and optical networks for early access to information that they could use for trading decisions.

Pigeons

During the 19th century, the Rothschilds used homing pigeons to transport information. Written in coded Hebrew characters, information that no one else yet knew was flown to their offices in Vienna, London, Frankfurt, Paris and Naples. I’ve read that they used a code: “A B in our pigeon dispatches means buy stock, the news is good. C D … means sell stock the news is bad…” One legend has them learning about and profiting from Napoleon’s 1815 defeat at Waterloo 24 hours before the British government.

Optical Networks

The Chappe telegraph was a system spaced every 10 or 20 miles composed of telescopes on towers that had wooden arms with seven positions (users had a code book). First located between Paris and Bordeaux, the network passed along information from station to station. Whereas the trip between the two cities could take several days, the signal reached its destination in hours. In the U.S. during the 1840s, this sort of optical network was used to convey stock and bond prices between New York and Philadelphia.

Our Bottom Line: Information Asymmetry

As an investor, being able to benefit from little known information just means beating how fast the news travels. Centuries ago, pigeons came in handy. Now we have computers doing high speed trading. Both though facilitate an information asymmetry through which one group of investors profits from knowing more than anyone else.