Plundered by Harpies An Early History of High-Speed Trading
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Plundered By Bob Pisani
On January 28, 1790, Representative
by Harpies
James Jackson of Georgia rose and spoke
in the then very-young House of Repre-
sentatives, meeting in New York City. His
purpose: to denounce high-speed traders.
“Three vessels, sir,” Rep. Jackson thun-
dered, “have sailed within a fortnight from
this port, freighted for speculation; they are
intended to purchase up the State and other
securities in the hands of the uninformed…”
An Early History of Jackson railed against these men, call-
ing them “rapacious wolves…preying
High-Speed Trading upon the misfortunes of their fellow-
men, taking an undue advantage of their
necessities.”
What terrible crime did these men
commit? Murder? Treason?
Hardly. Jackson and his fellow Con-
gressmen were debating a proposal by
Secretary of the Treasury Alexander Ham-
ilton that the then-new US government
should assume the old debts that the states
and the Continental Congress incurred
during the Revolution, a proposal that
became known as the Funding Act of 1790.
Traders who had heard of the delibera-
tions immediately chartered fast-moving
boats to front-run messengers and began
buying up the old debt, reasoning cor-
rectly that passage of the Act would raise
the market value of the old debt, which
was trading in some cases at 10% or less of
its face value.
Jackson was outraged; he demanded
that Congress take action to “save the dis-
tant inhabitants from being plundered by
these harpies.” The “distant inhabitants”
Jackson was referring to were his con-
stituents in Georgia; although, in a sense,
we are Rep. Jackson’s distant inhabitants,
still praying to be saved from the harpies.
Railing against informational advan-
tages that “speculators” possessed was a
common feature of American life from
the founding of the country right up to
the present day. Today, many complain
that “high-frequency traders” who employ
mathematical algorithms have unfair
advantages over those whose algorithms
are not as good, or who have trading sys-
Museum of American Finance
tems that are faster than theirs.
Uniformed NYSE trading floor clerks
gathered around a stock ticker, ca. 1915.
20 FINANCIAL HISTORY | Fall 2014 | www.MoAF.orgFrom the outset, there was a deep and information, it was hoped that citizens conveyed newspapers at the same speed as
abiding suspicion of the broker, who, for a could be quickly apprised of market-mov- letters to thwart speculators. “On all the
price, was willing to buy or sell your stock, ing events and stay ahead of the “harpies.” principles of fair dealing,” McLean wrote,
bond or commodity. It was a suspicion But speculators were far quicker than “the holder of property should be apprised
that these middlemen knew something newspapers. In 1817, when a ship arrived of if its value before he parts with it…To
that buyers and sellers did not. in New York from London with news that purchase an article at one-half or two-thirds
True or not, these complaints under- caused a sharp rise in stocks, three specu- of its value, which is known to the buyer,
score a larger historical fact: any technol- lators jumped on a stagecoach for Phila- but carefully concealed from the seller, is in
ogy that increased the speed of informa- delphia to buy up stocks. Thanks to greatly opposition both to the principles of law and
tion flow was immediately adopted by the improved highways, the time to travel sound morality.”
trading community in both Europe and between New York and Philadelphia had So serious was the government’s attempt
the United States. Traders have employed been cut to under two days, creating a to shut down high-speed couriers that
every known conveyance to trade faster lively arbitrage in stock trading between the US Post Office operated a high-speed
and cheaper. They were among the earli- the Philadelphia Stock Exchange (founded horse express from 1836 to 1839 linking
est adopters of faster boats, faster stage- 1790) and the early version of the New New York and New Orleans that transmit-
coaches and private horse expresses. The York Stock Exchange (founded 1792). ted news reports to journalists on light-
trading of securities was among the very When the stagecoach broke down, weight tissue paper rather than far more
first uses of the telegraph. they hired their own coach and arrived costly newspapers.
The adoption of these high-speed trad- in Philadelphia before the broken coach Traders, ever desperate for a trading
ing techniques had two characteristics: arrived with the news. They immediately edge, soon cut the time gap dramati-
1) they greatly reduced the price differ- bought stock, and when the mail arrived cally — they cut out the horse and stage-
ences between markets, and 2) those who the prices jumped in value. Those left out coach! In the late 1830s, Philadelphia bro-
were slower to adopt bitterly complained insinuated that the speculators had paid ker William C. Bridges operated a private
that the new technologies offered unfair the stagecoach driver to delay the mail. signal station between New York and
advantages to the participants. Traders quickly set up networks of speedy Philadelphia which disseminated stock
Then, as now, the buying and selling “private expresses” along the newly-created market news to him and his backers (and
public — and the government — were des- networks of turnpikes and expanded postal to no one else). The signals were transmit-
perate to keep up. Congress established roads, from New York to New Orleans. By ted through an “optical telegraph,” which
the US Postal Service in 1792 specifically 1825, Postmaster General John McLean, consisted of a series of boards on a pole,
for the “conveyance of information” into outraged by speculation in the cotton mar- mounted on hills that could be seen by a
“every part of the Union.” By establishing ket, attempted to convince Congress to telescope. Reports indicated that it could
low rates for the transmission of news- shut down these high-speed trading net- transmit stock information from New
papers that contained market-sensitive works and set up a government system that York to Philadelphia in anywhere from 10
Map showing the location of the transatlantic cable between New York and London.
www.MoAF.org | Fall 2014 | FINANCIAL HISTORY 21to 30 minutes. In the 1830s that was high-
speed trading!
Not surprisingly, there were complaints
from New York speculators not part of the
scheme, who had up to this time enjoyed
a substantial trading advantage. The locals
in Philadelphia were not happy either.
When the system was shut down after
the arrival of the telegraph in 1846, a local
newspaper account recounted that “many
mysterious movements in the Philadel-
phia stock and produce market were laid
at the door of the speculators who worked
the telegraph. No doubt the speculators
paid them well.”
No doubt. Unfortunately, the “orga-
nized” trading community did little to foster
transparency. In the early days of its exis-
tence, the NYSE (then known as the New
York Stock and Exchange Board) barred
the public from listening in on its trading
sessions (sessions would not be open to the
public until 1869). Competing traders (curb
traders, who literally operated outside) who
wanted to trade off the NYSE’s trades were
furious that they could not get proximity to
the exchange. In 1837, the NYSE discovered
© Chris Hellier/Corbis
that the curb traders had drilled a hole in
the brick wall of its building in order to
eavesdrop on the trading.
Just as the public was debating how
to outwit high-speed horses, a new tech-
Communications experiment using carrier pigeons, 1898.
nology came on the scene that would
transform trading into a truly high-speed
endeavor: the telegraph, which came into entire telegraph business specifically to financial community, kept deepwater boats
use after 1844. guard against speculative abuse. to meet ships arriving from abroad. An opti-
It was the greatest invention of its age. It was all for naught. Congress ulti- cal telegraph system similar to the private
Newspapers took time to get out and mately declined to take over the tele- one operating between Philadelphia and
for the most part operated only at fixed graph system, partly because competition New York operated between Sandy Hook,
intervals. But the telegraph operated at for market-moving information and the New Jersey, and New York City to inform
all hours and could be used for private limited wires space then available was the editors when ships were arriving.
communications. intense. That competition emerged not The Journal of Commerce and its rival,
It was a high-speed trader’s dream come only among traders but among their big- The Courier and Enquirer, even established
true. The first customers were stock bro- gest competitor: the press. rival pony expresses that ran between
kers and lottery speculators. On March 3, The early 1800s saw the birth of the New York and Philadelphia, and, later,
1846, the New York Herald reported that “cer- modern newspaper industry, and much of to Washington. Even the pigeons were
tain parties in New York and Philadelphia the purpose of those early papers was to dragged into the competition: one group
were employing the telegraph for speculat- get financial news out more quickly. James of penny newspaper owners paid $2,000
ing in stocks.” Gordon Bennett Sr., who in 1835 founded for a fleet of carrier pigeons to send news
Predictably, there was great indigna- the New York Herald, one of the country’s between Philadelphia, Washington and
tion at the use of the telegraph to transmit first “penny” newspapers, emphasized that Baltimore.
“secret intelligence.” Several early inven- the emerging press would break the infor- Traders, however, had plenty of help,
tors of the telegraph were persuaded to mation monopoly of the few: “Specula- for a price. One news entrepreneur, Daniel
abandon their endeavors when warned tors should not have the advantage of C. Craig, made a fortune selling informa-
that they could be prosecuted for cir- earlier news than the public at large,” he tion on European news to traders. Using a
culating information in advance of the proclaimed. combination of pigeons and express cou-
mail. The principal inventor of the tele- Suddenly, newspapers had boats. And riers, he got news from European steamers
graph, Samuel F.B. Morse, was in favor optical telegraphs. The Journal of Com- which had just sailed into Halifax harbor
of a hybrid public/private takeover of the merce, founded in 1827 to cater to the in Nova Scotia to Boston before anyone
22 FINANCIAL HISTORY | Fall 2014 | www.MoAF.orgelse. The information was then sent to transatlantic cable. The first successful by Wall Street firms. The firms were con-
New York via telegraph. cable came into use in 1866 between New nected to their branch offices by these pri-
Craig was so effective in gathering York and London and greatly reduced the vate telegraphs in Boston and Philadelphia
information ahead of others he was later information advantages that some trad- by 1879, and to Chicago by 1881. These
hired by the newly-formed New York ers had previously enjoyed; brokers could private wires were faster than the “public”
Associated Press. The press was apoplectic now telegraph an order to London and telegram. They were also more reliable
about traders and the agents who sup- receive confirmation within five minutes. and provided confidentiality.
plied them with information. There was Price differences between securities soon And Wall Street gladly paid up, because
particular anger directed against telegraph began to narrow. getting access to trading data as fast as
operators who were believed to have close The stock ticker, introduced in 1867, possible was, as always, crucial to profit-
relationships with traders; editorials railed was the next great electronic technology able trading: by 1894, brokers at the Bos-
against the telegraph’s potential for falling that was immediately adopted by the ton Stock Exchange knew of trades at the
“in the hands of bad men.” trading community. Prior to its introduc- NYSE within 30 seconds.
Receiving information first was so tion, stock trades were typically done The stock ticker also initiated a new
valuable that some speculators, at times by “pad shovers” — boys who ran back wave of stock market speculation, this time
in cahoots with telegraph led by working class inves-
operators, were willing to tors who began speculating
cut the telegraph wire after through the newly-created
the news had been received! bucket shops, which had
Because telegraph opera- also hooked up to ticker
tors were among the first to machines. Professional trad-
receive tradable news, some ers, who had heretofore
operators cut out the specu- enjoyed an enormous infor-
lators altogether and went mation advantage, bitterly
into business for them- complained: “indiscriminate
selves. This continued for distribution of stock quota-
decades: when the Civil War tions to every liquor-saloon
broke out, several Western and other places has done
Union employees made a much to interfere with busi-
fortune in the gold markets ness,” New York broker John
by leveraging their advance T. Denney said in 1889. “Any
knowledge of war news. person could step in a saloon
Forty years later, the tele- and see the quotations.”
graph was still a stock spec- Drawing of the Morse telegraph that appeared Though bucket shops
ulators’ realm. In 1887 the in Popular Science Monthly, ca. 1872–1873. were mostly scams (there
president of Western Union was no actual transfer of
said 87% of the company’s stock, so “investors” were
revenue came from stock and commodity and forth between the trading floor and merely betting against the bucket shop
speculators, and from racetrack gamblers. the offices of brokerage firms. It was an operator), many paid top dollar for fast
Getting a faster boat across the Atlantic enormous advance over the telegraph telegraph services; in 1887 the NYSE dis-
was even more lucrative for traders. In the for several reasons: 1) traders no lon- covered that one Chicago bucket shop was
middle of the 19th century, it took eight ger needed to be physically present on getting stock quotations several minutes
days to cross the Atlantic, and any person exchange floors; 2) it reduced transaction earlier than the “regular” ticker service,
who could get important news across the costs; 3) it enabled the dissemination of thanks to assistance from Western Union.
ocean more quickly could profit from it. continuous, real time information; and It went on like this, through the devel-
In one extreme example, when it became 4) it cut out pesky intermediaries like opment of the specialist system in the
known in New York City in 1865 that the telegraph operators and newspaper edi- 1860s, the invention of the telephone (first
South had lost the war, financier Jim Fisk tors. Not surprisingly, journalists and tested by Bell in 1876; there was a phone
chartered several ships that were faster newspaper editors began to worry that the on the NYSE floor by 1878), pneumatic
than the mail ships then in use and sailed ticker might put them out of the lucrative tubes shortly thereafter, the computer in
them to London with orders to his brokers business of financial news. the 1950s, computer-readable cards in the
to sell short Confederate bonds. When the Thomas Edison did not invent the 1960s, the early development of electronic
news became known in London that the ticker, but he made several crucial trading when the Nasdaq began operation
South had lost, the price of the bonds went improvements, including the invention in 1971 and algorithmic trading in the 1990s.
to zero, and Fisk of course made a fortune. in 1873 of the quadruplex, which allowed It was the same argument: some were get-
Just as the telegraph had been eagerly four messages to travel simultaneously ting information ahead of others, and oth-
adopted by stock traders in the United over one wire. Western Union put this ers were able to execute trades because they
States, stock trading and other commer- excess capacity to good use: they leased had a faster boat/horse/carriage/telegraph
cial uses were among the first uses of the the lines to private networks controlled line/computer link/algorithm.
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