Why might I care how quickly my orders execute?
I began trading a dollar-neutral strategy in 1988. In that first week I sent my orders through $2 brokers and I discovered that, even though it was not important how quickly my orders filled, it was imperative I receive reports immediately. Shorts Reports
This was because my strategy required that, for every dollar of something I bought, I had to short a dollar of something else. Because of the plus-tick rule, I had to place my short-sales first and wait until they executed before sending my buy orders.
Back then stocks traded in 1/8th of a dollar minimum price increments, and I could wait all morning for a market rally before I would get a short off.
By the time the broker returned to his post to give me a report, the stock I wanted to buy might have blown through my benchmark price by 25 cents.
The following week I began using the NYSE's Super-Designated Order Turnaround system (Super-DOT) for sending orders. Since then I've traded at least 10 billion shares electronically and probably fewer than a million over the phone.
Getting Screwed
I knew then that the specialist had an informational advantage over me, and the scalpers in the crowd could match on the inside quote while I waited in a queue for an execution.
Then one day I met a specialist at an industry function and we got drunk together. I told him that I thought I was getting screwed. He said, "You don't know the half of it." He invited me to visit the floor and promised that he would show me what was being done with my orders. Two days later I was at his post with my pen and notebook, but he was sober by then and he showed me nothing.
Are things better now? Technology circa 1915
My great grandfather taught Morse Code to my grandfather, Tom. Then he kicked Tom out of the house when the boy turned 14. This would be like me teaching my sons C++ and then changing the locks when they finished middle school. (In the case of my own sons, that would have been a superb idea because they would have been further along in their careers at 15 than they are now in their 20's. Superb, that is, all but for the fact that these days doing that today would land me in jail.)
Getting an Edge circa 1915
How might a young boy have used Morse code to make a living in 1915? To answer this you need to understand a popular form of gambling conducted in what were called "bucket shops." Imagine a room with a young boy at a chalkboard in front of a bunch of desks and chairs where gamblers pretend they are hard at work as "investors" executing "buy" and "sell" orders for stocks. In fact, no actual stocks trade hands; all “orders” are bets against the house.
To one side of the room is a Morse code operator. Whenever a new stock quote comes across the telegraph line, he copies down the quote and hands it to the boy who halts "trading" before scratching a new price on the blackboard. Gamblers can then settle old positions or establish new ones at the new price.
You might notice small boys outside peering in the window, and you might imagine they are upset they are too young to be allowed to "trade." Or that they envy the boy inside with the chalk.
However, you might not know that some of those boys at the window can read the Morse clicker's infinitesimal moves by sight without hearing a sound. You might notice a boy touching a nose or an ear. And you might not notice that the track record of the guy sitting next to you is somehow much better than your own.
Innovation
Today, we've improved things tremendously. We've banned bucket shops because we recognize them as just gambling dens of no redeeming social value.
We do continue to allow side bets although we now call them "derivatives." These chits must be tremendously useful because, by some estimates, they represent $1.2 quadrillion dollars. Although I was a math major, I have no feel for what the word "quadrillion" means, so I looked it up and discovered it represents 20 times the size of the entire world's economy. Surely that must justify derivatives as very good things because how could so many people be wrong about something that big?
Getting an Edge Today
I'm an amateur radio operator and, like my grandfather, I'm pretty good at Morse code. But that skill is useless these days if I want to get in front of your order.
Instead I would have to hire a dozen hot-shot Ph.D's and barefoot software engineers to program some super-computers co-located at the exchanges in order to piece together your intentions from the thousands of data points your algos are leaving all over the markets. Then, I would have to get my orders to the markets so quickly that I will care about how long the cable is between my machine and the exchange’s servers; otherwise my electrons might not arrive before yours.
If you think this does not go on, then watch Kevin Slavin's TED talk: How Algorithms Shape Our World and then think again.
It has been a century since my granddad left home, and it seems like we have made a lot of progress. But seeming like a thing is not the same as being the thing.
It is interesting how nothing changes, mostly for the worse. (This is an intentional Yogi-ism, not a typo.)
Extra Credit Reading:Reminiscences of a Stock Operator by Edwin Lefevre (1923).
Homework:
