Half a century ago, manufacturers of abacuses complained to the government, asking them to do something about companies producing calculators that were putting them out of business. It was the dawn of the computer revolution.

Neil Armstrong had to land on the moon manually because Apollo 11’s onboard computer overloaded. This failure did not stop progress in the use of computers in space. A few computer glitches on Wall Street cost some firms real money, but it did not stop progress in the use of computers in making investment and trading decisions.

When US Regulation NMS narrowly passed about a decade ago, it called for exchanges and trading firms to make the same information available at the same time at all exchanges across the entire United States. That defies the laws of physics!  The SEC did not consider that it takes milliseconds just for the light to travel between any two cities. During that time, a computer can make thousands of investment decisions to buy, sell, hold, change the bid or offer, or do nothing at all. Heaven forbid that someone open an exchange in Hawai’i — it would take more than a hundred milliseconds to get the trading information, evaluate it, make decisions and shoot the results back to the mainland for everyone waiting in compliance. You might as well go surfing in the meantime.

One side effect of Reg NMS was that trading firms had to significantly beef up their technology infrastructure to keep up, making it even more expensive for smaller firms to compete — the complete opposite of what the regulators intended.  Never mind the broken physics involved.

Not too long ago specialists on NYSE regularly took a whopping 90 seconds to match incoming buy and sell orders.  Nowadays, exchange order matching engines return order fills in as fast as a millisecond, or about 100,000 times faster.  They can churn out messages every microsecond.  Once you start connecting to multiple exchanges in order to access more complete information, you realize that you need to be astonishingly fast to keep up with the information flow.

If you do not want to end up left behind like those abacus companies whose names no one remembers, you need to invest in technology that will allow you to process information rushing at you at a high frequency.  That technology does not come cheap, nor does the knowledge of how to build it cheaply.

Firms that choose not to bother investing in new technology because they are ignorant of its necessity, and firms that are just falling behind in speed label the firms that actually try to keep up with the flood of financial information as “HFT“.  These firms actually work hard, and under a lot of pressure, on upping speed. They follow the rules of the financial markets.  They provide liquidity.  They post competitive prices reflecting the most recent information available.  They provide an invaluable service to the mechanism of a free market economy.


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