Communication Technology and Exchanging Financial Assets: A Historical Perspective

Abstract

In recent years high frequency trading (HFT) in the financial markets has gained the attention of practitioners, regulators and even the general public. The existence of this type of trading is the direct result of the development of computer technology that permits information to be processed and trades made faster than humans can think. The purpose of this paper is to place the discussion of the role of this type of trading in a historical context. We accomplish this task by examining two abrupt technological changes that dramatically increased the speed at which information can be communicated and acted upon, i.e., the change of transportation based communication to telegraphy (electromagnetic) and telegraphy to computer (electronic). This examination permits us to consider more broadly the role of financial markets in society. We argue that, as they have in the past when confronted with extreme change, high frequency traders and investors will learn to co-exist but only if new rules of the game are established and new data analysis and risk management techniques developed.