The first shares of company stock were bought and sold at meeting places on the streets in Manhattan with very few formal rules of engagement. It wasn’t until 1792 when 24 brokers met under the buttonwood tree on Wall Street and agreed to form the first stock exchange in the U.S. For the nearly 200 years between 1792 and 1971, stock transactions were made with paper tickets on the floors of the exchanges where trades were often won or lost — based upon the speed or aggressiveness of the traders on the floor.
In 1971, NASDAQ became the first electronic exchange and began to swing the pendulum between human traders and machines. Today, no longer are trades handled by people on noisy exchange floors. Instead, the new trading floors have migrated to chilled datacenter facilities without a trader in sight. But these are not just “any” datacenter.
The majority of the world’s electronic matching engines operate on what’s known as price-time priority in a central limit order book. This means that the first order to arrive at the best price will win that trade. Compared to auction-style trading methods, price-time priority places a tremendous emphasis on getting your trade in quickly. Just a micro-second or less can determine whether your trade will get filled or whether you’ll pay more.
The systemic latency of the leading high-frequency trading applications can be as little as a handful of microseconds achieved through high performance computing techniques such as hardware acceleration, kernel bypass, and massive parallelization. In relative terms, the speed of light travels only about 200 meters per microsecond…a distance easily traversed inside most datacenters, let alone between buildings or even states.
When the SEC decentralized the equity markets through Reg NMS, they created a framework which has now led us to over a half-dozen equity venues and nearly 50 dark pools and Alternative Trading Systems (ATS). A far cry from the centralized market located at 18 Broad Street. The futures markets, while not quite as fragmented as the equities space, adds a half-dozen venues and the new Swaps Execution Facilities, which could add several dozen on top off it all…and keep in mind we’re just talking about the U.S. markets.
So where do today’s electronic traders come to connect with each other? In the highly connected datacenters such as 350 E Cermak in Chicago, 111 8th Avenue in New York City, or in the exchange datacenters in less prominent locations such as Mahwah, Secaucus, Carteret, Weehawken and Clifton, NJ and Aurora, IL. Ultimately, it is in these discreet locations or in the fiber hung on the poles, or the microwave signals whizzing above our heads, which has replaced the open out-cry markets so many still associate with the financial markets.
No longer do we have aggressive traders on the floors of the exchanges, we now have highly educated technologists trading based on the nanoseconds lost or gained by the proximity of their trading engine to the matching engines, the routes taken by their fiber, or the location of their systems inside the datacenter.