Harpies on a Theme

BRIAN: Welcome to the show. I’m Brian Balogh.

ED: And I’m Ed Ayers. Peter Onuf is away this week. For a while now, financial market watchers have been involved in a debate about how fast is too fast. This was underscored in a book called Flash Boys by journalist Michael Lewis. Here’s Lewis on 60 Minutes last summer, explaining what happens in the milliseconds after he clicks “buy” on shares of, say, Microsoft.

MICHAEL LEWIS: There are waiting high frequency traders who have algorithms that are able to determine what it is I want to do. They then need to beat me to the other exchanges to buy the Microsoft I want to buy and sell it back to me at a higher price.

ED: And they’re doing that?

MICHAEL LEWIS: They’re doing that. But they not only need to beat me, they need to beat each other.

ED: Lewis and a number of other commentators say that the new computer technologies that enable this high frequency trading are stacking the decks against the average American investor.

BRIAN: Not so fast, say others. I mean yes, fast, but not problematic. We put a call into a person who happens to be in this camp, and who watches the market just about as closely as anyone.

BOB PISANI: My name is Bob Pisani and I’m the stocks correspondent for CNBC.

BRIAN: What interested us about Pisani is that he finds reassurance about the workings of his beat, the market, by turning to our beat, history.

BOB PISANI: We have seen these efforts to get information faster and more accurately for 200 years

ED: Pisani related a story from 1790, when the US Congress was convening in New York City. There, representatives were debating a proposal that the brand-new government take on the now virtually worthless debt of the old Continental Congress in the colonies. And word of this debate started leaking out to people on the streets of New York.

BOB PISANI: Traders heard it, and they said, my heavens. If this goes through, this old debt’s going to be worth a lot of money. So they literally hired fast boats, I mean, literally, fast boats, to cross the Hudson River to get to New Jersey and points south and go to as many communities they could find and buy up the old debt, reasoning– and it turns out correctly– that the trading would go from $0.10 on the dollar to much, much higher. And that’s exactly what happened.

ED: These boats moved much faster than news tended to flow in those days. And so the traders were in a position of knowing much more than the people they were buying their crummy debt from.

BOB PISANI: And when the Congress found out, representatives from Congress gave a big speech on the flooor– this is 1790– and said, these people who are hiring fast boats are terrible people. One guy said, we cannot afford to be plundered by harpies. He called the people who were making these trades rapacious wolves.

BRIAN: Whether it’s fast boats or computer algorithms, Pisani says professional traders have always been the first to adopt new information technologies. And so yes, they always have had a bit of an edge, at least until ordinary investors catch up with them.

Pisani shared another great example from the 1830s. A new turnpike had just been opened between New York and Philadelphia. A Pennsylvania stockbroker took advantage of the new road to set up a private signal station for him and his traders.

BOB PISANI: The signals were transmitted through an optical telegraph. That was a series of boards that were on poles. And these poles were mounted on hills that could be seen by a telescope every, say, seven or eight miles.

So there were reports at the time that indicated that it could transmit stock information from New York to Philadelphia anywhere from 10 to 30 minutes. Now, this in the 1830s. You’re 100 miles away. That is truly high speed trading, and a very good example of it for the time.

ED: A few years later, the telegraph came on the scene. Once again, says Pisani, professional traders were among the first clients. Even as late as the 1880s, Western Union estimated that 87% of its revenue came from market speculators and racetrack gamblers.

There was also the stock ticker, an 1860s technology that produced an automatic feed of numbers straight into the offices of brokers who could afford it. In each case, Pisani says, traders have taken advantage of new technology to cash in on market movement just a little faster than the rest of us.

BRIAN: So then why shouldn’t we look at all this and conclude that the market is not really a true market, but rather one that’s being gamed by wealthy insiders? Because, says is Pisani, history also suggests that the less we pay attention to the latest financial news, the better we’re likely to do.

BOB PISANI: The average person investing in long term for the stock market has done very well throughout history. Most people should be buying stocks for their retirement, unless you want to spend all your time glued to a stock ticker and watching CNBC, which is a great channel to watch. I would not advise people to trade that way.

ED: Whether it’s our financial markets or the processing speed of our computer chips or the news cycle itself, it’s often remarked that life in America is getting faster and faster and faster. And so we thought it would be worth taking an hour out of this Indianapolis 500 weekend to reflect on the theme of speed throughout America’s past. We have stories about an around the world race, and about the sport that takes pride in its disconnection from the clock. But first, a story about cars.