Jason Zweig on Exchanges and Proximity

Something I’ve been bitching and moaning about (often tongue in cheek) at this site is basically a complaint as old as time – the unfairness of co-located servers at the stock exchanges is the age-old proximity gripe.

The complaint that I and others have is that when the NYSE ($NYX) went for-profit , it got into the business of charging people for proximity, essentially selling a technological edge to some market participants to the disadvantage of others.

The legendary Jason Zweig puts this lament in historical perspective for us as news of NYSE’s merger with its German counterpart sparks a fresh wave of debate…

From the Wall Street Journal:

Around the time of the Civil War, the New York Stock & Exchange Board, predecessor to today’s New York Stock Exchange, charged outside brokers up to $100 for the right to put their ears up to a keyhole where they could eavesdrop on the trading activity going on behind the door.

By 1873, brokers were leasing private telegraph lines to provide customers—and, presumably, themselves—with faster information and trading. Between 1889 and 1892, according to research by economic historian Alexander J. Field, the New York exchange denied telegraph access to any outsiders who didn’t route orders through a network owned by the exchange. By 1913, Western Union was paying the NYSE $100,000 annually, more than $2 million in today’s money, to collect and disseminate data.

These were the direct ancestors of the “co-location” and “direct data feeds” that have enabled high-frequency traders to get first crack at market prices on today’s stock exchanges.

Zweig’s forgotten more about market history than most journos and bloggers ever knew in the first place.  Get over and read the rest.


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