In investing, speed matters. Largely, it is technology that has progressed transactions from slow, manual affairs, to nearly instantaneous electronic trades.
In this article we'll follow information through telegraph lines and telephone lines until we reach the internet, the medium that you are using right now to see how the exchange of information has changed the way trading is done. (To read about the impact of the printing press on trading, see From The Printing Press To The Internet.)
Tapping Out Trades
Even with the printing presses humming away, trades were difficult to make. The information on a company would already be old by the time an investor received it in the mail. The investor would then have to place buy and sell orders based on the old info and send them in by mail or travel to a financial district. When the railroads started cutting the country into manageable bits, it increased the speed of the mail system.
Samuel F.B. Morse's role in the invention of the telegraph has been questioned in recent years, but his role in proliferating it cannot be denied. Morse licensed the 1847 patent to his telegraph system to all who could pay. This resulted in a building boom, as up to 50 different companies started running lines with the help of the railroad. In return for running lines as they laid the rails, railroad companies were given priority on all messages they wished to send - messages that were sent for free. (Learn about how you can buy investment property before the next boom in Profit With Real Estate Land Speculation.)
With so many companies laying lines, the telegraph system was a geographical and financial hodgepodge. Sending a message to two different towns equidistant from you could cost very different amounts, as the steep rates charged by companies often varied. Because each company owned the line exclusively, the competition was in building the service area rather than in providing low-cost messages. There were also many dead spots where no lines ran, thus causing a coast-to-coast message to go through many different companies, and a connecting horse ride or pigeon journey where an alternate path couldn't be found. (Read about the first business monopolies in Early Monopolies: Conquest And Corruption.)
This was a problem faced by telegraph systems all over the world. Despite the problems, Wall Street and the New York Stock Exchange (NYSE) were some of the biggest customers for the telegraph companies, as investors demanded timely market information. One of the men who worked the gaps in the lines between Belgium and Germany with carrier pigeons, Paul Julius Reuters, went on to found Reuters in London to send European financial news all over the world. Other financial services followed the stock exchange onto the lines, and the first money order was sent in 1845. (To read more about the NYSE, see The Tale Of Two Exchanges: NYSE And Nasdaq.)
The Western Union Web
In 1851, a group of Rochester businessmen started the New York and Mississippi Valley Printing Telegraph Company. They went around the country collecting bankrupt telegraph companies, repairing shoddy service lines, running new lines and buying up all the patent rights that Morse had let loose on the world. By 1866, the company, re-named Western Union, was well on its way towards a monopoly of the telegraph industry. Not to be outdone by the underwater cable that the British ran to the European continent, Western Union laid the first transcontinental telegraph line. Soon there were lines to Japan and India as well. Next to updates about domestic/international weather and major news stories, financial news was the most common information flying back and forth between the wires.
In 1867, the NYSE started using an invention of Thomas Edison's, the stock ticker. This allowed the exchange to input price information on a typewriter and have it appear as print on a thin strip of paper issuing from stock tickers at select locations. The NYSE received information in this same way, finally eliminating the Morse code specialists at11 Wall Street
. This new system changed the practice of issuing daily stock summaries and gave investors a constant stream of information at the mind-boggling rate of one letter per second. The waste paper from the stock ticker was cut into strips and used as confetti during celebrations, giving us the phrase "ticker-tape parade." (Learn to interpret the modern version of the stock ticker in Understanding The Ticker Tape.)
Voices Without Faces
As is often the case with technology, the telegraph was obsolete before it even had a chance to peak. The years from 1870 to 1890 saw Alexander Graham Bell's telephone become a reality for local and long-distance calls. Edison and Bell went head-to-head through their respective companies, Western Union and the Bell Telephone Company. (Read more about how early businessmen interacted in History Of Capitalism.)
Although Edison did some brilliant reverse engineering and improvement, he had violated Bell's patents, and Western Union was forced to sell their telephone business to the Bell Telephone Company. Bell handled local calls, and the American Telephone and Telegraph Company (better known as AT&T) handled the long-distance ones. Stock exchanges, brokers and investors were all within a real-time call of each other for the first time in history. (Read more about the competitive dealings of AT&T in Monopolies: Corporate Triumph And Treachery.)
Telegraphs continued to develop and, under the guidance of the American Telephone and Telegraph Company, became a predecessor of the fax machine. The TWX system and its Western Union competitor, Telex, were machines containing a printer, phone line and telegraph line. The messages were received, printed and then replied to by phone or by hooking up a telegraph typewriter and banging out a reply. Unfortunately, the fax machine developed along phone lines rather than telegraph lines and, in a slow fade that lasted from 1930 to 1980, telegraph lines were rendered obsolete.
The Fruits of Nuclear War
Just when telephones, their cellular cousins and fax machines were beginning to crest, networked computers came onto the scene. The idea of storing information on a network of computers so that users could view it and add to it grew out of the Department of Defense's fear of a devastating nuclear war with the USSR. ARPANet was the great-grandfather of the Internet and, by 1980, it only boasted about 200 computers on its network. The problem, in today's terms, was that it wasn't user-friendly.
In 1991, Tim Berners-Lee did ARPANet one better and developed the base for the World Wide Web. Suddenly, people could access packets of information the minute they were posted to the web by another user's computer. The enthusiasm that investors had for real-time information was only matched by the enticing world of real-time securities trading. (Read more about the modern-day advantages and perils of the Internet in 10 Things To Consider Before Selecting An Online Broker and Avoiding Online Investment Scams.)
This unprecedented level of connectivity has minimized the old system of brokers (via discount brokers) and given investors the speed they have coveted since the dawn of investing - for better or for worse. Speed is great for business because the faster deals are done and paid for, the sooner the next deal can start. (Direct Access Trading Systems discusses a lightning-fast way to make trades.)
In contrast, speed can be as dangerous as it is beneficial for investors. Now that transactions, and not just information, can be done at the click of a button, the sober second thought that was once built into the practice of investing by the slow pace has vanished. In a very real way, the evolution of machines on Wall Street has given us information that is fast, cheap and, depending on the investor, subject to snap decisions, which may or may not be prudent or beneficial.