Nerds on Wall Street: Math, Machines, and Wired Markets

4.1. Alpha from Innovation

In the early days of electronic market data feeds, the 1970s and 1980s, traders who noticed that the crusty slow centralized systems lagged the fast broadcast streams by up to 20 minutes played the same game—without boats.

In 1815, technological information advantage came from birds. In June of that year, there was a general panic in London that the empire would be routed by Napoleon. Financial markets crashed, and dealers frantically unloaded government bonds. Nathan Meyer Rothschild knew the outcome before the British press, by virtue of his use of fast carrier pigeons to bring him the news of Napoleon's surprising defeat before the rest of the market knew. He quietly bought everything British he could get his hands on, and a few days later, when news of Napoleon's catastrophic defeat at Waterloo arrived for the non-bird owning traders, prices soared, and Rothschild became one of Europe's wealthiest men.

Figure 4.2. Indexing pioneer Bill Fouse with the Prime minicomputer used to run the fi rst index fund. This machine has less computational power than a mid-range high-end digital watch of 2008. Source: Anise Wallace, "How Did Wells Fargo Get to the Top?" Institutional Investor, June 1976.

We see an important part of the beginnings of financial information technology innovation in the form of the blinking, humming refrigerator-sized computers of the ...