Electronic Trading And The Need For Speed

This piece from the Wall Street Journal shows how electronic trading has changed the face of securities markets:

About four years ago, Dave Cummings moved his trading firm's computers from a storefront in this Kansas City suburb to buildings in New York and New Jersey that house central computers for two big electronic stock exchanges.

The move shaved a precious fraction of a second from the time it takes Mr. Cummings's firm, Tradebot Systems Inc., to buy or sell a stock on computer-based exchanges like Archipelago. It now takes Tradebot about 1/1000 of a second to trade a stock, compared with 20/1000 before the move -- a difference of about the time it takes a computer signal to zip at nearly the speed of light from Kansas City to New York and back.

Read the whole thing here

It's pretty amazing when you think about it - the company moved its computers from the Midwest to the same zip code as the exchange to save the time it takes an electronic message to travel from the Midwest to New York.

It turns out that electronic trading systems allow Cummings to effectively act as an exchange specialist - he's constantly trading in and out of stocks, and is fast enough to cut in front of exchange specialists - to the tune of over $100 million a year in profits (a penny a share at a time). And better yet, he makes markets more efficient, since he only gets to trade when someone needs fast execution. According to the article, on some days, his company accounts for 5% of all Nasdaq trading volume, and 5% of the trading in Microsoft.

The only ones unhappy are the specialists.