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The Absurdity of What Investors See Each Day

By Morgan Housel - Feb 23, 2016 at 1:21PM

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How long is that cable?

Source: The National Archives U.K. via Wikimedia Commons.

A few months ago I interviewed Ronan Ryan. He's the chief strategy officer at IEX, the trading system profiled in Michael Lewis's book Flash Boys.

Ronan understands the plumbing of how stocks are traded better than anyone I've met. He told a great story of how absurd trading has become.

Ronan pointed out that there a few office buildings in New Jersey where most stock exchanges house their servers. In order to send orders to the exchanges as fast as possible, high-frequency traders not only want to be close to New Jersey, and not only in the same office building as the exchanges, but literally in the closest room to the exchange servers. Every foot counts when you're competing on billionths of a second.

As the industry grew, high-frequency traders fought each other for space to become closer to the rooms where exchange servers are located. Here's Ronan:

What happened is when NYSE first allowed [traders] to collocate in the [same building], people started to get into pissing matches over the length of their cables. Just to give you an idea, a foot of cable equates to one nanosecond, which is a billionth of a second. People were getting into pissing matches over a billionth of a second. 

But then something funny happened. To cut down on arguments, some exchanges mandated that traders use the same length cable:

NYSE measured the distance to the furthest cabinet, which is where people put their servers. It was 185 yards. So they gave every [high-frequency trader] a cable of 185 yards. 

Then, traders who were previously closer to the [exchange server] asked to move to the farthest end of the building. Why? Because when a cable is coiled up, there's a light dispersion that is slightly greater than when the cable is straight.

Think about that. Traders are now fighting to get further away from the exchange servers because a coiled cable transmits data a few billionths of a second slower than a straight cable.

It's a crazy, funny story. But it also speaks to the absurdity of what goes on in the market on an hour-to-hour, day-to-day basis.

A feature of business journalism is the daily market update, which attempts to attach cause and reason to daily moves. "Dow falls on manufacturing data" or "Nasdaq rises on earnings hopes." But when you put daily moves into the context of stories Ronan tells, your view might change. The forces that move hourly and daily market prices are machines whose success relies not on corporate earnings or manufacturing data, but literally whether their computer cords coiled or uncoiled.

For more:

Full interview with Ronan Ryan

The upside of being miserable

How to give financial advice

The history of the stock market  

Contact Morgan Housel at The Motley Fool has a disclosure policy.

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