COM 546 at the University of Washington is a course that focuses on the past, present and future of digital communication technologies. Throughout this course we examined the connections between new technology, traditional media content, social and individual influences, and communications theory.
For my final project I chose to explore how the process of stock trading transitioned from a manual, hand-wrought system to one that is digital and instantaneous. In doing so I uncovered why there was a disruptive innovation gap of 100 years…. in other words, why stock market technology and processes didn’t really change for nearly a century. My research focused on the technological developments and changing processes of the securities industry beginning in the 1840s through the 1970s. I hope you find the following website/final project informative:
-Joanna Mullally, University of Washington 2011
When I first set out to explore the evolution of stock market technology, I thought that most of my research would focus on the development of internet trading and that my timeline would consist of regular innovations starting with the telegraph in the 1840s to the widespread practice of online trading in the 2000s of the “future.” I was wrong! Although I did research (rather extensively) the development of online trading, I decided that my paper would be more cohesive if I ended my timeline in the “future” of the 1990s and bypassed the world wide web altogether. In addition, my research revealed that beyond the late 19th century, stock market technology didn’t dramatically change until the 1960s, nearly 100 years later. To sum things up, my innovation timeline will not include the internet, has a century gap and is shorter. The following are three of the most important innovation developments on my timeline and an analysis of how communications theory best explains what happened or might happen:
The Past; the Telegraph (1840s-1870s):
Before Morse introduced the world to the electronic telegraph 1848, the quickest way to send information between inter-city exchanges took 30 minutes via the manual telegraph laid out between Wall Street in New York and Chestnut Street in Philadelphia. To signal changing securities prices, people were stationed every 6-8 miles in towers and used flags and telescopes to transmit data. With the onset of the electronic telegraph, the time it took to send information between the two cities took 3 minutes and far less hands. Ultimately, the electronic telegraph compressed trading time and formed a central stock market that linked traders from distant communities. Brian Winston’s theory of Ideation Transformation explains how the clunky, manual telegraph system evolved into an efficient electrical communications system. Performance was dramatically enhanced and the technology quickly diffused into what communications theorist, Clayton Christensen would call a disruptive innovation.
The Present; the Central Certificate System (1960s-1970s):
Although any stock could theoretically be bought and sold several times in one day during the 1960s, regulation and long-standing tradition required that its certificates and records be physically moved each time from seller to buyer. During the same period, the stock market was in a bull market that made trading volume skyrocket. As a result, the paper-based trade processing system could not deliver bought/sold securities fast enough and caused many trades to fail. Soon it became apparent that stock certificates needed to be eliminated and the electronic Central Certificate System was established in 1969. Although this new electronic system of delivering stocks to different brokerages reduced fails by eliminating 75% of the clerical steps needed to process trades, fails still continued because every brokerage used a different computer system. All systems became integrated in 1975 and fails stopped. Brian Winston’s theory of supervening social necessities explains why the stock market system finally evolved after nearly 100 years. Because of spiked trading volume, the antiquated process could not keep up with demand and the number of trade fails became unacceptable. In other words, the number of failed trades reached a point that necessitated change.
The Future; NASDAQ Domination (1980s & 1990s):
Although the NASDAQ first began trading on February 8, 1971 as the successor to over the counter trading system, it wasn’t until the 1980s that it eclipsed the NYSE. From 1976-1989, companies listed on NASDAQ jumped from 2495 to 4293 while NYSE-listed companies remained constant at around 1500 during the same period. The two exchanges eventually settled into niches, with NYSE attracting large, well-established companies and NASDAQ attracting smaller, start-up companies. According to Clayton Christensen, this dramatic shift in exchange preference, can be explained by the disruption innovation. The exchange market became disrupted when computers made it easier and less expensive to process trades. As a result, trading volume spiked again… more people started dabbling in the stock market.
 Wachtel, H. (2003). Street of Dream – Boulevard of Broken Hearts. Sterling, VA: Pluto Press, p. 78
 Christensen, Clayton M. (2004). Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change. Boston, MA: Harvard Business School Publishing Corporation, p.74
 Benn, A. (2000). The Unseen Wall Street of 1969-1975. Westport, Connecticut: Quorum, p. 16
 Benn, p. 187
 Blume, M.; Siegel, J. & Rottenberg, D. (1993). Revolution on Wall Street. New York: W.W. Norton & Company, p. 191
Benn, A. (2000). The Unseen Wall Street of 1969-1975. Westport, Connecticut: Quorum
Benn explores the New York Stock Exchange and how new technology (networked computers) helped prevent an industry collapse. Chapter 2 explores the early attempts at computerization and how infrastructure updating was not a priority for most brokerages. Benn goes on to explain that widespread adaptation did not happen until the paper processing of trades could not keep up with trading volume. Chapter 7 explains how the computerization of the health care industry in 1969 served as the model of computerization of the securities industry. Chapter 8 reviews the problems that arose when brokerages adopted different systems of computers, IBM vs RCA Spectra.
Blume, M.; Siegel, J. & Rottenberg, D. (1993). Revolution on Wall Street. New York: W.W. Norton & Company
Written by a team of Wharton finance professors, this very thorough book reviews significant US stock market events starting with the inception of the New York Stock Exchange in 1792 to the debut of the World Wide Web in 1992. Further, the book examines the underlying political, economic and social forces of change behind these events. As I will be starting my research with the debut of the telegraph on Wall Street in 1844 and only focusing on market events that were spurred by changing infrastructure technology (or vice versa), I will mostly pull information from chapters 1, 2, 7, 10-13. In these chapters, Blume chronicles the introduction of the telegraph, stock ticker, telephone, the OTC market, the Securities Industry Automation Corporation, NASDAQ, the Block Automation System, SuperDot and the internet.
Dalton, J. (2001). How the Stock Market Works. New York: New York Institute of Finance
Dalton goes into great detail explaining the mechanics behind the stock market. Unlike many of my other references, this is not a history of the stock market. Instead, this book helps explain what historical technological changes ultimately created; an industry completely dependent on computers. More specifically, Dalton explains how the NYSE’s SUPERDOT and Broker Booth Support Systems function; the development of the OTC market comprising hundreds of brokerages throughout the US doing business over the phone; why the NASDAQ was formed, and how online trading is a “revolutionary new technique that allows direct market trading by individuals (p.269).”
Greenwood, J. & Jovanovic, B. (1999). The information-technology revolution and the stock market. Retrieved on May 2, 2011 from http://www.nyu.edu/econ/user/jovanovi/ITRev-AEA99.pdf
The authors argue that the stock market declined in the late 1960s because the old, paper-based system of processing stocks could no longer support the number of daily trades and that computerization did not enhance stock market value until the 1980s.
Hamilton, T. (2011, March). Securities brokering in the US. IbisWorld. Retrieved on May 2, 2011 from http://www.ibisworld.com.offcampus.lib.washington.edu/industryus/default.aspx?indid=1308
Hamilton argues that since brokerage information technology changed in the late 1970s, the number of individual investors increased and that competition, trading commissions and the role of brokers in executing trades have diminished. The author further argues that technology improvements will continue to pressure brokers in the future. Specifically, Hamilton believes that the growth of alternate trading systems will directly impact traditional brokerage revenue.
Malkiel, B. (2011). A Random Walk Down Wall Street. New york: W.W. Norton & Company
Written by a Princeton University finance professor, this is a robust and jovially written book about investing and uses historical market events to support his theories. Although I will not be studying investment techniques, chapter 4 on the internet bubble of the late 1990s and early 2000s gives an interesting analysis of how market bubbles are usually caused by new technology and why people invest in them.
Scott, P., Maniam, B. & Leavell, H. (2010). Online investment brokers vs. discount and full service brokers: Is there really a difference anymore? Review of Business Research, Vol. 10, No. 2, pp.150-155. Retrieved on May 2, 2011 from EBSCOhost.com, University of Washington Library.
These authors explore how the onset of online trading in the mid 1990’s managed to drastically change the investment brokerage industry as a whole. Throughout most of this article, online brokerages are compared with discount and full-service brokers in order to understand their differences in services, cost structures and to determine whether or not there are advantages in choosing one type of brokerage over another.
Smith, B. (2001). Toward Rational Exuberance: The Evolution of the Modern Stock Market. New York: Farrar, Straus and Giroux
Smith chronicles the last 100 years of the US stock market to illustrate how the market went from being a primitive system that was mostly distrusted by the public to a sophisticated system that is embraced by the public. Chapter 5 gives an overview of the “radical new technologies (p.90)” that were introduced in the 1900s like electricity and industrial machinery and how they impacted the stock market.
Sterling, R. (2001, June 13). As compliance obstacles dissolve, online brokerages will shift to responsive trading. Forrester Research. Retrieved on May 2, 2011 from http://www.forrester.com/rb/Research/as_compliance_obstacles_dissolve%2C_online_brokerages_will/q/id/48962/t/2
Sterling discusses how new regulation from NASD and improvements in online security will cause online trading to enter a new phase. He further argues that for the first time, the brokerage industry can use secure wireless and e-mail technologies to encourage their customers to make responsive trades.
Sterling, R. (2002, September 18). Jupiter consumer survey, brokerage and wealth management. Forrester Research. Retrieved on May 2, 2011 from http://www.forrester.com/rb/Research/jupiter_consumer_survey/q/id/50620/t/2
This survey explores consumers’ attitudes toward online banking, what online financial products they find most appealing and predicts how financial institutions will succeed in attracting and retaining online customers in the future. Further, the author concludes that a decline in the number of online traders will eventually drive firms to be more creative in building financial products that will perform in difficult markets.
Thomas, D. (1989). The Plungers and the Peacocks: An Update of the Classic History of the Stock Market. New York: William Morrow & Company
Thomas chronicles the history of the stock market with the idea that in order to forecast accurately, you need to first understand the past. He further argues that although the stock market of the late 1980s had a different set of players and operations compared to the prior century, the “…basic dynamics of market investment” remain the same since market inception in the late 1700s (p.17). Chapter 4 explains how the first Atlantic telegraph cable of 1866, linking Wall Street to London, created global arbitrage opportunities for the first time (profiting off of price discrepancies on different exchanges). Chapter 13 explores how the computer transitioned from a WWII “learning machine” used to develop defense strategies against Nazi bombings into a “supreme calculator” used to develop investment strategies and to automate trade processing (p.312-314).
Wachtel, H. (2003). Street of Dream – Boulevard of Broken Hearts. Sterling, VA: Pluto Press
Wachtel tries to define Wall Street and uncover how other ‘streets’ define Wall Street by exploring the 19th century history of the stock market. By focusing on what he believes to be the most formative years of the stock market, Wachtel attempts to explain how the period’s “…accomplishments and excesses, practices and ideology inform the present (p.xi).” Chapters 4 and 7, respectively, have lengthy discussions about the century’s two primary market innovations, the telegraph and stock ticker, and what impact they had on the stock market of today.
Presenting to an audience has always been a challenge for me and this assignment did put my nerves through the ringer. Surprisingly, it was not the presentation part that challenged me the most, but all the preparation leading up to the limelight. Reading through a very densely written piece (Daniel Czitrom’s “Lightning Lines” and the Birth of Modern Communications, 1838-1900) and trying to pick out the most salient parts to share with the class was difficult, as every other sentence seemed to be worth highlighting in neon yellow. When it came time to present, I found that it got easier with each round. My rhetoric progressively became more fluid and confident, which proves that practice makes perfectly acceptable. In addition, I found that not having an abundance of bulleted text on my slides made things more spontaneous and dare I say engaging for the audience. I confess that I’ve mostly read off the text of my slides while presenting in the past, which probably explains why I haven’t had much success with public speaking. In much the same way, I found that spicing questions throughout the presentation broke the ice and produced interaction that made the experience more entertaining for both the audience and me, the speaker. To sum things up, I’m proud to say that people enjoyed my presentation on the parallels of the telegraph and the internet. I even received a few compliments on how nice my slides looked, for which I credited Presentation Zen.
Aside from the whole presenting experience, the following are a few interesting tidbits from my audience:
- The internet is an equalizer, a network that connects all people at the same level (both businesses and individuals)
- The telegraph was a more important innovation than the internet because it created a solid foundation for the internet to be built on… and without a solid foundation you have nothing
- Many audience members said that their first impression of the internet was curiosity, but thought it was mostly for the socially awkward
I. Summary: “Lightning Lines” and the Birth of Modern Communications, 1838-1900
How did America’s society react to the telegraph, the world’s first electronic communications network and one of the “most remarkable technological triumphs of the age?” It is this question that Daniel Czitrom explores in the first chapter of his book MEDIA and the American Mind, from Morse to McLuhan. Although Czitrom gives a detailed account of the events leading up to the debut of the telegraph, he primarily focuses on the issues that arose from the cultural and economic development of the new communications system:
First Impressions of the Public – Samuel Morse gave the world its first electromagnetic telegraph in 1838 via several public demonstrations on the east coast. Although people were generally curious about the new invention, the majority doubted its ability to communicate a message through “two miles of wire.” The general public’s mixed sentiments continued for the next six years until Morse conducted a well-publicized demonstration in front of government officials concerning the Vice President nomination verified the telegraph’s communications capability.
The Changing Conception of News – By dramatically speeding up the news gathering process, the telegraph made it possible for the press to offer frequent news updates. The public soon acquired a taste for local and sensational news stories, which ultimately shifted the focus of newspapers away from opinion pieces toward fact-based accounts of current events.
Corporate Monopoly – At first, many start-up telegraph companies built shoddy, poorly-coordinated lines all over North America. Out of this commercial hodgepodge emerged Western Union (“WU”), which in ten years grew into America’s first industrial monopoly by aggressively acquiring competitors, patents and exclusive railroad contracts. Eventually WU’s monopoly helped establish a mutually beneficial news monopoly with the Associated Press (AP).
Government Regulation – Towards the end of the 19th century, complaints of the WU and AP monopolies eventually made their way to Congress. By 1890, more than two million signatures reached Congress demanding a postal telegraph system. However, the momentum for telegraph reform faded after WU used its deep pockets to lobby Congress.
II. Analysis: Parallels of the Telegraph and Internet
Over one hundred years later, another extraordinary innovation was unleashed to the American public. In 1979, a group of university computer departments decided to build a cheaper and less redundant computer network than what already existed (ARPANET). Although this new network called CSNET was slower, it made computer networking accessible to people beyond university computer science departments. Much like the telegraph’s quick transition from a communications marvel to a lucrative vehicle of enterprise, CSNET evolved from an “academic toy” into a commercial digital world. Again like the telegraph, the World Wide Web (“the Web or the internet”) communications network caused a similar set of cultural and economic issues:
First Impressions of the Public – Although many of the initial Web users thought they were entering “a brave new world of free and democratic communications” in 1992, it was over-shadowed by the stigma of being an outlet for the fringe of society. By the mid-1990s, America Online had eased this stereotype by making it easy for people to get online. Further, AOL was a supporter of many educational institutions, which increased the internet’s respectability much in the same way as the eye witness accounts of government officials validated the telegraph.
The Changing Conception of News – Like the telegraph sped up the newsgathering process, the Web sped up the news update process. As a result, the Web has become a primary news medium that is rapidly superseding daily newspapers.
Corporate Monopoly – Although the Web was originally moderated by the government’s National Science Foundation (“NSF”), it later transferred management to private telecommunications giants. As a result, companies like Verizon, AT&T and Comcast acquired a virtual monopoly over access to the internet much in the same way that WU arose as the primary gatekeeper of telegraphy.
Government Regulation – Just as there was a call to reform the telegraph system and transfer control away from Western Union to the government, there is a current movement to reform internet service providers and to empower the FCC to ensure that all web content and traffic to is treated equally (net neutrality). Similar to the telegraph reform being subdued by WU’s lobbying, this movement was slowed down in April 2010, when a three judge appeals panel ruled that the FCC does not have authority over the internet.
2. What are the social parallels between the telegraph and mobile phones?
2A. First Impressions of the Public?
2B. The Changing Conception of News?
2C. Corporate Monopoly?
2D. Government Regulation?
3. Which is the greater innovation, the telegraph or the internet? Why?
Czitrom, D. (1982). MEDIA and the American Mind, from Morse to McLuhan. Chapel Hill: University of North Carolina Press
Winston, B. (1998). Media Technology and Society. London & New York: Routledge
Van Camp, S. (November 2004). AOL, ClassesUSA partner up on learning site. MC Marketing Computers. Retrieved on April 25, 2011 from http://www.allbusiness.com/marketing-advertising/4447773-1.html
Drawbaugh, K. (April 2011). Republicans say FCC should not regulate Internet. Reuters. Retrieved on April 25, 2011 from http://www.reuters.com/article/2011/04/08/congress-internet-idUSN0825411720110408
 Czitrom, D. (1982). MEDIA and the American Mind, from Morse to McLuhan (p.4). Chapel Hill: University of North Carolina Press
 Czitrom, p.5
 Czitrom, p.6
 Czitrom, p.15
 Czitrom, p.23
 Czitrom, p.28
 Winston, B. (1998). Media Technology and Society (p.332). London & New York: Routledge
 Winston, p.331
 Winston, p. 334
 Van Camp, S. (November 2004). AOL, ClassesUSA partner up on learning site. MC Marketing Computers. Retrieved on April 25, 2011 from http://www.allbusiness.com/marketing-advertising/4447773-1.html
 Winston, p.333
 Drawbaugh, K. (April 2011). Republicans say FCC should not regulate Internet. Reuters. Retrieved on April 25, 2011 from http://www.reuters.com/article/2011/04/08/congress-internet-idUSN0825411720110408
 James, S. (April 2010). Comcast routs the FCC. Techland. Retrieved on April 25, 2011 from http://techland.time.com/2010/04/06/comcast-routs-the-fcc-rip-net-neutrality-and-bittorrents/
Based on all the other course readings that I have done thus far, I assumed that this read would be like the others, formally written with a dense amount of relevant theory. And, I was quite mistaken. Tom Standage’s The Victorian Internet was more of a colorful account of how new technology has impacted society in a variety of ways through time. Not only did its pages entertain me on the 14th day of straight Seattle rain, but I also learned about how the stock market technology of today had its beginnings in 18th century France via clocks and cooking pans (Standage, p.9). Seventy years later, those French clocks and cooking pans evolved into a globally adopted telegraph system that completely changed the way commodities and securities were bought and sold. Over a century later, a similarly dramatic change took place when this network transitioned from a long-winded trading system that only a privileged few could access to an instantaneous system that anyone could access. For the first time, in 1992, people outside of the brokerage industry could plug into this network via the internet and conduct their own trades. As Standage cleverly demonstrates throughout his book, the onset of the two internets caused similar networking catalysts that completely transformed stock market dynamics:
“The information supplied by the telegraph was like a drug to businessmen, who swiftly became addicted. …the rapid supply of information dramatically changed the way business was done. Suddenly, the price of goods and the speed with which they could be delivered became more important than their geographic location. …Tradesmen could have several potential suppliers or markets at their disposal and were able to widen their horizons and deal directly with people whom it would taken days to reach by mail. Direct transactions between producers and customers were made possible without having to go through middlemen (Standage, p.166-167).”
“Internet sites routinely offer stock prices and news headlines, both of which were available over 100 years ago via stock tickers and news wires. And just as the telegraph led to a direct increase in the pace and stress of business life, today the complaint of information overload, blamed on the internet, is common place (Standage, p. 210).”
Expanding on the above observations by Standage, the abundance of stock market information and the ability to enter cheap buy-sell orders online made it possible to cut out the middleman (stock brokers) much in the same way as the telegraph cut out go-betweens and allowed producers to directly transact with consumers. Traditional stock brokers were no longer essential. The cost effective, easy-to-use and convenient online trading platforms rapidly cut into the number of people relying on full-service brokerages to manage their portfolios and created a new class of self-directed investors. Further, just as the telegraph increased the number of businesses participating in global commerce, the internet increased the total number of individuals participating in the stock market. According to Forrester Research, between 2006 and 2011, general trading volume grew by 45% and the number of US households trading online increased by nearly 50%.
Aside from Standage’s rich content, I found that his writing progressively gained momentum much in the same way as a Victorian steam engine or a gothic novel. With the exception of the electrocuted monk story, the book started out a bit on the slow side with Chappe’s manual telegraph system and Morse’s code taking up a good forty pages. A quarter of the way through, the prose suddenly came alive when Cooke and Wheatstone quelled their squabbling and electrified the telegraph. From then on, my over-flowing laundry basket and thirsty plants no longer encroached on my reading experience. The pages turned much faster and my mind connected with the subject matter. Instead of dryly recounting key historical events as traditional historians often do, Standage crafted a wryly humorous narrative of true stories like the following about the first subaquatic telegraphy attempts:
“Things did not go according to plan. For starters, the wire was so thin that it wouldn’t sink; it simply floated pathetically in the water behind the boat. …The transatlantic cable was regarded as nothing short of miraculous; indeed it was a miracle that it worked at all (Standage, pp.71-83).”
In all, I definitely recommend The Victorian Internet. I think that both history buffs and financial services professionals will appreciate its insightful recount of how the two networking innovations of the telegraph and internet dramatically changed society and the stock market therein.
 Standage, T. (1998). The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century’s On-line Pioneers. New York: Walker & Company
 Standage, p.167
 Doyle, B. (April 2007). US Online trading forecast: 2006-2011. Forrester Research. Retrieved on April 18, 2011 from http://www.forrester.com/rb/Research/us_online_trading_forecast_2006_to_2011/q/id/40800/t/2