On Wall Street in 1792, 24 stockbrokers stood under a buttonwood tree and negotiated terms for trading stocks and bonds.1 The Buttonwood Agreement memorialized this precursor to the New York Stock Exchange, and set forth early, and very basic, parameters for their trading: The brokers were to deal solely with each other, not auctioneers, and commissions were to be at least .25 percent.2 At that time, the brokers traded with each other by gathering outdoors on Wall Street or at a nearby coffee house and dealing face-to-face.3 The curbside trading of the early Buttonwood brokers contrasts starkly with today’s trading strategies that use algorithms executed by massive computers co-located in trading data facilities to maximize the speed of executing orders. In 1792, neither the telephone or telegraph as we know them had been invented, and horses were not only the primary means of transportation, but also the fastest means of distributing information.4 We now have smartphones, electric cars, and fiber-optic cable that can transmit huge amounts of data around the world in seconds. In the 200+ years since Buttonwood, evolution in the equity market structure has mandated the need for continuous reform and regulation, with recent technology spurring further discussion.
The latest regulatory debate has centered around so-called “high frequency trading” (HFT), an undefined and ambiguously categorized form of trading that relies on powerful computers to conduct large numbers of trades at high speeds. The U.S. Securities and Exchange Commission has commented that HFT is one of the “most significant market structure developments in recent years,”5 and concluded that “[b]y any measure [HFT] is a dominant component of the current market structure and likely to affect nearly all aspects of its performance.”6 As the SEC wades into the regulatory pool (“dark” or “lit”) on HFT, all eyes will be focused on whether subsequent regulations are appropriately and narrowly tailored to promote market stability without limiting the advances that technology has provided for market access and structure.
