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.
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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:
But then something funny happened. To cut down on arguments, some exchanges mandated that traders use the same length cable:
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.
The article The Absurdity of What Investors See Each Day originally appeared on Fool.com.
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