Traders have been seeking to gain an edge ever since the market began. In the old days, being on the trading floor was the ultimate advantage. However, due to membership requirements and geographic restrictions, not everyone who wanted to be a trader could trade on the exchange floor. Technology such as the telegraph and telephone provided off-the-floor traders their first edge during the infancy of day trading. These tools were faster and more accurate than the old methods of doing business.
The next dramatic breakthrough came in 1971 when the National Association of Securities Dealers formed its own electronic communications network, known as Nasdaq. Soon after, in 1975, the SEC abolished fixed commissions, creating discount brokers who used competition to set trading commissions. The lowered commission structure opened the door for the advent of the Small Order Execution System. The innovative traders who used this system, known as the SOES Bandits, gained an edge over the competition with execution speed and simultaneously laid the groundwork for the active trading boom.
Today, execution speed and accuracy remain critical to maintaining a true edge in trading. An entire segment of the market relies on these two factors for its profit-making advantage. Known as high frequency trading, or HFT for short, this trading form has truly maximized the speed advantage. Often measuring market data speed in nanoseconds and using co-located servers, these market players have redefined the trading landscape, just like their edge-seeking predecessors throughout market history.
Fortunately, the widespread availability of technology makes a difference for today’s traders. The speed advantage is no longer the sole province of HFT shops, hedge funds and professional trading firms. Whether you use the keyboard, are a manual point-and-clicker or algorithmically auto-trade to enter orders, speed is of the essence in today’s market. This is particularly true in the recent slow market environment. Opportunities are fewer and further apart with more competition vying to be first in line.
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