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'We Built A Robot That Types': The Man Behind Computerized Stock Trading


The U.S. government wants to extradite a stock trader from the U.K. The U.S. says his activities helped trigger the flash crash of 2010. That's when the Dow Jones Industrial Average fell nearly a thousand points in mere minutes. The plunge was sudden and deep because so many stock trades are now done by computers that decide on their own to buy or sell. That reminded us of someone we first met a few years ago on this program, one of the fathers of electronic trading. Planet Money's David Kestenbaum brought us that profile as he set out to learn how computers ended up controlling so much of the market.

DAVID KESTENBAUM, BYLINE: Thomas Peterffy grew up in Hungary after World War II. His first experience with trading happened when he was around 12. A friend went across the border to Austria and brought back something truly precious.

THOMAS PETERFFY: Juicy Fruit Gum - these were beautiful, yellow Juicy Fruit (laughter) Gum sticks.

KESTENBAUM: Peterffy cut each stick into five small pieces and sold the pieces to his friends at school for a profit.

PETERFFY: Eventually, the principal found out about this, called me down into his office and he said, well, where is your communist conscience? And I didn't know what he was talking about (laughter).

KESTENBAUM: Was that your first time buying low and selling high?

PETERFFY: That is correct.

KESTENBAUM: Peterffy eventually makes his way to the United States where he meets his first computer - a big, boxy calculator of a thing, and he falls in love; stays up all night programming it. And eventually gets a job at a company that is trying to use computers and math to make money on Wall Street. In particular, there are these complicated things called options or derivatives that give you the right to buy, say, a certain stock at a certain price on a specific date. It's hard to calculate what one should cost, but Peterffy, with a computer, he finds a kind of secret formula.

PETERFFY: It took me about nine months, but once I figured it out (laughter) it was a fantastic feeling.

KESTENBAUM: 'Cause it meant there was a way to price them.

PETERFFY: That's right.

KESTENBAUM: And a way to make money. But this is 1977, and Peterffy has a problem. Trading isn't done on computers. You have to go stand in a pit on a trading floor and wave your hands around and shout. Every time Peterffy tries to use computers to trade, it's like the world just isn't ready for it yet. He hires some engineers who help him build these early tablet computers, which work, though, one burst into flames on the trading floor. It isn't until 1987 that Peterffy finally is able to take people out of the loop entirely. It happens at Nasdaq, the world's first electronic stock exchange, meaning there is no trading floor. You buy and sell by typing orders into a computer, a Nasdaq terminal. Peterffy, of course, doesn't want to have to type in orders, so he and his engineers hack into the terminal. They wire it up to their computer, which starts trading up a storm. So many trades that a high-up official with Nasdaq comes by to see what's going on and the guy sees just this one terminal attached to a computer.

PETERFFY: He looks and looks and looks and he says, well, tell me how you're doing this? And so I explain to him what's happening here and then he says I don't think you can do this, but let me go back to my office and I'll let you know.

KESTENBAUM: The man calls back and says I'm sorry. The Nasdaq rulebook says you can't go cutting wires. All orders have to be entered through the keyboard. You have one week to fix it.

PETERFFY: So this was a problem (laughter).

KESTENBAUM: Peterffy and his engineers come up with a solution. Trades have to be entered on the keyboard - fine. They build a machine to do that.

PETERFFY: So it was basically - they were rubber fingers that are typing.

KESTENBAUM: You built a robot to type in the trades.

PETERFFY: We built a robot that types.

KESTENBAUM: What did that thing sound like when it was running?

PETERFFY: Like a machine (imitating machine sound) because it was typing so fast.

KESTENBAUM: Finally, in the 1990s, exchanges started to let people just plug their computers directly into the markets. Today, Peterffy is one of the big players. The company he started - Interactive Brokers - does electronic trades on a mind-boggling scale. Peterffy says automation has done some very good things for the world. It's made buying and selling stocks much, much cheaper for everyone. But Peterffy thinks this race for speed - it's doing more harm than good now. It's an arms race like the U.S. had with Soviets.

PETERFFY: We are competing on milliseconds and whether you can shave off three milliseconds in the execution of an order has absolutely no social value.

KESTENBAUM: Peterffy is in favor of more regulation, rules that'll build in some safeguards and slow things down. The challenge, of course, people will try to find ways around those rules. There's always someone willing to build a robot that types. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.

David Kestenbaum is a correspondent for NPR, covering science, energy issues and, most recently, the global economy for NPR's multimedia project Planet Money. David has been a science correspondent for NPR since 1999. He came to journalism the usual way — by getting a Ph.D. in physics first.