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The pursuit of an advantage in financial markets is as old as the markets themselves. Investors and traders have always sought to buy something for less than they can sell it for, preferably getting there before somebody else.

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The origins of London's stock market can be traced to the late seventeenth century, when brokers and dealers gathered around the Royal Exchange. In fact, one particularly unruly group was expelled from the Exchange for its bad manners — the stockbrokers. They took their business to nearby establishments, notably Jonathan's Coffee House in Exchange Alley, a narrow network of passages connecting Cornhill and Lombard Street. It was here, in 1698, that a French immigrant and broker named John Castaing began publishing share prices, government securities and foreign exchange rates a few days a week.

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Stockjobbers, or as the satirical journalist Ned Ward called them, fools and knaves, hurried between the coffee houses of Exchange Alley where groups of men gathered, some looking as though a terrible catastrophe had befallen them, and others laughing triumphantly at their misfortune. Despite this, the merchants and stockjobbers of Exchange Alley helped create the financial system that much of the world still uses today.

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One of the fascinating features of Exchange Alley was that the same share might be offered at different prices only a few yards apart. This created opportunities for what we now call arbitrage. A canny stockjobber, whether acting on his own account or that of his client, could buy shares at one price in one establishment, then bustle down the alley and sell them for more at another.  Speed, even then, was money.

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Financial centres across Europe offered similar opportunities, although exploiting them was rather more complicated. A messenger travelling between London and Amsterdam faced a sea crossing as well as journeys on horseback, often changing horses along the way. By the time news of a price difference arrived, the opportunity might have disappeared. Merchants eventually established networks of agents and correspondents in different cities, enabling them to trade locally while exchanging instructions by letter.

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The successful completion of a transatlantic telegraph cable in 1866 transformed communications between London and New York. What had previously taken days or weeks could now be communicated in minutes. But the pursuit of speed was far from over.

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In his fascinating book Flash Boys, Michael Lewis describes how high-frequency traders went to extraordinary lengths to gain an advantage measured in milliseconds. In 2010, Spread Networks completed an 827-mile fibre-optic cable between Chicago and New Jersey for high frequency firms at a reported cost of $300 million. The route was deliberately kept as straight as possible, even cutting through mountains to shave a few milliseconds off the time needed to transmit prices between the two financial centres.

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That was only fifteen years ago. Since then, microwave transmissions, improvements in optical fibre and increasingly powerful computers have reduced delays still further. Algorithms can now receive information, interpret it and execute trades in fractions of a second. Artificial intelligence promises to accelerate the process further.

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But has all this speed actually made us better investors? Speed has largely eliminated the advantage that human traders once enjoyed from having time to receive, consider and act upon information. Increasingly, computers are doing the thinking, or at least the reacting, for us.

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There is another potential consequence. As AI systems analyse similar information and potentially reach similar conclusions, they may all decide to buy or sell at much the same moment. Rather than calming markets, this could make them more volatile, particularly during periods of stress. It is a risk highlighted by the International Monetary Fund, which has warned that AI-driven trading could encourage herd behaviour and amplify market movements. The more successful technology becomes at identifying arbitrage opportunities, the faster those opportunities disappear. Vast sums are being spent competing for an advantage that may last only a millionth of a second.

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In July of this year the London Stock Exchange announced plans for continuous trading twenty fours hours a day , five days a week, although initially only for ETFs, not individual shares. The world is an international marketplace so time zones will become a thing of the past for traders outside the UK.  But even if shares are one day included, will there be someone available at the other end of the trade to provide a favourable price and liquidity could be very thin at 3 a.m in the morning.

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There remains an important distinction between trading and investing. Traders seek to profit from changes in price, often buying and selling the same securities repeatedly. Investors, on the other hand, can profit from owning businesses capable of increasing their earnings, cash flow and intrinsic value over many years. That requires patience, judgement and, occasionally, the willingness to do nothing at all.

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Three hundred years of technological progress have reduced the time needed to trade from days to microseconds. Whether they have improved the quality of investment decisions is another matter entirely.

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Traders compete against time. Long-term investors benefit from time.

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PS It was an extraordinary period in London’s history, when several institutions we take for granted today were coming into existence, including the Royal Society, Lloyd’s of London, the Bank of England and the beginnings of the London Stock Exchange. Remarkably, much of what we now know as Mayfair and Belgravia was still open countryside. It was not until the early eighteenth century that the Grosvenor family began developing its 500 acres of marshy fields and pastureland to accommodate the wealthy moving westwards from the increasingly crowded City.

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Comments from James Scott-Hopkins, Founder of EXE Capital Management.

The views are those of the author only.

The value of investments can fall as well as rise. Past performance is no guarantee of future returns.

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