Researchers use patent data to ascertain the technological roots behind Wall Street’s current ‘technology arm race’

In the past, trading a share was a hands-on transaction that took about two minutes to complete. Nowadays, deals are completed in nanoseconds by computers talking to one another the world over.

How the financial market got to this point was the subject of a study conducted by researchers at New Zealand’s University of Otago, who used US patent data to determine what steps were taken that led to the industry’s current “technology arms race”.

Specifically, Dr. Diaz-Rainey, along with co-authors Dr. Michael Falta and doctoral student Stephan Esendorfer, examined patent information from the US Patent and Trademark Office database to examine market infrastructure (MI) patents for software or hardware used in trading filed between January 1976 and December 2013.

“Established economic theory tells us that new firms will play a leading role in transforming an industry. However, traditional finance firms are powerful and commercially astute so it is reasonable to assume at least some will have responded aggressively by patenting new MI technologies themselves,” says Dr. Diaz-Rainey.

One of the things they found was that the top firms behind most of the MI patents weren’t the established names of Wall Street; rather, it’s been a rather healthy mix of “new entrant” and “incumbent” firms. 

“We identified software companies and smaller brokerage firms that have invested heavily in technology internally and through market acquisitions, right alongside major incumbent firms like the Chicago Mercantile Exchange and Goldman Sachs.”

Interestingly enough, the authors also found that the leading MI patentee wasn’t one of these trading firms — it’s actually Trading Technologies International, a private software company. 

An additional detail worth noting: most of the MI patents filed began in the mid-to-late 90s, and it’s been more intense in recent years compared to general patent filing levels of the same time period. 

“This is consistent with the notion of a 'technological arms race',” Dr. Diaz-Rainey says.

He went on to say that the impact of these finds on the financial sector should not be ignored. 

“Until now, we have had no way of knowing who exactly was involved in this 'arms race'. Was it the finance firms themselves? Were there new players involved? We just didn't know. We were in the dark.”
“The patent data has allowed us to gain, for the first time, whole new insight into this aspect of the market. This paper is just the start.” 

Via University of Otago