A SUBSTANTIAL PART OF all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike.

Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, which encloses more than a hectare, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light.

The exchange is called Direct Edge, hardly a household name.

“This,” says Steven Bonanno, the chief technology officer of the exchange, “is where everyone does their magic.”

In many of the world’s markets, nearly all stock trading is now conducted by computers talking to other computers at high speeds.

The advantages of this new technological order are clear. Trading costs have plummeted, and anyone can buy stocks from anywhere in seconds with the simple click of a mouse or a tap on a smartphone’s screen.

But some experts wonder whether the technology is getting dangerously out of control. They wonder whether the new world is a fairer one - and whether traders with access to the fastest machines win at the expense of ordinary investors.

As the machines have taken over, trading has been migrating from raucous, populated trading floors like those of the New York Stock Exchange to dozens of separate, rival electronic exchanges.

They rely on data centers like this one, many in the suburbs of northern New Jersey. “New Jersey is the new heart of Wall Street,” says WILLIAM O’Brien, chief executive of Direct Edge.

While this “Tron” landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock . No one knows whether this is a better world, and that includes the regulators, who are struggling to keep up with the pace of innovation in the great technological arms race that the stock market has become.



PHOTOGRAPHS BY MICHAEL FALCO FOR THE NEW YORK TIMES

The Race for Speed

The upheaval got under way in the late 1990s and early 2000s, after the Securities and Exchange Commission enacted a series of regulations to foster competition and drive down commission costs for ordinary investors. These changes forced the New York Stock Exchange and Nasdaq to post orders electronically and execute them immediately, at the best price available in the United States - suddenly giving an advantage to start-up operations that were faster and cheaper. Direct Edge now trails the N.Y.S.E. and Nasdaq in size; it vies with the BATS Exchange, based in Kansas City, Missouri, for third place.

Direct Edge accounts for about 10 percent of stock market trading in the United States, according to the exchange and the TABB Group, a specialist on the markets.

Direct Edge and other new venues have sucked volumes away from the Big Board and Nasdaq. The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself.

Bryan Harkins, Direct Edge’s chief operating officer, says the new world is fairer because it is more competitive. “We helped break the grip of the New York Stock Exchange,” he says.

In this high-tech stock market, Direct Edge and the other exchanges are sprinting for advantage. All the exchanges have pushed down their latencies - the fancy word for the lessthan- a-blink-of-an-eye that it takes them to complete a trade. Almost each week, it seems, one exchange or another claims a new record: Nasdaq, for example, says its time for an average order “round trip” is 98 microseconds - a mind-numbing speed equal to 98 millionths of a second.

The exchanges have gone warp speed because traders have demanded it. Even mainstream banks and old-fashioned mutual funds have embraced the change.

“Broker-dealers, hedge funds, traditional asset managers have been forced to play keep-up to stay in the game,” Adam Honore, research director of the Aite Group, wrote in a recent report.

The exchanges are catering mostly to a new market breed - highfrequency traders who have turned speed into a new art form. They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors to take advantage of mispricing between stocks, or differences in prices quoted across exchanges.

One new strategy is to use powerful computers to speed-read news reports - even Twitter messages - automatically, then to let their machines interpret and trade on them.

Traders may make only the tiniest fraction of a cent on each trade. But multiplied many times a second over an entire day, those fractions add up to real money. Kevin McPartland of the TABB Group says high-frequency traders now account for 56 percent of total stock market trading. Rather than charging them commissions, some exchanges now even pay highfrequency traders to bring orders to their machines.

High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”

As everyone goes warp speed, a number of high-tech construction projects are under way.

CME Group, which owns the Chicago Mercantile Exchange, has opened a 40,000-square-meter data center in the western suburbs of Chicago. It houses the exchange’s Globex electronic futures and options trading platform and space for traders to install computers next to the exchange’s machines, a practice known as co-location - at a cost of about $25,000 a month per rack of computers.

The exchange is making its investment because derivatives as well as stocks are being swept up in the high-frequency revolution. The Commodity Futures Trading Commission estimates that high-frequency traders now account for about one-third of all volume on domestic futures exchanges.

In August, Spread Networks of Ridgeland, Mississippi, completed a 1,328-kilometer fiber optic network connecting the South Loop of Chicago to Cartaret, New Jersey, reducing the round-trip trading time by three milliseconds, to 13.33 milliseconds.

Fractions of a second are regularly being shaved off of the busy Frankfurt- to-London route. And in October, a company called Hibernia Atlantic announced plans for a new fiberoptic link beneath the Atlantic from Halifax, Nova Scotia, to Somerset, England that will send shares from London to New York and back in 60 milliseconds.

“Speed,” a banker said, “is money.”


Runaway Technology

The “flash crash,” the harrowing plunge in share prices that shook the stock market during the afternoon of May 6 last year, crystallized the fears of some in the industry that technology was getting ahead of the regulators.

In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.

The fund company, Waddell & Reed Financial of Overland Park, Kansas, conducted its sale through a computer algorithm.

The sale may have been a case of inept timing - the markets were already roiled by the debt crisis in Europe. But there was no purposeful attempt to disrupt the market, the regulators found.

But there was a role played by some high-frequency machines, the investigation found. As they detected the big sale and the choppy conditions, some of them shut down automatically. As the number of buyers plunged, so, too, did the Dow Jones Industrial Average, losing more than 700 points in minutes before the computers returned and prices recovered just as quickly. More than 20,000 trades were ruled invalid.

The episode seemed to demonstrate the vulnerabilities of the new market, and what could happen when no humans are in charge to correct the machines.

Since the flash crash, the S.E.C. and the exchanges have introduced marketwide circuit breakers on individual stocks to halt trading if a price falls 10 percent within a five-minute period.

But some analysts fear that some aspects of the flash crash may portend dangers greater than mere mechanical failure. They say some wild swings in prices may suggest that a small group of high-frequency traders could manipulate the market.

One debate has focused on whether some traders are firing off fake orders thousands of times a second to slow down exchanges and mislead others. Michael Durbin, who helped build high-frequency trading systems for companies like Citadel and is the author of the book “All About High- Frequency Trading,” says that most of the industry is legitimate and benefits investors. But, he says, the rules need to be strengthened to curb some disturbing practices.

“Markets are there for capital formation and long-term investment, not for gaming,” he says.

The S.E.C. is a year into a continuing review of the new market structure. Mary L. Schapiro, the S.E.C. chairwoman, has already proposed creating a consolidated audit trail and raised the idea of limiting the speed at which machines can trade.

Most of the exchanges have already eliminated a controversial electronic trading technique known as flash orders, which allow traders’ computers to peek at other investors’ orders a tiny fraction of a second before they are sent to the wider marketplace. Direct Edge still offers a version of this service.

Regulators are also examining the implications of so-called dark pools, in which large blocks of shares are traded electronically and without the scrutiny exercised on public markets. About 30 percent of domestic equities are traded on these and other “unlit” venues, the S.E.C. says.



At Direct Edge, a clock ticks down to the markets’ opening. Andrei Girenkov, a Direct Edge programmer , said he and his friends benefited from the growth of financial data centers in New Jersey.


A Need for Traffic Lights

For Mr. O’Brien, the benefits of technology are clear. “There is almost no other industry where people say we need less technology,” he said. “Now someone can execute a trade from their mobile from anywhere on the planet. That seems to me like a market that is fairer.”

But some analysts question whether everyone benefits .

“It is a technological arms race in financial markets and the regulators are a bit caught unaware of how quickly the technology has evolved,” says Andrew Lo, director of the Laboratory for Financial Engineering at Massachusetts Institute of Technology. “Sometimes, too much technology without the ability to manage it effectively can yield some unintended consequences. Finally, it gets to the point where we have a massive traffic jam and we need to install traffic lights.”


By GRAHAM BOWLEY SECAUCUS, New Jersey