Could Limits to Net Neutrality Hurt Wall Street?

Following President Obama’s dramatic words on net neutrality, it’s time for a look at how the financial world might respond.

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Demonstrator Anna Roblin holds a sign in support of net neutrality outside the Federal Communications Commission (FCC) headquarters in Washington, D.C., U.S., on Wednesday, May 14, 2014. FCC Chairman Tom Wheeler is going forward with a vote tomorrow on rules to allow paid fast lanes for Web traffic as artists protest and corporate chieftains warn him against going too far. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Anna Roblin

Andrew Harrer/Bloomberg

On Monday President Barack Obama began his lame-duck era with a flourish. With a jaunty “Hi, everyone,” the now Republican-encircled president took to the camera in shirtsleeves to declare himself firmly in favor of reclassification, the shift that would allow the Federal Communications Commission to recategorize broadband Internet services as telecoms (public utilities) and regulate them to protect the freedom and openness of the web. Much of the debate since has focused on the potential impact of any limitation on Net neutrality, the principle by which Internet service providers are bound to treat all Internet traffic equally, on consumer-oriented Internet services. Will we lose access to Netflix? How long will Taylor Swift’s new video take to load in a non-Net-neutral world? And on, and on. But could curbs on Net neutrality also affect the financial industry?

The issue of Net neutrality has been kicking around the middle waters of the U.S. policy discussion for much of this year, but Obama’s intervention — an exercise in pure moral suasion, since the ultimate decision on reclassification and Net neutrality rests with the FCC and, once the inevitable legal challenges surface, the judiciary — brought it renewed attention. The case in favor of Net neutrality is made perhaps most vociferously by media and consumer tech companies, making Obama’s choice of a video to deliver his message on Monday particularly apt. Their fear is that in a non-Net-neutrality-protected world, Internet service providers — large cable and telecommunication companies like Comcast, Time Warner, Verizon and AT&T (which announced today that it’s postponing its fiber investment in light of net neutrality concerns) — will be able to create tiers of speed and ease of access to different web sites and services. This, the argument goes, will separate the Internet into a fast lane and a slow lane, crimping innovation in the process. Web sites stuck in the slow lane, ones that do not pay the telecoms for better service and payload speeds, will quickly lose customers. Data-intensive services like YouTube or Hulu might be degraded in a non-Net-neutral world, critics say, and the elevation of telecoms into market gods, picking winners and losers as they see fit, will prevent “the next Twitter” from emerging.

Concerns about speed and access to information have been at the core of the development of the capital markets for more than a century. Paul Reuter’s use of carrier pigeons to deliver stock prices between Brussels and Aachen in the mid-19th century was a famous, early illustration of the trading advantages gained from pure speed in the transmission of information. Net neutrality is mainly a concern playing out in the domain of what financial professionals like to refer to, slightly disparagingly, as “the public Internet.” The financial industry, by contrast, operates under different skies. Think about the way most participants in the capital markets get connected today — how they source market data, route order flow, communicate among themselves, do posttrade processing — and it’s fair to say that Wall Street left the public Internet and any notion of a level, open, one-speed playing field behind years ago.

The information that’s critical to the way markets function today is transmitted well away from the clunky pipes that Internet service providers make available to the public. Instead, most market participants hook into point-to-point dedicated telecommunication lines; they shift their servers and colocate directly in exchange data centers; or they go after even funkier solutions, using microwave dishes or hot air balloons or drones in the quest to find a way to receive and deliver information better and faster than their competitors. Over the past couple of decades, the idea that you should be able to pay to gain a speed advantage, the very principle that raises the hackles of the Obama-led pro-neutrality brigade, has become the markets’ default economic discriminator.

And yet. The information flows – all the stuff happening in the world – that remain critical to the functioning of the financial markets still sit, by and large, out there in the vast, choppy, and — for now — barely protected waters of the public Internet. Tampering with the universality of access to media and content has the ability to interfere with the information flows that grease the wheels of the market.

At the same time, if you accept the thesis that Wall Street is moving, however slowly, from a world of closed-box, proprietary solutions to its data and technology problems to a world in which more and more services are web-hosted and cloud-friendly, and in which there is a greater appetite among financial professionals for consumerlike products that interact more freely with the protocols of the public Internet, Net neutrality suddenly becomes something finance should care about. Financial technology has not witnessed the same velocity of innovation as has the consumer world over the past decade, but there’s still a place in the fintech universe for the plucky start-up. Tiny newcomers can still produce big and useful ideas, and it’s not hard to see how moves to limit Net neutrality might make it harder for smaller shops, which for cost reasons may be more reliant on delivery of their services through the public Internet, to get traction among the industry in an Internet of slow and fast lanes.


But then, it could be that there’s a basic logic of power at work here. Net neutrality advocates state their case most forcefully in the arena of the consumer Internet for the simple reason that this is the area that touches most ordinary people — who, by and large, don’t have a dedicated line into government. The financial industry, by contrast, with its battery of lobbyists and its ever-revolving door between Manhattan and the regulatory class, is embedded in the very belly of Washington. It would take a brave telecom indeed to degrade access to products of true value and importance to the financial industry. Most of the traders and technologists I spoke to for this post struggled to think of how the Net neutrality debate might spill over into finance. To be fair, their quiet, slightly smug confidence is probably entirely justified. In the end, Wall Street’s best protection against any adverse market impact from moves to limit Net neutrality might be the simple fact that it is Wall Street.

Follow Aaron Timms on Twitter at @aarontimms.

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