Creative destruction in Wall Street's technological arms race: Evidence from patent data

Technology and policy have transformed the market infrastructure of trading in capital markets and have helped financialize other markets, such as commodities trading. The associated 'technological arms race' has created a new market ecology which has made trading cheaper and faster but more volatile and fragmented. This paper charts the technological roots of this transformation from a conventional measurement of innovation perspective. We do so by employing content analysis techniques and extracting market infrastructure patent counts from the USPTO (United States Patent and Trademark Office) database for the period January 1976 to October 2013. From the resulting time series and a qualitative examination of patents we find that (1) the number of market infrastructure patents has dramatically increased since 1999, as confirmed by an associated structural break; (2) the new market ecology has, in true Schumpeterian style, been associated with a new breed of firms, most notably software firms and historically smaller brokerage firms that have invested heavily in technology internally and through strategic acquisitions; and (3) some incumbent firms have responded aggressively to the new market ecology, most notably the Chicago Mercantile Exchange and Goldman Sachs. We conclude that policymakers, regulators and academics wishing to further investigate the technological roots of recent changes in capital should refer to patent data. Our principal contribution is to highlight that Wall Street has been actively patenting market infrastructure innovations in a pattern consistent with claims that an associated 'technological arms race' started in the late 1990s.