The 1866 cable collapsed arbitrage forever

For most of the 19th century, the New York Stock Exchange and the London Stock Exchange were parallel universes. The same railroad might trade at different prices in both markets, and the gap could persist for days. A packet-ship captain in 1855 who carried the week's London prices to Manhattan was a node in the global financial system, and his delay was the arbitrage opportunity. Nathan Rothschild had built a fortune on the same kind of delay a generation earlier. Everything changed on 27 July 1866, when a ship called the Great Eastern finished laying a working copper cable across the Atlantic.

Twelve years to cross

The project was Cyrus Field's. Field was an American paper-maker who had retired rich at 33 in 1853, looked for a harder problem, and settled on a transatlantic telegraph. He founded the New York, Newfoundland and London Telegraph Company in 1854. He had no engineering background. What he had was persistence that by the end looked almost pathological.

The first cable was laid in 1857 and snapped 380 miles out. The second, in August 1858, worked for just over three weeks. Queen Victoria exchanged a ceremonial message with President Buchanan on 16 August 1858, the first transatlantic telegraph transmission in history. The voltage applied to reach across the ocean ended up destroying the cable's insulation, and by September it was dead. Then came the American Civil War and no investor would fund another attempt until 1865. That cable broke too, 1,200 miles out. The 1866 expedition finished the job, and for good measure grappled up and completed the 1865 wreck as a redundant second line. From then on, London and New York were effectively the same day.

The spread collapses

The Richmond Federal Reserve Bank published a study in 2018 comparing cotton prices in Liverpool and New York before and after the cable. The average price difference was 2.56 pence per pound before 1866. It fell to 1.65 pence per pound within a year of the cable opening, a reduction of more than a third. The remaining 1.65 pence reflected shipping costs, insurance, and an ongoing risk premium, all of which are real and not informational. The purely informational component of the arbitrage had largely disappeared.

Similar patterns showed up in railway bonds and foreign-exchange rates. Shares of the New York and Erie Railroad, which traded in both cities, converged to within a few percent. The margin that had supported a whole class of specialist transatlantic traders was gone.

The pattern

The 1866 cable was the first moment in history when information travelled faster than humans could. It never slowed down. By 1870 an undersea cable connected Europe to India. By 1902 all six inhabited continents were wired. By 1984 the first fibre-optic cable across the Atlantic carried 280 million bits per second. By 2023 a single modern cable was carrying more than 300 terabits per second, over a million times faster than the 1984 line.

What Field collapsed was not just a price spread. It was a business model. Anyone in 1855 who made a living off the eight-day London-New York lag was watching the water recede from under their feet in 1866. They just could not yet see it. Every subsequent compression has done the same thing to someone: the pit traders after electronic markets, the newspaper-reading retail investors after CNBC, the early algorithmic shops after colocation, the colocation shops after AI-driven execution. The phrase 'information arbitrage' means roughly what 'steam power' means today, a specific technique that used to matter, which has been commoditised into a feature of the infrastructure.

Field himself lost most of his fortune speculating on railroad stocks in the 1880s and died in 1892 in genteel poverty. The cable he laid kept working.