The New York Stock Exchange agreed to sell itself to Germany’s Deutsche Boerse earlier this year, and although an opposing bid from Nasdaq OMX has delayed any final sale, the Deutsche Boerse offer is seen as some as another indication of America’s declining influence in the world. In reality, stock exchanges have been steadily evolving for centuries.
The history of securities markets in the United States precedes the founding of the New York Stock Exchange. In 1790 the federal government refinanced Revolutionary War debt by issuing $80 million in bonds, the first major issue of publicly traded securities and the birth of US securities markets. In 1792, when five securities were traded in New York City (three government bonds and two bank stocks), 24 brokers and merchants gathered on Wall Street to sign the Buttonwood Agreement to trade securities on a commission basis. A formal organization, the New York Stock & Exchange Board, was established in 1817 with a constitution and rules for conduct of business, and Wall Street has been synonymous with securities markets ever since. In 1836 the NYS&EB prohibited members from trading in the streets.
Until the 1870’s traders sat in chairs to trade and the number of “seats” increased to 1366 in 1953. These seats, which offered the privilege of trading directly on the NYSE rather than through another NYSE broker, were traded regularly until 2005 when the NYSE became a public company. In 1871 the exchange developed an “open outcry” system to manage the continuous auction of securities, replacing the calls for trading at set times. Traders would literally yell orders at a trading post where a specialist broker for a specific security would accept orders and maintain an orderly market for that security. The New York Quotation Company was created by the NYSE in 1889 to provide ticker price service to subscribers. Many rules were adopted to improve reporting and reduce fraud, such as “watering stock”, or issuing shares in secret. As a result of World War I, from which America emerged as a creditor rather a debtor nation, Wall Street overtook London as the world’s investment capital and foreign issues began to be issued in the US.
New York was not the only securities exchange, of course. The Philadelphia Stock Exchange was actually established first in 1800. Eight other regional exchanges developed (Boston, Cincinnati, San Francisco, Spokane, Chicago, Los Angeles, Miami, and Salt Lake City), each with its own unique factors and specialties.
The NYSE weathered plenty of economic crises over the years. For example, in 1873 the NYSE closed for 10 days after speculation in railroad stocks caused the downfall of Jay Cooke & Company, a prestigious Philadelphia banking firm. Legislation enacted during the Depression mandated new issues to be registered and established federal disclosure requirements. The Securities and Exchange Commission (SEC) was created to provide full disclosure to investors and to prohibit fraud in connection with the sale of securities.
Change accelerated in the 1970’s. The NASDAQ stock exchange, founded in 1971 by the National Association of Securities Dealers, was the first electronic stock exchange. It began as a simple computer bulletin board posting bid and ask prices and did not actually connect buyers and sellers. In 1975 the SEC banned fixed minimum commission rates, which opened the door for what came to be known as “discount brokers”. (Today, trading of shares in the US accounts for only an estimated 3% of NYSE revenues.) Shortly thereafter, in 1978, the first electronic link between the NYSE and competing exchanges was established, enabling brokers to access all markets nation- wide to find the best purchase or sale price for a security. The market crash of 1987, when most trading still occurred over the telephone, resulted in many brokers becoming unavailable and the development of electronic trading systems for dealers. Real-time quotes on financial broadcasting outlets, rather than a 20-minute delay, were introduced in 1996.
Today daily trading volume in the US is between 8 and 9 billion shares, with an estimated 50% of trades taking place via automated algorithms that bypass any formal exchange. These new techniques have increased concerns of market collapse from massive unregulated and unmonitored trading, such as occurred in May, 2010’s “flash crash” when prices of some securities dropped more than 90% in minutes and recovered just as rapidly. The NYSE, after already absorbing a number of regional and electronic exchanges, merged with Euronext in 2007, which included exchanges in Lisbon, London, Paris, Brussels and Amsterdam.
And even the merger of NYSE and Deutsche Boerse would not necessarily end American dominance. It is true that Deutsche Boerse would own 60% of the new entity, with NYSE owning the remaining 40%. The NYSE name could disappear and the majority of board members would be from the Deutsche Boerse. But because American investors already own a large part of Deutsche Boerse, Americans would actually own around 55% of the combined company, with only 11% owned by Germans. Welcome to the global economy.
March 2011