The
Origins of Stock Broking
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History
of the US Stock Exchanges
Overview
Brokers have been trading US stocks and securities for over
300 years, but it was not until 1800, when America’s
oldest stock exchange – the Philadelphia Stock Exchange
– was established, that the business of trading in US
stocks and securities became organized and regulated. Today,
not including any over-the-counter markets, the US has two
regulated stock exchanges in New York and nine smaller regulated
regional stock exchanges that operate in (alphabetical order
and not in order of importance):
- Boston
- Cincinnati
- Chicago
- Los Angeles
- Miami
- Philadelphia
- Salt Lake City
- San Francisco
- Spokane
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Although each of the stock exchanges in the US trades in its own
stock and securities, that are unique to them, as each stock exchange
has some unique factor of its own – for example, some stock
exchanges are more popular with banks, others with new technologies,
some companies are known to issue their stock and securities in
a number of exchanges. As a result, the most well known exchanges
in the US today are:
– the New York Stock Exchange (NYSE)
– the American Stock Exchange (AMEX)
– the Nasdaq Stock Market (NASDAQ), the US’s biggest
over-the-counter market; and
– the Futures and Options exchange in Chicago
The early days
Having begun trading in parks and coffeehouses around America since
the early 1700s, when the first regulated exchanges were created
in 1800 in Philadelphia and 1817 in New York, they were regulated
and traded along lines and rules that brokers had become accustomed
to over a long period of time. Together with the continued growing
economy in the US following the end of the American Revolution,
the first 100 years of trading stocks, although not without the
odd hiccup, was a resounding success!
What goes up must come down – the Crash
of 1929
Having enjoyed an unbroken period of success for a very long time,
America’s love affair with US stock exchanges came crashing
down to their knees on October 29, 1929 when a huge number of investors,
having borrowed heavily to make their millions in the stock market,
realized that a ‘bubble’ economy existed on the US stock
exchanges and that the stock value of listed companies far outweighed
their actual value. With the largest number of ‘sell’
orders ever posted in one day came the 1929 crash of the New York
Stock Exchange that eventually led to the Great Depression of the
1930s and which is still talked about to this day.
From 1929 to 1970
With many Americans having lost their entire life savings in the
1929, and with one in every four Americans out of work during the
Great Depression of the 1930s, little money was available for investment
in the US stock exchanges – and, having already been burnt,
those who did have money to invest refused to do so.
However, the US stock exchanges survived and with the coming World
War II, so did a large number of American corporations who were
either listed on the stock exchange or who needed to raise money
on the stock exchange to invest and take advantage of the boom that
was coming. So, although slightly more regulated following Congress’s
passing of the Securities Act of 1933, the stock exchange rebounded.
With the 1929 crash still firmly in everyone’s mind, from
1945 to 1970 the theme of the US stock markets was continued regulated
growth.
1970s and reform
As with most changes that the US stock markets have undergone, new
technologies brought about a new era. Realizing in the early 1970s
that the US stock markets were no longer serving the purpose for
which they were created, in part due to the restrictive regulations
imposed following the 1929 crash, the regulators of the stock markets
introduced:
- the Consolidated Tape System (1972), which provided trading information
to investors for all US exchanges and over-the-counter markets;
and
- the National Market System (1975), which provided the price of
stock and securities from all US exchanges simultaneously at each
other exchange,
Gordon Gekko and the early 1980s
With the liberalization of the markets in the 1970s, combined with
ever more innovative means of communication, the watchword of the
1980s became ‘money’ – in particular, making lots
of it.
1987 – and another crash!
According to economist, the 1970 reforms led directly or indirectly
to brokers and traders trading low-margin stock index futures. When
prices began to drop, traders began selling securities on new futures
markets. In October 1987 the US government released pessimistic
economic forecasters, traders and brokers once again rushed to post
sale signs on their stocks and Standard & Poor’s index
of stock prices fell 20% in one day.
The modern era – a Bull market turns
Bearish
Following the latest crash in 1987, regulators of the stock exchanges
once again introduced restrictive trading regulations – in
this case, the so-called ‘circuit breaker’ system, by
which if a stock price falls 10% or more in one trading session
then a halt to trading would come into play.
While it has now been shown that stock markets go in cycles, upturns
and downturns becoming more predictable, the modern era of the US
stock exchanges has seen an almost unrivalled period of sustained
growth in US stock and securities.
However, two major factors put a halt to the phenomenal growth
of the 1990s, the September 11, 2001 World Trade Center attacks
and the ongoing corporate scandals involving the likes of Enron,
WorldCom, Inc. and Martha Stewart – to name but a few. Strangely,
it is likely that the second of these two major events is going
to have the longer lasting affect on stock exchanges in the US,
with the advent of new bookkeeping and accounting standards and
new liabilities on companies CEOs and CFOs who sign company audited
accounts that later transpire not to have told the entire truth.
So, while we may currently be at a crossroads in the history of
US stock markets, one thing that is in little doubt is that the
markets will survive, they will continue to grow and develop, and
they will still be places where professional and amateur investors
alike can make or lose millions.
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