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<< Return to Research published Nov 10, 2007 | updated Sep 21, 2008

The NYSE and American Capital Markets

Introduction

The island of Manhattan is 23 square miles of living history and we are fortunate to have artifacts from the story of Wall Street scattered throughout the city. The buildings remind us of stories that shaped the American financial landscape. While the activities taking place inside may be very different today, they help us envision the past. They stand as footnotes to the lessons already learned while we write a new history in American finance. There are the signposts we know well, like the iconic NYSE building at 18th Street.

There are also obscure remnants that we overlook like the American Bank Note building at 74 Broad Street that are an important reminder of how intricate and complicated the Money Trust's control over American financial markets was at the turn of the 20th century. The buildings that hold the past of Wall Street are not just in the financial district but throughout the city, like The New York Life Company building that still stands at 51 Madison Avenue.

This work will audit major periods and events of the Wall Street history while seeking to understand the long-term impact of these events and similarities with our current environment. To explore the entire history of the exchange would far exceed the scope of this piece of work, so the primary focus will be the Money Trust era from approximately 1890-1920. While much has been recently made about the 20th anniversary of Black Monday in recent weeks, there are fascinating and critical concepts buried deeper in the history of the exchange and Wall Street.

The Money Trust era saw significant legislation passed, prior to the well-known New Deal era of the 1930s. It set off a chain reaction followed by a shift of power in US Government in the 1920s to more business friendly policy, which may have laid the groundwork for the crash of 1929 and ultimately the Great Depression.

The Money Trust era saw the most powerful men in the banking world extend their reach through corporate directorships and inspired a crusade against concentrated wealth by leaders like Louis Brandeis.

Before getting into the specifics of history, it is important to outline a few persistent themes recognized throughout the long history of the Exchange and American financial markets. These themes can be easily recognized throughout nearly every major period of Wall Street and they lend a deeper understanding of what is different about the markets and exchanges today and what is actually just the reoccurrence of characteristics that have long been at the core of American capital markets and exchanges since the beginning.

Persistent Themes

Wall Street has a colorful history, full of legends both famous and infamous. Underlying the stories of great successes and documented swindles can be found similar themes that drove and continue to drive market forces. Market efficiency, manipulation,
technology, and regulation can be attributed, in some sense, to nearly every significant market event throughout its history. While the manifestation of these factors and the details of each significant market event reflected the realities and opportunities of that time, each was driven by similar forces at the core. The following characteristics can be found in the events of the NYSE and Wall Street throughout its existence.

Market Efficiency

The NYSE and all exchanges represent a vehicle to achieve greater market efficiency than possible before their existence. Brokers in New York began making deals on the street in the 18th century with no real structure to their activities. When a group of brokers got together and agreed to a few simple rules on how they would trade and moved their activities into a coffee house, it gave the market for the stocks they traded a structure that resulted in greater efficiency. Underlying the structure was a method for conducting trades and common expectations on how to learn of news and prices related to the stocks they traded.

Market efficiency is based largely on equal and unbiased dissemination of information. Organized exchanges were not a new concept when 24 New York brokers organized the NYSE in 1792. Exchanges, or bourses as they were called, had been established in Europe during the 17th century.¹ New York brokers were not even the first to establish an exchange in America as the Philadelphia Stock Exchange had been formed two years earlier. Nonetheless, the founders of the NYSE were the first to provide structure and an advance in market efficiency in what would become the financial capital of the world over the next century. Throughout the history of the NYSE, the institution continued to build on this foundation of enabling a more efficient market through additional trading rules, further development of the physical space that became the trading floor, and the application of technology.

An early use of computers during the 1950s was to analyze economic time series data and stock market prices were a natural fit for this new analysis. The results of research by Maurice Kendall using these new methods seemed to demonstrate that there were no recognizable patterns or predictability in stock prices. This disturbed many in the financial community as they initially thought it was an indication of irrational market behavior. They later reversed their opinion of the results as the idea that the analysis illustrated a well-functioning efficient market became widely accepted.²

For many years academics believed that exchanges represent some form of an efficient market and rejected the notion of behavioral psychology as a market force. It is and will always be a mistake to overlook the impact of behavioral psychology on a free market exchange. The underlying concept of a stock price is that it represents the value of a company's assets, operations, and potential for future earnings. In a hypothetical efficient market, information about the company will be available to all investors and potential investors at the same moment and without bias. The efficient market hypothesis goes further to assume that investor behavior is rational. This is an assumption born out of necessity to make the hypothesis work, but clearly a fallible assumption to make about human beings. More importantly, the hypothesis overlooks the idea that two investors can look at the same information and see something very different. There is no one true value of a stock, but rather a consensus of subjective assessments made by investors that result in a stock price.

When considering the efficient market hypothesis, we see that the evolution of exchanges have both improved market efficiency and also interfered with it. As a vehicle of efficient dissemination of information about companies and stock prices, the exchanges contribute greatly to market efficiency. The NYSE brought traders off the street and provided a forum for efficient communication related to companies and stocks. At the same time, putting brokers in the same room exacerbated the impact of behavioral psychology that interferes with the rational behavior assumption. As traders became more immediately aware of changes in stock prices, their subjective assessment of the value of that stock is certainly affected to a greater degree.

Through two centuries of development in American exchanges, market efficiency has continued to improve as a function of information dissemination but the impact of behavioral psychology has grown and developed along with it. However, efficiency has mitigated market manipulation. Market inefficiency previously enabled manipulation by individuals or groups who interfered with news and information dissemination, evidenced by many of the Robber Barons' activities in the late 19th century.

Market Manipulation

The term manipulation naturally has negative connotations associated with it. However, the impact of manipulation can be positive or negative, depending on how it is put to use. Manipulation can be mechanical, such as manipulation of the market by the Federal Reserve in present day American finance. When the Federal Reserve provides liquidity to the market, as it did during the sub-prime lending crisis in 2007, this is thought to be for the general good of the market, the economy, and the people. Markets can also be manipulated through emotion and psychological warfare. The latter is illustrated by one of the great bear traders of the Robber Baron era, Daniel Drew.

During the 1850s, Drew became a director of Erie Railroad in order to gain a steady supply of shares he intended to sell short. Before selling the stock, Drew wanted to push the price as high as possible, so he visited a New York City club where stock traders congregated. It was a particularly hot day and Drew pulled a handkerchief from his pocket to wipe his brow, dislodging a small piece of paper that fell to the ground. None of the traders told Drew that he had dropped the paper and instead waited until he left. After he had gone, the traders pounced on the scrap of paper to find a piece of "bullish" news about Erie. The other brokers frantically bought Erie after reading the news that fell from Drew's pocket, pushing the stock to new highs. Drew then began selling the stock short and the price quickly dropped, wiping out many brokers in the process.

While such antics would be ineffective in today's environment, the market remains susceptible to manipulation through human emotion and the psychology of investors in the marketplace as a vehicle. Recent events like the fall of Enron, that exposed the practices of energy traders in the late 1990s, remind us that manipulation will always be a risk to free markets.

Rules and regulations have been installed to combat the impact of individual emotions; both self-imposed by NYSE and through government regulation. In spite of these measures, individual perception and emotion will always play a hand in any free market exchange. Human beings, including investors, are irrational at times.

A Wall Street broker recalled receiving a visit from a young congressman named William McKinley in the 1870s. Mr. McKinley told the broker that he heard good things about Erie Railroad stock and wished to purchase 100 shares. He also explained to this broker that he was not concerned with fluctuations in the stock price and the broker should not bother Mr. McKinley by telephoning. Ten minutes after McKinley left the office, the broker received a call from his new client asking "How is Erie now?"³

The occurrence of market manipulation has presumably declined over the years while the impact of technology has increased dramatically.

Technology

When suggesting that technology has had an impact on exchanges today, the Internet and electronic trading would probably be the first thought that comes to mind. There is no question that technology developments in the late 1990s and early 21st century have had a profound impact on the NYSE, but technology development began to impact the exchange long before the Internet age.

The advent of the telegraph in 1844 had as much impact on the exchange as the internet has, relative to the period. It might be said that the telegraph had a more significant impact since there was no way to participate in the exchange without physically being in New York prior to its invention.

Significant technological innovations during the first 100 years of the exchange included the telegraph, stock ticker, and the telephone. These early innovations connected people far from Wall Street with the activities of the NYSE and reinforced the exchange as the most important market and location in the global financial world. The number of traders continued to grow as the technology communicated transactions from the floor to distant regions. These technologies also made administrative support more efficient but they did not alter the way transactions were conducted.

Technological innovations of the late 1990s, including popularization of the Internet as a tool for the general public and advancements in networks and software development, had the opposite effect on the trading floor of the NYSE. These innovations changed the way transactions were executed and allowed those distant from Wall Street to execute the same transactions that had always been completed on the floor. The way that transactions are executed at the exchange has changed significantly but the need for strong regulation remains persistent.

Regulation

While not a persistent theme in the traditional sense, regulation or a lack of regulation has had a significant impact on Wall Street and the NYSE throughout its history. American financial markets, and the NYSE in particular, have evolved from the early years when social Darwinism was implied. During this period, each businessman looked out for himself and it was expected that all would seek an advantage through any means necessary and available. Caveat emptor was the doctrine required for survival during an era when "Traders were assumed to be gentlemen who would honor contracts as required, except in those instance where it did not suite them."⁴

After the well-publicized fall of Enron and the excruciating detail that was revealed about energy traders at the close of the 20th century, it is natural to ask if anything has changed since the age of Social Darwinism on Wall Street. On the surface, it may appear there has been no change at all. However, through regulation and an evolution in media over the last 200 years, it could be said that Wall Street has developed to adopt a doctrine of social utility and fair dealing has become the expectation and standard. Granted, this "evolution" came at the hands of a far different level of control and influence from beyond the street than was actually generated from within. Nonetheless, this change was accomplished in no small part due to regulation that continues to play a primary role in American financial markets today.

History

To traverse the history of Wall Street is to take a tour of New York City history and its landmarks. There is something mystical about walking by 68 Broad Street where the Buttonwood agreement was signed or standing in front of the "House of Morgan" on the corner of Wall and Broad. Many of the great and disastrous moments of Wall Street were enabled by power, not only over assets and means, but power over human emotion. Today, as the trading floor quickly fades into the background and history books, this emotional power can still be observed through consistent articles and coverage of the largely irrelevant icon at 18 Broad Street. What is it about Wall Street, and the NYSE, that has gripped the American psyche for more than two centuries?

Legends of Wall Street's past became famous through dubious activity, much of which has since been prohibited by legislation. Today, J.P. Morgan and many other names associated with the Street would be prosecuted for their complicated and often undisclosed dealings. Still, they are admired to some degree for their passion and diligence.

The next section will audit the NYSE's early years through 1890 before spending time examining the Money Trust Era of the Wall Street. This history will be our precursor before we examine present day Wall Street and speculate about the future of the NYSE and exchanges. The question we will seek to understand throughout is What makes American financial markets and the New York Stock Exchange unique?

Early Years of American Capital Market and Exchanges

The origins of the New York Stock Exchange go back to the birth of our nation and the early histories of both are closely intertwined. It could be said that no other institution was more critical to the survival of our new Federal government than was the exchange in the late 1700s.

New York City built its City Hall in 1700 on the northwest corner of Wall Street and Broad Street in Lower Manhattan. Much later, as the colonies had declared independence and were enthralled in the American Revolution, City Hall in New York was renovated into Federal Hall to serve as the first capitol of the newly formed government. Federal Hall was the site where congress first met in 1789 and 1790 and where George Washington was sworn in as the country's first President. The structure that currently stands on the Federal Hall site was built as a U.S. Customs House in 1842 but a statue of President Washington adorns the front steps to commemorate the history of the site.5 While the iconic New York Stock Exchange building stands on the opposite corner of Wall Street and Broad Street, this is both ironic and fitting. The irony comes from the fact that the Federal Government had moved to Philadelphia two years before the New York Stock and Exchange Board (predecessor to the NYSE) was founded. Yet this coincidence is fitting due to the critical role the New York financial market played in fulfilling the government's earliest needs.

During the infant years of the country, it lacked an organized stock exchange where shares of trading companies and manufacturers could change hands, inhibiting the growth of commerce. An exchange was needed as merchants began to look for investment opportunities and a way to become familiar with companies and their products. European stock exchanges, called bourses, had existed as early as 1611 in the Netherlands, but the concept was slow to cross the Atlantic.6

The war debts of the original colonies and the Continental Congress were assumed by the newly formed Federal government but it had very little revenue to service these debts. If the new government did not honor the assumed debt, new investors would be hard to come by and progress would be impeded. This resulted in the issuance of $80 million in federal government bonds in New York. While it seems strange today, the U.S. government had to offer a high interest to sell these bonds due to the uncertainty surrounding the financial condition of the newly formed government. In spite of the higher interest rate, many of the new government bond issues were only partly sold.7 This chain of events and the U.S. government’s need to raise capital gave birth to the American capital markets. During the same period, Philadelphia was establishing a stock exchange just 90 miles to the south.

The First American Stock Exchange

The Philadelphia Stock Exchange, officially organized in 1790, has the distinction of being the first American Stock Exchange. Stock trading in Philadelphia began at the London Coffee House which functioned as the city’s exchange from 1754 to 1777. Upon leaving office in 1746, Mayor of Colonial Philadelphia – James Hamilton, instead of throwing a lavish party, set aside "one hundred and fifty Pounds toward erecting an exchange or other public building." Successors to Mayor Hamilton added to the fund and reinforced the importance of such an institution.8 While the exchange was actually funded by the merchants who stood to benefit the most, without tapping the fund, Mr. Hamilton’s attention to the importance of the exchange surely had an impact on its realization. The 1820s were good years for both the Philadelphia Stock Exchange and the New York Stock Exchange, but construction on the Erie Canal began in 1817 which would eventually allow New York to “take the lead from Philadelphia in the commercial life of the country.”9

Birth of the New York Stock Exchange

The New York Stock Exchange traces its origins back to the Buttonwood Agreement, which took place on May 17th, 1792 at 68 Wall Street. Through this agreement, the New York Stock and Exchange Board was created by 24 stock brokers who became members of the original exchange. Two provisions were central to the Buttonwood Agreement, one being that the brokers could only deal with each other and the second set commissions at 0.25%. The agreement eliminated auctioneers from transactions and thereby mitigated the suspected price fixing by those serving in the role. The members of the exchange conducted their business in the Tontine Coffee House during this period and the original name of the exchange, New York Stock & Exchange Board, paid homage to the “Board Room” in the coffee house. The term “Board” was later dropped from the name in 1863.10

With the invention of the steam locomotive in the 1830s, transportation became the first growth sector of early American capital markets. Prior to the transportation boom, American markets were still focused on banking and insurance stocks as well as Federal and local government bonds. Driven by the growth in transportation, American exchanges and particularly the New York exchanges were attracting more investors as the number of stocks increased.11

New York and Philadelphia were in a battle for supremacy in American finance during the 19th century. New York eventually became the capital of American finance primarily
due to geography and transportation. Ships crossing the Atlantic arrived in New York harbor first due to its geographical position therefore news from European markets also arrived in New York first. The opening of the Erie Canal in 1854 reinforced New York’s importance as it opened up shipping distribution to the Great Lakes region.12

Railroad stocks and government bonds dominated the market for much of the 19th century and the virtual absence of regulation and oversight resulted in a constant stream of panics and market manipulation. New York and the NYSE were at the center throughout this era as it became the undisputed center of American banking and finance leading up to the Money Trust era.

The Money Trust Era

This Money Trust era was preceded by the period of the Robber Barons, where gamesmanship in the financial market was at its peak and fair play was an abstract concept. The Robber Barons, including Jay Gould and John D. Rockefeller, used any advantage available to conduct their dealings but they were known to have an "uncanny ability to spot structural deficiencies in companies." 13 The Robber Barons seemed to have played with the railroad companies like they were manipulating their marionettes.

Daniel Drew and Cornelius Vanderbilt faced off in a battle to manipulate New York and Harlem Railroad which began with Vanderbilt acquiring a great deal of the stock at a premium from New York legislators. Drew responded with a bear raid on the stock. Vanderbilt eventually won this financial dual when the stock hit $285, up from $25 before these men began to manipulate the stock price. This classic face-off personified the personal battles that took place on Wall Street causing stock prices to fluctuate wildly with seemingly little to do with the actual value of the companies and their operations.

Jay Gould staged similar theatrics in dealings to acquire Western Union and the companies developing New York City's rapid transit system. However, these activities did not go unnoticed as the New York Times chastised Gould and his associates saying "There is no more disgraceful chapter in the history of stockjobbing…" after they profited from their play on New York City’s transit development. The Robber Barons caused great devastation, including multiple railroad bankruptcies, while generating great personal gains. This set the stage for a more subtle power play on Wall Street during the Money Trust era.

From the late 1890s to the outbreak of World War I, Wall Street enjoyed one of the greatest bull markets in its history. Not even the 1920s, before the crash of 1929, could compare in terms of consolidation, expansion, and production in American business.14

During this bull market, there were varied opinions about bankers. Some considered them to be plunderers while others viewed them as patriots for helping finance the Allies, and eventually America’s entry into the war. This perception became one-sided by the 1930s as most viewed bankers to be “tearing apart the financial system from the inside”.15 Many believed that a group of influential Wall Street bankers held undue influence through their collaboration in what was termed as the Money Trust. Though there was little evidence, the presumed members of the Money Trust included famous private bankers like J.P. Morgan and the heads of public banks, like James Stillman at First National.16 The Money Trust was thought to have directing in power railroads, public service, insurance companies, banks (beyond their own), and trust companies.

American Bank Note Company
74 Broad St.

The American Bank Note Company was
another example of the Money Trust’s complicated dealings the pervasive control. A New York City bond issue was denied a listing on the NYSE because they were not engraved and printed by the American Bank Note Company. American Bank Note had been underbid by the New York Bank Note Company but American Bank Note had been issued an exclusive monopoly by the NYSE. It was later revealed that American Bank Note had some very well-known investors, including J.P. Morgan.17

Curbing the power of industrialists and bankers became a heated topic in the late 19th century resulting in passage of the Sherman Antitrust Act in 1890. The Sherman Act was
the first significant piece of legislation aimed at controlling the power of prominent Wall Street bankers and industrialists who held the highest concentrations of wealth. The Act specifically prohibited cartels and monopolies that constrained trade and competition, not unlike Rockefeller’s oil cartel developed during the Robber Baron era prior to 1890.

The country still did not have a central bank and the large commercial banks were accustomed to having things their way in the absence of a central banking authority. The Pujo committee hearings, also known as the Money Trust hearings, took place in 1912 in response to a proposal for establishing the Federal Reserve. Creation of the Federal
Reserve would result in a significant loss of power for the large New York banks when it came to money and credit creation. J.P. Morgan testified at the Pujo Hearings and
became famous for revealing how much corporate power bankers really held. A complicated web of corporate directorships was revealed whereby the money center banks
in New York had control and influence in every major industry. Their influence also reached throughout the financial industry, including 80% of Boston banks.18

The money center banks in New York fulfilled one of the current roles of the Federal Reserve by lending money from their assets to create liquidity in the market. When they
made this money available at low interest rates, they could push the price of stocks up. Conversely, when they made margin money less available, the market would retreat. The
banks could aid their own issues by creating liquidity in the market and generating the perception of a hot market. The asset base of the Money Trust was so strong that they
could easily manipulate the entire market for their own benefit.19

The Pujo hearings explicitly exposed Morgan’s grip on the insurance industry. Three New York life insurance companies-New York Life, Mutual of New York, and Equitable-had more than $70 million that had to be invested. A Morgan partner, George W. Perkins, was a vice-president of New York Life and regularly sold the company investment securities and J.P. Morgan was a major shareholder of Equitable life.

While the Pujo Hearings overall were considered to shed a positive light on the Money Trust bankers, including Morgan, the momentum for creation of the Federal Reserve had
grown too strong. The activities of this era lead to the passage of the first significant legislation aimed at controlling the activities of Wall Street, including the Clayton Antitrust Act and the Sherman Antitrust Act. This groundbreaking legislation along with the creation of the Federal Reserve in 1913 forever changed American finance and continues to have an indirect impact on today’s financial markets.

Present Day and Future Outlook

NYSE Lobby

Changes in technology and the industry have had a significant impact on the NYSE and all of established exchanges. The changes are pervasive and ongoing but the function of the exchanges remains as being a vehicle that enables a more efficient market. Market turns and company scandals still create dramatic headlines in New York but less often than seen in early eras of American markets. Veteran NYSE traders tell stories of the not-to-distant past while recognizing the reality of the fundamental change that has occurred to the exchange and the industry.

The Voice and Image of the NYSE Trading Floor

Ted Weisberg has been storming from post to post on the floor of the New York Stock Exchange as a broker since 1969. Ted is considered an expert on the exchange and is frequently interviewed on financial media broadcasts like CNN Financial. To many, Ted is the voice of the trading floor and an era where thousands of brokers filled the exchange each day to conduct their trades. However, bring up the founding of the exchange and the organization’s roots under the buttonwood tree and Ted is quick to remind us that he hasn’t been at the exchange since it opened.

Ted explains that “Trading is a game of cat and mouse, you can’t let anyone know what you’re up to. I’ve been selling an enormous item for months now, very inconspicuously.”20 Ted’s comments represent a very different time than the Robber Baron and Money Trust Eras of the late 19th and early 20th century. The gamesmanship of trading is still alive and well on Wall Street, but it has been shaped by more than one hundred years of regulation and ethics scrutiny. Ted still must outplay his rivals to be successful but gone are the days of outright manipulation of colleagues and the market.

When asked about the transformation of the exchange and financial markets since the proliferation of electronic trading, Ted notes that “People have a chance to be opportunistic while machines cannot.” Ted says he does not know what will happen with the exchange in the future. However, he goes on to remind us of previous events that were expected to doom the business only to see it survive and flourish in new ways. The elimination of fixed commissions imposed by the government in 1975 was one of these events. Prior to the elimination of fixed commissions it was said that “as long as 1/8th is 1/8th, nothing will change.” But Ted told of how 1/8th became 1/16th and 1/16th became $0.01, and “everything changed.” But Ted says the business survived because the traders do it for the trading spread, not commission on trades. Since the elimination of fixed trading commissions, dating back to the Buttonwood Agreement in 1792, the trading spread has now been squeezed by electronic trading creating new challenges for those in the business.

Ted spoke of that day’s financial news with the excitement of a new business school graduate as he mentioned NASDAQ’s deal to buy the Boston Stock Exchange. He continued to explain that the identities of the NYSE and NASDAQ used to be very distinct but they are blurring as each becomes more like the other. NYSE’s merger with Euronext and NASDAQ’s acquisition of the Boston Exchange are both examples of one organization extending into the domain that was traditionally thought to be the others. 21

Wall Street bankers and traders are still passionate about what they do but the terrorist attacks that brought down the World Trade Center on September 11th, 2001 resonate.

September 11th, 2001 Terrorist Attacks

The 9/11 terrorist attacks had an impact on the NYSE, the industry, and the City of New York unlike any event that came before it. The exchange has rarely been closed on regular trading days. Following the terrorist attacks, the NYSE suspended trading and closed its doors for four consecutive days. This was the longest closure since the exchange closed for FDR’s 1933 bank holiday. In the midst of World War I, the exchange closed for four and a half months, the longest shutdown in its history. The events of 9/11 and the closure of the NYSE this time were different.

The attack created ongoing uncertainty and skepticism in the financial markets. New York’s financial district may never be the same, as many of the things Americans took for granted before 9/11 were shattered. 9/11 was unique to all of these other events because it called into question the basic safety of everyone working on Wall Street. The exchange had been enabled by electronic trading in the years leading up to 2001, but this event led to scrutiny of the necessity to physically locate in the Financial District.

Electronic Trading and the Demise of the Trading Floor

In the six years since the terrorist attack, the trading floor at the NYSE has shrunk each year. In just ten years, the NYSE floor has dwindled from its peak of 3,000 brokers and clerks to just 1,700. Two more trading rooms were closed in late 2007 making the trading floor half the size of its mid-1990s peak. Only a few major financial firms still maintain their headquarters on or near Wall Street.22

In 2003, the future of the NYSE was already coming into question. The significance of the financial district to the economy of New York City was well understood with the industry accounting for a third of the city’s economy and a quarter of its tax revenue. Regardless of its importance to New York City, many began to question the need for the time-honored trading floor and suggested that the NYSE adopt an electronic-based system similar to NASDAQ.23

In 2005, the members of the New York Stock Exchange voted to take the organization public through a merger with electronic platform Archipelago Exchange.24 This move was the biggest shake-up in the NYSE’s long history. The exchange began charting a new course that was unlike anything the organization had seen. The move appeared to signal the acceptance of change that removed focus from the exchanges trading floor. Mergers and acquisitions involving the NYSE did not stop there but instead accelerated after this historic event.

NYSE Euronext and the Consolidation of Exchanges

Exchange mergers are not a concept novel to the post-9/11 era. There have been significant exchange mergers throughout American history. The NYSE merged with the Open Board of Brokers in 1869 and less than ten years later acquired the business of the Gold Room, a consolidation of the three major daytime exchanges in New York.25 While the NYSE trading floor was hitting its peak in the mid-1990s, the nearby New York Mercantile Exchange was merging with the Commodity Exchange of New York.26 This evidence supports the somewhat obvious assumption that there are scale economies that provide an advantage in the exchange business. Exchanges have three primary revenue streams: listing fees charged to companies, fees charged on trades, and fees charged on the data they produce from trading activity. The revenue from selling data can be packaged and sold to businesses and newspapers.27 This may be where the greatest benefits are derived as mergers expand the data that can be packaged and sold by exchanges. Since the turn of the 21st century, the pace of consolidation has become fevered.

After going public and merging with Archipelago in 2006, the NYSE Group undertook unique efforts to create a global marketplace resulting in a merger with Euronext. This created the world’s largest equities market with 22 hours of trading in six countries.28 Both the NYSE Group and Euronext had been consolidating exchanges on their respective continents, but the merger of these two organizations created a truly global exchange with reach unlike any exchange that came before it.

Merger activity has become competitive with a few large exchanges vying for remaining independent exchanges. NASDAQ acquired the Boston Stock Exchange in October of 2007 in its own effort to grow through consolidation and there is ongoing competition to acquire the Philadelphia Stock Exchange that appears imminent. Both the NYSE and NASDAQ are considering bids for the oldest American stock exchange, as well as a few trading firms including Goldman Sachs.29

After 215 years of NYSE history, we now have public financial statements to evaluate the strength of the organization. (Appendix A – NYSE Financial Summary) In its first two years since going public, we can see that the company’s net profit margin has already increased dramatically from 2.5% in 2005 to 8.6% in 2006. The company has also brought its P/E ratio down significantly to 60 and reduced its use of financial leverage. When evaluating NYSE financial ratios against competitor NASDAQ, the NYSE does not appear to be performing as well. NASDAQ has a 22% profit margin and a trailing P/E ratio of 12.5.30 The activity that resulted in the NYSE going public and merging with Archipelago makes a comparison of the firm against industry competitors premature. Despite the results of the NYSE Euronext financial ratios, the relative improvement in its first two years as a public company should be noted.

The NYSE has transformed in the last three years unlike any previous time in its history. The organization has recognized opportunity derived from changes in the financial industry and executed its new strategies effectively. The NYSE has changed significantly and the trading floor is no longer a strategic focus but the organization is well-positioned to prosper in the foreseeable future.

Conclusion

On a relatively quiet October Sunday afternoon in New York’s financial district, you can still find tourists gathering to take photos of the landmarks that represent American Capitalism in what has long been the mecca of American financial markets.

They gather in the places you would expect to take photos of friends and family in front of the Federal Hall site and the NYSE building. These are the landmarks that visitors from across the world associate with America’s success and prosperity.31 However, they overlook many of the monuments that they stand next to while taking their photos, like the House of Morgan, or the American Bank Note building further removed down Broad Street. These overlooked relics tell the story of a period that truly shaped Wall Street and American finance because they represent the Money Trust era which pushed the government to take action in regulating the activities of the Street. Many of these visitors know of George Washington from the history books and the NYSE floor from the global financial television broadcasts, but they do not recognize how the activities of Morgan and the other Money Trust Bankers impacted the street and led to regulation intended to protect the common people.

Charging Bull by artist
Arturo Di Modica

What may be surprising is that the most popular icon on this quiet day is the Charging Bull statue positioned at the southern end of Broadway. This statue was a rogue project by artist Arturo Di Modica, self-financed at a cost of $360,000. Di Modica began working on the piece after the market crash of 1987 as “a symbol of strength and power of the American people”, and placed it in front on the NYSE on December 15th, 1989 as a Christmas gift to New Yorkers.32 As the piece was not commissioned by the City of New York, it was impounded shortly thereafter but reinstalled a few blocks away at Bowling Green after public outcry in support of the piece. This symbol of America’s success and financial dominance is what more visitors are attracted to than anything else in the district. This underlying constant has shaped our history and continues to remain at the core our existence as we continue to endure the great successes and hardships it has brought.

Appendices

Appendix B - NYSE Timeline (1685-1914)

1685 - Wall Street Laid Out

Surveyors lay out Wall Street along the line of the stockade.

1790 - US Investment Markets Born

The federal government refinances all federal and state Revolutionary War debt,
issuing $80 million in bonds. These become the first major issues of publicly
traded securities, marking the birth of the U.S. investment markets.

1792 - Five Securities Traded

There are five securities traded in New York City. Three are government bonds and two are bank stocks.

1792 - Buttonwood Agreement

There are five securities traded in New York City. Three are government bonds and two are bank stocks. Twenty-four prominent brokers and merchants gather on Wall Street to sign the Buttonwood Agreement, agreeing to trade securities on a commission basis. The New York Stock Exchange traces its beginnings to this historic pact.

1815 - Securities Market Grows

In the aftermath of the War of 1812, the market for securities in New York begins to grow. Along with government bonds, bank and insurance stocks now trade.

1817 - Rules and a Constitution

A constitution with rules for the conduct of business is adopted.

1817 - Call Market Procedure

Stocks are traded in a "call market." The president reads out the list of stocks as the brokers trade each security in turn. There are two trading sessions each day, one in the morning and another in the afternoon.

1817 - NY Brokers Form NYS & EB

The New York brokers establish a formal organization, the New York Stock & Exchange Board (NYS&EB) and rent rooms at 40 Wall Street. They adopt a constitution with rules for the conduct of business.

1824 - Peak of 380,000 Shares

Annual trading at the NYS&EB had reached a peak of 380,000 shares by 1824, which declined to 15 percent of that number by 1829, remaining low through 1831.

1825 - Erie Canal Opens

The opening of the Erie Canal makes New York City the seaboard gateway for the Great Lakes region. New York State bonds, issued to finance the canal, are traded actively on the Exchange.

1830 - Railroads Dominate Trading

The first railroad stock, Mohawk & Hudson, is traded on the NYS&EB. Railroad securities will dominate trading for the rest of the 1800s.

1836 - Trading Prohibited in Streets

The NYS&EB prohibits its members from trading in the street.

1844 - Telegraph is Invented

The telegraph is invented, broadening market participation by facilitating communication with brokers and investors outside New York City.

1853 - Complete Statements Required

The NYSE strengthens its listing standards, requiring companies to provide complete statements of shares outstanding and capital resources.

1857 - Panic of 1857

The Ohio Life Insurance & Trust Company collapses. Prices drop eight to ten percent in the course of a single trading session, the culmination of a 45% decline in market value since the beginning of the year.

1861 - Outbreak of the Civil War

At the outbreak of the Civil War, the NYS&EB suspends trading in securities of seceding states.

1863 - New Name

The New York Stock & Exchange Board becomes the New York Stock Exchange (NYSE).

1865 - NYSE Moves into Permanent Home

The Exchange moves to 10-12 Broad Street, just south of Wall Street. This move, together with subsequent purchases of adjacent land, establishes Wall and Broad as the center of securities trading in America.

1865 - Lincoln is Assassinated

The Exchange closes for more than a week following the assassination of Abraham Lincoln.

1866 - NYSE Begins Supervising Listing Policies

The NYSE appoints the Committee on Stock List to take charge of admitting new securities. This begins the Exchange's effort to supervise and control listing
policies.

1866 - Trans-Atlantic Cable

The first trans-Atlantic cable is completed, providing instantaneous communication between London and New York.

1867 - The First Stock Ticker

Invented by Edward A. Calahan, the stock ticker revolutionizes the stock market by bringing current prices to investors everywhere.

References

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rt

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21 Personal communication, October 5th, 2007. Ted Weisberg.

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