You’ve probably heard about “Wall Street”, and there’s an image you’ll also probably associate with it, of men in suits running around, on their phone, screaming values to screens with lines going up and down. We know that’s the simplest picture of it, but this profession – stock trading – is as complex as antique.
If you want to master it, besides trying to acquire every piece of knowledge there is about it, you should also understand its context in history and what are its origins – that’s what we’re here to help you with!
Philadelphia is considered, by many, as the birthplace of the stock exchange, as it was considered the leading city in foreign and domestic trade. It all started in 1791 and, one year later, New York opened its own stock exchange market, when 24 merchants and brokers decided to help those who didn’t understand the “game”, charging commissions and working together, under a large tree at 68 Wall Street. Ironic how such a capitalist principle was born under the symbol of Nature.
Early trading was based on government securities – a range of investment opportunities offered by a governmental body. It was a way to get the funds for infrastructures and military projects.
New York, who rapidly became the heart of stock exchange, decided to formalize its business and, in 1817, created the New York Stock and Exchange Board. With the industrialization of the United States of America, the offers were no longer only government securities, as private companies started getting into the “game” as well.
All over the country, but specifically in New York, there were “bucket shops”. These were small businesses where the regular Joe could go in and make “plays” in the market. You would get it and drop some money in the “bucket” – a collective pool of money, used for purchasing stocks or commodities with leverage, unreachable by the small trader alone. You could already feel the fast and furious vibe, known in today’s Wall Street. One clerk read the ticker tape while another wrote values on a chalkboard. Then, the players would quickly buy and sell stocks. Needless to say, most of these places were unlicensed and illegal.
Stock Market Crash of 1929
We are all familiar with this event, but the truth is that it was an enormous catalyst in Stock Trading’s change and evolution. The roaring ’20s made Americans believe that this business was an infallible one and the confidence in the stock exchange was over the roof. The list of causes is a complex one, but a diversity of headlines induced investors in going for risky moves, which made the stock market unstable, which led to more headlines, and a cycle was created. In three days millions of Americans lost their houses, finances, and, overall, their lives. After the crash, those “bucket shops” we’ve mentioned before were all eliminated, regulated out of existence.
The 1970’s and NASDAQ
After the crash of 1929, America’s Stock Market and New York Stock Exchange (NYSE) in particular took a hard punch, but decade by decade things would return to normal, with major events shaping its functioning, like World War II. But the major point of change was the appearance of the first real national NYSE’s competitor – NASDAQ.
NASDAQ was pretty different from NYSE – the most notable aspect is that it didn’t have a physical space (no tree to trade under). Created in 1971 by the National Association of Securities Dealers (now Financial Industry Regulatory Authority), NASDAQ was a network of computers that executed trades, electronically. This allowed them to run a more efficient business, which reduced the bid-ask spread – the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept.
This new kid on the block forced NYSE to change, evolve, and, consequently, to merge with Euronext, forming the first trans-Atlantic stock exchange market. Even though, since then, there haven’t been any large and noticeable changes to the business,(probably the biggest one was the beginning of stock trading apps. You can click here to take a look at the best ones, on the market, at the moment). In 2014 Euronext decided to follow its own path and become independent. In spite of that, today, NYSE is considered the most powerful stock market, even though NASDAQ has more companies listed, but when we look at the market capitalization, there’s no real comparison.
A Spanish-American philosopher, called George Santayana, once said: “Those who cannot remember the past are condemned to repeat it”, meaning that to predict the future, your biggest weapon in the arsenal is studying the past, as “history repeats itself”. That’s why learning the historical context of the stock market can help you understand it better, while at the same time gaining some respect for the ones who did it with only a telegraph, a chalkboard and a hat full of money.