Stock markets are a driving force behind a nation’s capital formation. They are also a barometer of its economic strength. The evolution of stock markets has been an eventful journey from a physical marketplace to one featuring sophisticated algorithmic trading. Here is a chronicle of the stock market history and the significant events that have led to its evolution.
A stock exchange or a security exchange is a marketplace where traders and intermediaries can buy and sell various assets, such as stock, bonds, and other financial instruments.
When we first think of “stock exchange,” our mind visualizes trading terminals, screens with tickers and prices, or traders meticulously placing orders. It is an arena that is governed by technology. However, it is unique that the stock exchange functioned even centuries back when no technology was involved. This is one of the earliest forms of economic exchange with a rich history.
Stock exchanges have seen an incredible journey. Initially, stock exchanges were marketplaces for merchants and sailors offering only government bonds, foreign currencies, and commodities for trade. People began to recognize shares as an asset class only after the 17th century.
In the developed world, the biggest stock markets in the world officially emerged in the 19th and 20th centuries following the creation of the London Stock Exchange and the New York Stock Exchange. Whether it is Switzerland, Germany, Japan, or China, the major economic powers in the world have highly-developed stock markets operating today.
One of the first exchanges of the world was established in Aizanoi, Turkey, around the 2nd century AD. UNESCO lists the ancient city as its World Heritage site. It stated that Macellum or the round building in the city depicts the prices of all goods sold, possibly food items, in the markets, and one can read it entirely even today.1
In 1100 AD, France had a system of courtiers de change for managing agricultural debts across the country for banks. Many saw it as an early form of brokerage because intermediaries were actively involved in trading debts.66
In the early 13th century, the merchants of Venice traded government securities. Gradually, Lombard bankers in the nearby Italian cities of Pisa, Verona, Genoa, and Florence started buying and selling government securities.67 It was only after 1500 AD that the concept of traditional stock markets began to take place. Some European countries like Belgium, Bruges, Flanders, Ghent, and the Netherlands had their systems in the 1400s and 1500s, similar to the “stock” market.68
Learn about stock vs. commodity markets.
However, the closest form of the modern-day stock market was in Antwerp. It was the commercial seat of Belgium and home to the highly influential Van der Beurze family. The house of the Beurze family on Vlamingstraat Bruges was the location of the world’s first stock Exchange in 1415.2 The building that served as a trading exchange was established by Robert van der BuerzeIt as ‘Ter Beurse’ inn. The place was popularly known as the ‘Oude Beursplein’ This is why early stock markets were usually called Beurzen or the Burges Exchange.
Back then, the Burges Stock Exchange acted as Wall Street. It is also believed that the term Bourse has been derived from the family name Beurze. Bourses differed from fairs and markets because proper rules and regulations governed them. The bourses were divided into separate commercial exchanges (bourses de commerce), where trading happened for different merchandise such as wheat, flour, spirits, sugar, etc. The Beurze family was one of the key contributors to the development of the modern stock exchange. By the end of the 1400s, Antwerp became the center of international trade. Some merchants used to purchase goods at a specific price to earn a profit in anticipation of a price rise.
It’s noteworthy that though most of them functioned like the present-day stock markets, there wasn’t any actual trading of company shares. These markets dealt with other forms of assets, primarily debt securities. People who wished to borrow funds would do so from merchants who would lend at exorbitant rates. These merchants would then issue bonds backed by the debt and offer interest to those who purchased them.
In 1556, the pioneer of English banking and wealthy merchant Sir Thomas Gresham and Sir Richard Clough, a Welsh merchant, established The Royal Exchange for trading stocks.5,6 Sir Thomas Gresham was based in the Antwerp financial bourse as a royal agent and modeled the Royal Exchange in London on it. He was a highly sought-after advisor in the English financial market and even worked with the government in their financial dealings.
Queen Elizabeth I officially inaugurated the exchange and conferred a royal license to trade in liquor. In 1660, Sir Gresham even added two additional floors for retailers on the exchange and formed Britain’s first shopping mall. However, in 1666, the Great Fire of London destroyed the Royal Exchange, and a new building was built. However, another fire in 1838 destroyed the second building too, and Queen Victoria launched the third building in 1844.
Established in 1558, the Hanseatic Stock Exchange in Hamburg is Germany’s oldest stock exchange.3 The founders of this exchange were maritime traders who were a part of the “Gemener Kopmann” association. The primary focus of the exchange was goods trading; however financial transactions and bill transactions were simultaneously conducted. Initially, trading took place outdoors, but in 1583, trading shifted indoors after constructing the first building.4
1585: Frankfurt Stock Exchange
The Frankfurter Wertpapierbörse, or the Frankfurt Stock Exchange, was born in 1585.7 Frankfurt became the hub of commercial activity and immigrants, and Dutch and French dominated the commercial and banking sectors. All the merchants used to meet at Spring and Autumn fairs to conduct business. The Frankfurt stock exchange was formed to counter the depreciation of coinage and establish uniform exchange rates.
1600: East India Companies
The first official known stock exchange is the Amsterdam Stock Exchange, established in 1602. The Dutch East India Company (VOC) was the first company to issue bonds and stocks on the exchange was the Dutch East India Company (VOC).
The East Indies became well-known as the repository of trade opportunities for spices, fabrics, and luxury goods. This led explorers to sail there in large numbers. However, rough seas and pirates played havoc, and only a handful of voyages made it home. Ships went missing, and there was mass loot of fortune. The traders were worried and wanted to do something to mitigate the risk.
In 1600, a group of English merchants requested Queen Elizabeth I for a royal charter to allow voyages to the East Indies to create a British monopoly on trade.8 The merchants paid close to 70,000 Pounds to finance the venture and formed a unique corporation named the “Governor and Company of Merchants of London trading with the East Indies.” 9 This is what became popularly known as the East India Company.
It dawned on the investors that putting money on a single voyage of East Indies trading wasn’t a smart move. On average, the possibility of a ship being hijacked by pirates was 30- 33%. Therefore, they thought of investing small portions in multiple voyages instead of putting all the money on one of them. Even if one ship went missing, investors could still earn a profit through the other ones.
After the British East India Company, the Dutch founded a giant corporation in 1602 known as Vereenigde Oost-Indische Compagnie (VOC) or popularly the Dutch East India Company.10 It was also the first company to use a limited liability concept. The company officially listed its shares on the Amsterdam Stock Exchange and became the world’s first publicly-traded company in the same year.
The States-General of the Netherlands granted the company a 21-year monopoly over Dutch operations in Asia. The VOC was a massive corporation with nearly 5000 ships, and its spice trade helped it earn phenomenal profits. Because of the success of the VOC, Amsterdam remained the global financial capital for almost two centuries.
The method became very successful, and within a decade, other businesses throughout England, France, Belgium, and the Netherlands began to earn a similar charter.
The East India Company issued its shares and bonds to investors entitled to a fixed percentage of East India Company’s profits. Initially, the company did not pay dividends. However, under severe shareholder pressure, the East India Company began to pay dividends in 1605, partly in money and spices. Its dividends varied greatly. In 1605, The VOC paid dividends of 15% of capital, while in 1606, it paid 75%.
On September 9, 1606, the Dutch East India Company’s chamber of Enkhuizen issued the first share certificate to a local investor, Pieter Harmensz.11 Harmensz received it once he paid the last installment of his 150 Dutch guilders. Currently, this share certificate is preserved in the Enkhuizen city archives in the Westfries Archief in Hoorn, the Regional Historic Centre for eastern West-Friesland, Netherlands.
The Old Stock Exchange was one of the oldest buildings in Copenhagen, situated on the island of Slotsholmen.69 The stock exchange was built by King Christian IV, also known as the architect of Copenhagen, between 1619 and 1640.
The King wanted to transform Copenhagen into a financial and trade center by building the stock exchange. After completing the building construction in 1640, the stock exchange was akin to a Dutch Renaissance shopping complex. It was a meeting point for all merchants to trade in merchandise of all kinds.
1688: Coffee Houses as the foundation of stock exchange
Between the 17th and the 18th century, coffee houses in the City of London emerged as significant meeting nodes for investors and eventually the foundation of stock exchanges. In the 17th century, the importance of London as a trade center boosted increasing demand for ship and cargo insurance.
From 1680, Jonathan’s Coffee House at the Change Alley became a principal meeting hub for business people.12 The coffee houses had runners who collected the latest information regarding cargos and shipments from the docks. They also posted the news on walls for everyone to see.
In 1688 Edward Lloyd’s coffee house started gaining prominence as the place for obtaining marine insurance.13 Lloyd’s coffee house offered specialized advice in information about shipping. Over 80 coffee houses within the City of London became meeting hubs for merchants and mariners. These coffee houses specialized in one form of shipping insurance over the other. Edward Lloyd, an ambitious man, always aimed at offering information and assistance, which was way superior to his peers.
In 1698, John Castaing, a regular businessman at Jonathan’s coffee house, began to list share and commodity prices twice a week called “The Course of the Exchange and other things”. This laid the foundation for the official listing of stock prices and organized trading. Over the years following, the coffee house became a focal point for trading stocks.15
1685: Borsa Berlin – Germany
In June 1685, Elector Friedrich Wilhelm founded the Berlin stock Exchange. Located at Burgstrasse, the Berlin Stock Exchange was also known as “The Burgstrasse.” 14. The exchange served as a marketplace for the city’s guilds of chandlers and dressmakers. However, it was only in 1739 that the first trading took place on the exchange.
One of the most significant financial disasters of the 18th century was the South Sea Bubble.16 The South Sea Bubble is the story of the collapse of the South Sea Company in 1720, within just nine years of its formation. The South Sea Company was created in 1711 to supply 4800 enslaved people every year for the next three decades to the Spanish colonies in Southern and Central America.
Because of the financial boom in England, there were no regulations for issuing shares. The South Seas Company (SSC) bought the rights of slave supply from the British government for £9,500,000 at the Treaty of Utrecht with Spain in 1713. The company listed its shares and was fully subscribed. Amid the euphoria surrounding the success of stock issues, speculators also paid exorbitant prices for the stock. Holders of government bonds worth GBP 9 million were allowed to exchange their bonds for stock with 6% interest in the South Sea Company.
The South Sea Company overestimated the profits from slave trading, which proved detrimental and led to the financial collapse.17 The bubble burst in 1720 when the company failed to pay dividends on its practically non-existent profit. Millions of South Sea Company investors were impoverished, and this debacle resulted in a severe economic crisis, pulling many other stocks downwards.
The Directors of South Sea Company Directors were arrested and their estates forfeited. It was not just the South Sea company but many other companies who got lured by the success of the stock markets and mistook it for a get rich scheme. Many of these companies did not even have a sound business model.
In 1724, the Paris Stock Exchange was first incorporated as the Paris Bourse.18 The Royal Council of State authorized the creation of a stock exchange in Paris. The Bourse de Paris was initially located at the Louvre and founded by King Louis XV, who wished to bring some discipline to the French economy. 19
According to another order in 1774, an exclusive trading area within the Bourse called the parquet (floor) was created. This place was reserved for agents de change, who had to trade through the “open outcry” method.
The Paris Stock Exchange then moved to the Palais Royal before shifting to the Palais Brongniart, located today.20 Napoleon commissioned the construction of the building in the early 19th century.
In September 1795, the Bourse de Paris was eventually closed, and joint-stock companies were abolished. However, it reopened in October after the general public in France started to trust ‘paper money,’ and the French Stock Exchange gained official status.
The ancient Lisbon Stock Exchange was the predecessor of one of the oldest stock exchanges in Europe, the Euronext, Lisbon.21 It was founded in 1769 and was known as the Assembleia dos Homens de Negócio (Assembly of Businessmen). The stock exchange was located in the Praça do Comércio Square, Lisbon.
In 1771, Empress Maria Theresa founded the Vienna Stock Exchange to raise capital for the state.22 Like the French model, the stock exchange was under government control. The Vienna Stock Exchange allowed only the trading of bonds, bills of exchange, or foreign currencies. The exchange also featured stockbrokers or ‘Sensale’ who ensured smooth trading and received a commission in return.
As we have read that Jonathan’s Coffee House had become a hotspot for traders from 1680. The trading expanded, and in 1773, the traders built a bigger New Jonathan’s coffee house or ‘The Stock Exchange’ in Sweeting’s Alley.23
The building had a 35 feet frontage with a dealing room on the ground floor and a coffee room on the first. The building functioned as a stock exchange for London but is yet to be regulated. The original Jonathan’s Coffee house succumbed to fire in 1778.
When the British occupied Philadelphia, the City Tavern became the focal point of business.24 The City Tavern, later called the Merchants Coffee House, became Philadelphia’s exchange.
In 1790, the first US stock exchange, the Philadelphia Stock Exchange, was formed. Originally known as the Board of Brokers, the exchange boosted prospects of developing financial sectors in the country. In 1875, the Board of Brokers changed its name to the Philadelphia Stock Exchange. Over centuries, the stock exchange building shifted to several locations. Contrary to popular belief, it is the Philadelphia Stock Exchange and not the New York Stock Exchange, the first official exchange in the United States.
The Philadelphia Stock Exchange initially focused on government and semi-government bonds, notes, and bills. By 1792 securities brokerage was a well-established business in Philadelphia. One of the earliest securities quotations in the United States is the “Price Current of Stocks,” dated April 10, 1792, and printed on a paper and signed by Samuel Anderson, Stock Broker from Philadelphia.25 However, In 1796, the exchange became slightly more restrictive as it began to charge entrance fees for brokers.26
This stock exchange was also used to raise capital for public works such as the Philadelphia and Lancaster Turnpike Company, Lancaster and Susquehanna Turnpike, and America’s first turnpike.27
The Philadelphia stock exchange also listed many financial institutions and insurance stocks, facilitating a constant traffic flow for them. This could be partly because Robert Morris and some private investors who established the Bank of North America dominated the Philadelphia business scene during the 1780s. The First Bank of the United States, the Pennsylvania Bank, the Philadelphia Bank, The Pennsylvania Company for Insurance on Lives, Granted Annuities, and The Insurance Company of North America.28
The Buttonwood Agreement was a written compact made in 1792 between 24 stockbrokers and merchants of high reputation on Wall Street in New York City.29 The agreement’s objective was to create a credible and ethical system wherein the brokers and merchants would conduct trade amongst themselves and charge a fixed commission for their services. The financial system participants committed to the more significant interest of the investors.
By keeping the external agents and auctioneers away, the market participants would trust each other more, and there would be a more efficient system for investments and payments. The Buttonwood Agreement aimed to reduce unhealthy competition amongst brokers and instill investor confidence.
According to popular belief, the agreement was made under a Buttonwood Tree from which the name was derived. The Buttonwood Agreement was formulated as per the European trading system. It was based on the Spanish practice of dividing the silver dollar into eighths or using fractions to describe stock values. The Buttonwood Agreement laid the foundation of the New York Stock Exchange. This also marked the beginning of the investment community in the United States known as “Wall Street.”
The New Jonathan’s Coffee house set up at Sweeting’s Alley in 1773 stayed there for over a century because stockbrokers were seen as too rowdy to be a part of the Royal Exchange established in 1571.
In March 1801, traders raised capital and constructed a new building in Capel Court, Bartholomew Lane.30 The Stock Exchange opened on a subscription basis and was the first regulated stock exchange globally. In February 1812, the General Purpose Committee finalized a set of recommendations used as a framework for the first codified rule book of the exchange. The document was brief and easy to follow. However, it contained comprehensive information about the settlement system and default.
By 1830, the exchange witnessed a revolutionary change with the invention of the telephone, ticker tape, and the telegraph. Even corporate announcements began to be pinned up on notice boards at the LSE. The stock exchange became an indispensable part of the British government for raising massive amounts of capital required for Neapolitan wars.
As London emerged as the focal point of international trade, two other cities, Manchester and Liverpool, also showed immense economic development. In 1836, both these cities had their stock exchanges.
In 1817, the Buttonwood traders visited the Philadelphia Merchants Exchange to study and replicate their exchange model, officially forming the New York Stock and Exchange Board in March 1817.31
The stock exchange began operations with rented rooms at 40 Wall Street with a constitution and definite rules. Members needed to gain a seat in the exchange for which they had to pay a fee. The NYSE has traded stocks since its very first day.32 Originally, there were five securities traded in New York City, with the first listed company on the NYSE being none other than the Bank of New York.
There was a spurt in commercial activities in the United States after the War of 1812. 33 The launch of the Erie Canal and the start of the railways in America in the 1830s brought a boost in business to the exchange.34 There was also a massive demand for railroad stocks. By 1835, average daily trading of nearly 8,500 shares took place. This was 50 times more in just seven years.
After the Great Fire broke out in 1835 and nearly 700 buildings were gutted in lower Manhattan, the New York stock exchange. However, the brokerages could still communicate using a telegraph code developed by Samuel Morse.
The Austrian central bank was founded in 1816, and, in 1818, it became the first joint-stock company to be listed on the Vienna Stock Exchange.35
Ludwig van Beethoven was one of the first stockholders who purchased eight shares in the Austrian central bank in 1819. Due to the political and economic significance of the Habsburg Empire, the Vienna Stock Exchange gained global prominence during the 19th century. There was an emergence of new companies and a surge in company listings, primarily in the railways, transport, and steamships industries.
1820: Stock Trading Begins at the Frankfurt Stock Exchange
Unlike other European stock exchanges, the Frankfurt stock exchange primarily focused on foreign bonds and international government securities.36 It was only after the industrial revolution in Germany that the exchange began to conduct share trading. In 1820, the first common share – a participating certificate of the Austrian National Bank (Oesterreichische Nationalbank) traded on the exchange. After the ‘Gründerjahre’ boom period, several companies transformed stock corporations, and the Frankfurt stock exchange began trading stocks.
One of the biggest disasters to have impacted the budding securities exchange is the Panic of 1837. It was a financial crisis spurred by speculation. Nahant Bank in In Massachusetts and Oriental Bank in Boston were gripped by speculation.37 Most of their assets became concentrated in unnavigable land based in Maine. A survey confirmed that this property had inflated valuation, and these banks failed. Many Experts believe that President Andrew Jackson’s economic policies caused the Panic of 1837.
A five-year depression followed the Panic of 1837, resulting in financially failed banks and unprecedented unemployment levels. It also had a lasting impact on the American economy. As the failure of businesses had become routine, Lewis Tappan founded a company, the Mercantile Agency, offering the latest and comprehensive credit information about various companies to their subscribers. Tappan’s firm successfully created a nationwide network of credit reporters, thus forming the framework of present-day credit rating firms.
After the panic of 1837, many investors suffered massive losses because of the companies’ shaky financials and business dealings.38 Therefore, disclosure of public information became mandatory for companies listed on the New York stock exchange. Transparency became a prerequisite for stock listing on the exchange.
Canada developed its first stock exchange, the Toronto Stock Exchange, in 1861.39 This exchange is one of the oldest and largest stock exchanges in North America. The TSX informally started as an association of brokers by twelve business people in 1852.
In October 1861, the Toronto Stock Exchange was officially founded after a formal resolution was passed at Toronto’s Masonic Hall. It consisted of half-hour sessions and allowed a handful of trades in only eighteen stocks in the early days. In 1871 there were 14 companies listed on the exchange which paid C$250 each for the privileged “seat.”
1878: Formation Of The Tokyo Stock Exchange
In May 1878, the erstwhile Tokyo Stock Exchange was founded. 40 This stock exchange was formed as a part of the westernization of finance and industry in Japan during the Meiji Period. During this period, the magnitude of the market expanded, and the stock trading floor was renewed.41 Initially, the bulk of the exchange’s trade only consisted of the government bonds, gold, and silver currencies. However, with modernization and the economic growth in Japan by the 1920s, stock trading had become predominant.
1891: Foundation of the Shanghai Stock Exchange
Shanghai emerged as the most important financial center in mainland China in the mid-nineteenth century. The port city was abuzz with trade and capital flows. Since the late 1860s, Shanghai saw a spurt in securities trading, and the shares of local and regional companies started getting printed in business dailies.42
In 1891, American, French, and British merchants founded China’s first stock trading organization called the Shanghai Stock and Sharebrokers Association.
In 1904, after applying for company registration in Hong Kong, the association was renamed Shanghai Stock Exchange. In 1909 a different set of brokers created another Stockbrokers Association in Shanghai’s International Settlement. In 1928, the two associations eventually merged to form the Shanghai Stock Exchange.
The Dow Jones Industrial Average debuted in May 1896 and was created by Charles Dow, a financial journalist of high repute. Dow’s contribution to the global financial markets is unparalleled. He laid the foundation of some of the most innovative systems followed even today.
Dow took up journalism early in his career. In 1880, he moved to New York City to pursue his professional interest in a financial news service.43 However, in 1882, Dow and Edward D. Jones founded Dow Jones & Company to deliver bulletins through a messenger to financial houses on Wall Street.
The news sheet delivered at the end of the day, “Customer’s Afternoon Letter,” was the predecessor of The Wall Street Journal, first published in July 1889. Dow was the first editor of the journal between 1889 and 1902, and his writings lay the framework for the famous “Dow theory” that market analysts use.
Charles Dow was also a member of the New York Stock Exchange between 1885 and 1891 and part of the Goodbody, Glyn & Dow brokerage firm. It is interesting to note that the Dow Jones Industrial Average wasn’t Mr. Dow’s first tryst with measuring the market. In 1884, he produced an average of 11 stocks, which were primarily railroad companies.
The DJIA initially had 12 components that were predominantly industrial companies which is why it is called the “Industrial” Average. Most of these were leather, sugar, or steel manufacturing companies. Some of the iconic companies that were a part of the DJIA’s first launches were General Electric, American Cotton Oil, American Tobacco, American Sugar, Distilling & Cattle Feeding, National Lead, North American, Chicago Gas, Laclede Gas, Tennessee Coal, and Iron, US Leather, and US Rubber.44 Amongst them, General Electric continued to be on the Dow Jones for the longest time.
At the time of the launch of the DJIA, stock market investing was seen as a highly speculative activity and was limited to a handful of hardcore investors. There was hardly any retail participation. However, by the 1920s, stock investing began to catch pace, and many individuals participated. This drove the industrial average from 100 in 1924 to almost 400 before the 1929 Crash.
Securities trading in Hong Kong dates back to the mid-19th century.45 However, it was only in 1891 that the Stockbrokers’ Association of Hong Kong’s first formal market was established. In 1914, the association was renamed the Hong Kong Stock Exchange. In 1921, another exchange, the Hong Kong Stockbrokers’ Association, was incorporated. Eventually, both the exchanges merged to form the Hong Kong Stock Exchange in 1947.
The decade of the 1920s was known as the Roaring 20s.46 After World War I in 1918, there was an era of mass consumerism as companies launched innovative products one after the other. The Americans flocked to the stock market, and this kickstarted a bout of severe speculative investment. What followed was a short phase of deflationary recession. Since the period was short, January 1920 to July 1921 was known as the Forgotten Depression. The stocks plunged sharply, and the climate was not conducive to thriving businesses.
The S&P 500 is globally recognized as one of the most potent benchmarks for the US stock market. The formative version of the S&P 500 index was created in 1923 by Standard Statistics Company.47 48The company began rating mortgage bonds and introduced several indices, including 233 companies spanning over 26 industries computed weekly. By 1926, it developed a 90-stock index which was based on daily computation.
In late October 1929, there was a sharp decline in the stock prices in the United States, leading to a massive stock market crash. This was also known as the Wall Street crash of 1929 or the Great Crash.49 The stock market crash lasted over four business days—Black Thursday (October 24) through Black Tuesday (October 29). The Dow Jones Industrial Average plunged 25% during the period. Here’s an informative video on the market crash of 1929.
The primary reason behind the Wall Street crash of 1929 was the prolonged phase of speculation that led people to buy more stocks with owned and borrowed funds. Some of the other causes were interest rates by the Federal Reserve in August 1929. Also, a mild recession led to gradual declines in stock prices, ultimately leading to panic.
After the stock market crash in 1929, investor confidence in the market was deeply shaken. Congress conducted many hearings to identify the issues and resolve them. Eventually, it passed the US Securities Act of 1933 during the height of the depression.
The Securities And Exchange Commission or SEC was established by the passage of the US Securities Act of 1933 and the Securities and Exchange Act of 1934.61 The SEC is the primary regulatory body of the securities market in the United States. It has the authority to impose civil actions against lawbreakers. It also works with the Justice Department on criminal cases. The SEC’s primary objective is to encourage companies offering public-sale securities to provide complete disclosure of risks and maintain transparency. The SEC also mandates brokers, dealers, and exchanges to act in the best interest of the investors.
1937-1950: Shanghai Stock Exchange Is Suspended
The Shanghai Stock Exchange became one of the largest securities markets in Asia. In 1937, it was closely linked to the New York Stock Exchange, and both the stock markets used cable and radio to communicate the orders in just a couple of minutes.42 However, once the Japanese occupied the International Settlement, Shanghai Stock Exchange suspended its operations in December 1941. It resumed operations in 1946 but was eventually liquidated by November 1950 post the Communist revolution.
In 1941, Poor’s Publishing, Henry Barnum Poor’s company, merged with Standard Statistics. Formed in 1860, Poor’s Publishing published an investor’s guide to the railroad industry. On the other hand, Standard Statistics was founded in 1906 by the Standard Statistics Bureau.
After the merger, the entity was called the Standard and Poor’s Corporation, and it became a pioneer in offering financial information and analysis. The S&P began tracking 500 stocks in 1957, officially launching the S&P 500 Stock Composite Index. This index covers the 500 leading stocks of the US equity market, representing the top industries. The Conference Board Leading Economic Index is the only stock market benchmark serving as an economic indicator.70 It was also a more comprehensive measure of the investor sentiment as it tracked 500 stocks instead of just 30 stocks on the DJIA.
With $172 billion in market capitalization, the S&P 500 tracked the performance of 425 industrial, 15 rail, and 60 utility stocks.48 AT&T, known as American Telephone and Telegraph then, was the heaviest-weighted stock in the index.
The S&P is also the default benchmark for passive investors who invest through index funds. The S&P 500’s performance is a barometer for the growth of the US economy. Price swings in the S&P 500 have also accurately reflected the volatile phases of the US economy.
In 1970, The over-the-counter stock market exchange transformed into the NASDAQ, or National Association of Securities Dealers Automated Quotation market. NASDAQ is an electronic network of nearly 500 dealers trading in a list of close to 4,800 stocks.50
The NASD contracted with the Bunker-Ramo Corporation of Trumbull, Connecticut, to build a system where market makers in OTC stocks could electronically update their bid/ask quotes. That system went live in February 1971 as the National Association of Securities Dealers Automated Quotations (hence the acronym NASDAQ) under the leadership of Gordon Macklin, the pioneer of electronic stock trading.51 The birth of NASDAQ marked a significant transition from the conventional floor-based trading models in stock market history.
Today, electronic stock trading depends heavily on advanced data centers. But, it was Nasdaq that set up one of the first “data centers” for trading. These data centers featured tape drives, monochrome cathode tube screens, sideburns, and plaid trousers. Data centers have indeed come a long way since then.
Instead of a physical trading floor, NASDAQ always had an “open architecture” platform that electronically brought together competing market makers. In 1977, Canada’s CATS, Computer Assisted Trading System, incorporated the technological breakthroughs made on the NASDAQ stock exchange. After that, electronic trading gradually traveled to other exchanges like the Paris Bourse, Brussels, and Madrid.
One of the biggest and longest stock market collapses happened in 1973 and lasted until twelve months.52 Accompanied by the market collapse, the economy slipped into a recession until March 1975. There are two main reasons behind the crash. The prime reasons were the collapse of the Bretton Woods system over the past two years and the dollar’s devaluation under the Smithsonian Agreement. Another factor that exacerbated the problem was the 1973 oil crisis in October.
The 1973-74 crisis was a terrible combination of inefficient policymaking, high inflation, investor frenzy, and the first Arab oil embargo. After the initial shock, the stock market started to collapse. All the world’s major stock indexes bottomed out between September and December 1974. The Dow Jones plummeted 45% in just two years.53
According to Charles Geisst, a Manhattan College finance professor and author of Wall Street: A History, “A lot of the build-up in the market in the 1960s was based upon the perception of America’s growing power and strength.” He added that the 1973-74 “ended that period of naïve expectations for the future.” 53
In 1976, the New York Stock Exchange introduced the Designated Order Turnaround (DOT) system facilitating the electronic transmission of orders to buy and sell securities.71 Then, in the 1980s came Program Trading, a computerized way of securities trading that involved different portfolio trading strategies. Program trading was prevalent for trades between the S&P 500 equity shares and the futures market. The program could automatically place an order in the NYSE’s electronic system in the event of a predetermined difference between the two markets.
This was when the markets started to look beyond the bid and offer price. One of the significant innovations on the data front was the launch of a real-time “Level 2” data feed. 54 The exchange that offers the market provides the market data. Let’s say the New York Stock Exchange (NYSE) provides Level I and II data for the securities listed on it.
Level 2 provided a holistic quote montage to subscribers, indicating the quotes of all market makers instead of just providing the highest bid and ask prices. Bid and ask prices are known as Level I data.
Thus, Level II data was broader and provided in-depth data to the investors. Level II is also called the “order book” because it displays every order that has been placed and is in the pipeline. An order is fulfilled when a trader is willing to transact with another at the same price. Another name for Level II data is “market depth,” as you can see the number of contracts available at each pair of the bid and ask prices.
The Big Bang is a landmark event in the life of the London stock market. It took place in October 1986 when the London Stock exchange was deregulated, and it became a private limited company.55
In 1986, the London Stock Market transitioned from conventional physical share dealing to electronic trading. This transition gave it an edge over its European competitors, and the stock exchange attracted a lot of international banks for listing,
One of the most significant outcomes of the Big Bang was massive changes in the regulatory landscape. It eventually led to the creation of the Financial Services Authority (FSA) — a regulatory body that governed the financial services industry in the United Kingdom between 2001 to 2013.56
The 1987 stock market crash, also known as the Black Monday, started in Hong Kong, where the indices plunged 45.5% between October 19 and October 31.57 It was considered the first major crash of the electronic trading era. Experts believe that programmed trading models that replicated a portfolio insurance strategy caused the crash.
Wall Street was relatively new to computer programs handling significant trading decisions. Automated systems were not equipped to handle orders during market crashes, and things spiraled out of control.58 Extreme investor panic also added to the woes. Another factor leading to the Black Monday of 1987 was the then Federal Reserve Chairman, Alan Greenspan, slashing interest rates and flooding the system with liquidity.
Black Monday created a domino effect, and global stock markets collapsed. The Australian bourses witnessed a 42% decline, while stock markets in the United States and Canada saw over a 20% decline.
1990: Introduction Of Electronic Communications Networks
The 1990s saw the introduction of Electronic Communications Networks (ECNs). ECN enables the trading of financial securities besides the arena of regular exchanges. Those who subscribe to these systems can place orders electronically. Trading firms have made investments in ECNs increasingly since the 1990s due to improved speed, efficiency, minimal costs, and limited manual errors. This also marked the beginning of algorithmic trading. Algorithmic trading facilitates the execution of orders on the exchange platform through a specially designed program.
The Shanghai stock exchange was shut for 41 years during the Cultural revolution. In 1990, the Shanghai Stock Exchange reopened. In the 1980s, the issue and trading of securities in China had resumed in the country.59
However, the equities were strictly under the control of the Chinese government. The laws of the securities were highly restrictive. Gradually, the People’s Bank of China and the Ministry of Finance recognized the importance of an efficient securities market for the country’s economic development.
After the government-appointed Stock Exchange Executive Council offered recommendations, In 1990, the People’s Bank of China reopened the Shanghai and Shenzen Stock Exchange. After Hungary, China became the second socialist country to create a national stock exchange. In July 1991, the Shanghai Stock Exchange launched its first stock index.
1998: The Beginning Of High-frequency Trading
To restrict the monopoly of the NYSE and NASDAQ, the SEC passed the Regulation Alternative Trading Systems (Reg. ATS) in 1998. This resulted in the emergence of several alternative electronic trading platforms. A year later, High-frequency trading (HFT) began with a trading time of just a few seconds. Over the course, the gap has reduced to milliseconds and nanoseconds. High-frequency trading is an advanced form of algorithmic trading. It manages to send small portions of larger orders to the market at an excellent speed, such as milliseconds or microseconds.
The new millennium began with one of the biggest stock market crashes of that era. The dot-com bubble started to form in the late 1990s as internet access expanded and became indispensable in people’s daily lives. Amid the tech euphoria, the stock values began to climb. Home to the most significant tech stocks, NASDAQ rose from close to 1,000 points in 1995 to over 5,000 points in 2000.62 There was an IPO frenzy, and stocks began to trade at inflated levels. Easy access to capital, market exuberance, and pure speculation.
However, in March 2000, things began to change. The value of stocks on NASDAQ crashed from $6.71 trillion to $5.78 trillion by the end of April.63 Tech stocks, especially online retailers, took a huge hit. The share prices of blue-chip technology stocks such as Intel, Oracle, and Cisco plunged by over 80% of their value.
2008: The Sub-prime Crisis Rattled The Stock Markets
In association with steep house prices, the extension of mortgages to high-risk borrowers led to a spell of financial markets crisis lasting from 2007 to 2010.64 Homeowners began to default on the payments. The decline in mortgage payments eroded mortgage-backed securities’ value, banks’ net worth, and financial health.
By March 2007, the failure of Bear Stearns led to a massive loss due to its underwriting of the securities linked to the subprime mortgage market. By July 2008, the Dow Jones Industrial Average traded below 11,000 for the first time in over two years. By September 2008, average US housing prices dropped by more than 20% from their peak in mid-2006.
As the final nail in the coffin, in September 2008, Lehman Brothers filed for bankruptcy due to its overexposure to the subprime mortgage market. This was the largest bankruptcy filing in the history of the United States. The following day markets plunged, and the Dow ended 499 points lower at 10,917.
The repercussions were so widespread that they spilled over to the equity markets of other countries like the United Kingdom, Canada, China, Japan, and Hong Kong. While the sub-prime crisis started in the United States, it became the decade-long global recession starting point.
In 2012, the SEC updated the existing single-stock circuit breaker and made it more holistic. The objective of this system was to reduce the possibility of a stock market crash and limit the adverse impact of a crash. It is an emergency regulatory mechanism.60 Even the Chicago Mercantile Exchange and the Investment Industry Regulatory Organization of Canada (IIROC) use circuit breakers.
The market-wide circuit breakers were adopted in October 1988 after the Black Monday in 1987, and they were triggered only once, in 1997. However, in 2012, the circuit breakers were also made applicable on single securities. The new “limit up-limit down” mechanism prevented trades in individual exchange-listed stocks from happening outside a specified price band. FINRA and exchanges pre-determined the bands at a percentage level above and below the security’s average price over the immediately preceding five-minute period.
The evolution of the stock exchanges worldwide makes it evident that the entire stock market now depends heavily on technology, and this evolution isn’t slowing down anytime soon.
Global exchange operators are likely to aim at various initiatives to streamline operations and boost revenue, which may require adopting innovative technologies such as AI and blockchain.
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