Trading Up

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Wall Street, the world’s greatest capital market, is inevitably a mirror to the global economy. What happens in the world is quickly reflected in Wall Street as market forces and new technology cause old industries to fade and new ones to rise. And nothing illustrates better just how much the economy has changed in the last half-century than what’s happened to the major companies traded on Wall Street.

A Rip Van Winkle who dozed off in 1955 would probably be startled to learn that of the 30 stocks that then made up the Dow Jones Industrial Average, only 5 —DuPont, General Electric, General Motors, Standard Oil of New Jersey (now Exxon), and United Aircraft (now United Technologies)—are still on the list in 2005. Several of the mightiest companies in the Dow today, such as Home Depot, Intel, Microsoft, and Wal-Mart, did not even exist in 1955. And Rip would surely be flabbergasted to learn that General Motors, the mightiest industrial corporation on the face of the earth in 1955, would have had its bonds demoted to junk status in 2005.

But Wall Street itself, of course, has been profoundly affected by both market forces and technology. The daily volume in 1955 averaged a few million shares, barely a thousandth of the volume today, while the Dow is about 20 times as high as it was 50 years ago. Standing in the New York Stock Exchange’s visitors’ gallery back then, you could actually see most of the floor and admire one of the grand architectural spaces of New York. Today much of that space is filled with the electronic gear that makes trading in such huge volume possible.

More important, as far as the New York Stock Exchange is concerned, the NYSE in 1955 had a monopoly of trading on its listed stocks, and the cost of each trade was fixed, assuring fat commissions for the brokers who owned the 1,366 seats that symbolized membership on the exchange. But new computer technology opened up new ways to trade stocks, and the Securities and Exchange Commission moved to end trading monopolies and fixed commissions in the 1970s. By the 1990s, as volume soared along with the Dow, new competition began to erode the Exchange’s dominant position. In 1997 there began a new form of trading, done electronically via the Internet, and a company called Archipelago started to trade stocks this way. It provided quicker executions than the old system still being used on the NYSE, where specialists and brokers traded stocks on the floor, using “open outcry”—shouting, in other words—to make bids and offers.

In 1998 the daily volume on Archipelago reached five million shares. In 1999 it became a regular, SEC-regulated stock exchange, and the following year daily volume exceeded 100 million shares for the first time. Heavyweight financial institutions such as J. P. Morgan and Merrill Lynch invested in the new company. By 2002 volume was over 600 million shares.

The New York Stock Exchange, the very epitome of American capitalism since the 1830s, was starting to look old-fashioned, out of touch. People began to wonder if its days at the center of the American financial system might be numbered. After all, why would you want to trade stocks via men shouting at one another when computers could match buy and sell orders in a fraction of a second?

Then, in April of this year, the NYSE announced that it was going to merge with Archipelago, keeping the name New York Stock Exchange and making its seat holders shareholders with 70 percent of the equity in the corporation. The new entity would trade securities using both Archipelago’s electronic system and the NYSE’s floor-trading system. The future of the NYSE as the central institution of American capitalism suddenly looked a lot brighter.

Talk about déjà vu. Almost exactly the same scenario played out on Wall Street 140 years ago. Only it wasn’t technological change that revolutionized Wall Street in the 1860s. It was war and the financial consequences thereof.

Wall Street had been the unquestioned center of American securities trading for nearly 30 years by the end of the 1850s, but it was still a small and, in the scale of things, inconsequential place. The larger brokers were members of the New York Stock and Exchange Board, where the most important stock and bond issues were traded. Every business morning the president of the board would bang his gavel and begin to call out each stock in turn. The brokers, seated in rows of chairs, would shout their offers to buy or sell until there were no more bids. The president would then move on to the next security until he reached the end of the list. The board would break for a leisurely lunch and reconvene for another auction in the afternoon.

But while this decorous affair was going on inside, many brokers, even members of the New York Stock and Exchange Board, were trading outside on the “curb,” a free-for-all market on Broad Street. Each lamppost marked a spot where particular stocks were traded. Brokers wishing to buy or sell a stock would go to the designated post and yell out their offers until they found a broker willing to take the other side.

The New York Stock and Exchange Board operated much like a private club, and applicants were often blackballed. Because of the board’s exclusivity, rival exchanges would spring up in boom times but invariably wither away in the next bust.