August/September 2005 | Volume 56, Issue 4
The New York Stock Exchange plans to modernize by merging with a new competitor—just as it did in 1869
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.
Then the Civil War changed everything. The war caused an enormous surge on Wall Street as government bonds were issued in ever-increasing amounts to finance it (the national debt increased between 1861 and 1865 by a factor of 41). The demand for uniforms, boots, tents, gunpowder, ordnance, transportation, and a thousand and one other necessities of modern warfare transformed the American economy. This transformation had to be largely financed on Wall Street.
Customers and newly minted brokers flooded onto the Street because of the new business. The increase in trading made it impossible for many brokers to go home at noon, and lunch counters opened up to enable them to grab a quick bite before plunging back into the fray.
For many it was a most profitable fray. A contemporary wrote that brokers could earn between $800 and $10,000 a day, at a time when a skilled worker might earn $1,000 a year. But other than change its name in 1863 to the New York Stock Exchange, the Stock and Exchange Board did nothing to adjust to Wall Street’s growing into the largest securities market on earth after London’s. It refused to list any but the most prominent stocks or to admit many new brokers to its exclusive club.
As always in boom times, new ephemeral exchanges opened up to handle the increased business. The Mining Exchange, which had collapsed in the crash of 1857, reopened and prospered thanks to often highly dubious companies. The Petroleum Board was born to handle securities in that new business. There was even an exchange, called the Long Room, that operated in a space rented from the NYSE in its own headquarters. Often deserted during the morning and afternoon calls, as the sit-down auctions were known, it was thronged at other times.
But the largest of the new exchanges opened in 1862 in a cellar at 23 William Street, called with no great affection, the Coal Hole. A few months later several traders departed for nicer quarters and organized the Open Board of Stock Brokers, with a trading floor on Broad Street just two doors down from the New York Stock Exchange. It quickly adopted the open-outcry method of trading used in the Broad Street curb market. Before long, with less restrictive membership and a willingness to list more securities, the Open Board was doing as much business in NYSE-listed stocks as the NYSE itself.
Worse, with all these exchanges (a second curb market soon opened up on William Street, and evening exchanges operated late into the night at the uptown Fifth Avenue Hotel and elsewhere), it was impossible to regulate the new, giant capital market effectively. The 1860s were Wall Street’s Wild West days, with few rules and few means of enforcing what rules there were. It was capitalism red in tooth and claw.
But while the speculators (and, all too often, corporate management pursuing its own interests rather than its stockholders’) enjoyed the lawlessness of Wall Street, the brokers, who depended on small commissions from a large number of customers, did not. They were afraid business would flee to safer places.
In November 1868 the Open Board and the New York Stock Exchange jointly imposed new rules on listed securities and greatly limited the ability of “speculative directors” to manipulate the stock in their own companies. Together, they found, they had the power to enforce the new rules, and in May 1869 they merged, under the name of the New York Stock Exchange. The number of seats was increased from 533 to 1,060, bringing much new blood into the NYSE. Furthermore, members were no longer to be elected. Instead, if you wanted to trade on the New York Stock Exchange, you had to buy the seat of a member.
For a while the sit-down auctions and the open-outcry trading continued side by side. Then, in 1871, as trading volume climbed relentlessly, the sit-down auctions were abandoned in favor of the system still in use today. The “seats” became merely symbolic of membership in the Exchange.
With the merger of the NYSE and Archipelago, it is entirely possible that the open-outcry method of trading that served Wall Street well for a century and a third will also disappear. That will present a problem—not for Wall Street but for television news. With no traders gathered around posts, shouting their offers to buy and sell, what will TV use for a visual when giving the stock market report?