sustaining the ongoing mergers of major national exchanges. 1. Basic Definitions Any history of ‘stock’ market globalization prior to the 20th century has to deal with semantic complications, with “the perplexing habit of business nomenclature which seems to go out of its way to be unscientific and confusing” (Withers 1910, p.33). In particular, the securities being traded, market terminology and trading conventions are often determined by the dominant trading venue. During the 20th century, New York emerged as the center of globalized stock trading and ‘stock’ came increasingly to refer only to equity securities, primarily ‘common stock’. Withers (1910, p.55) describes market terminology at the beginning of the 20th century: “Bonds are nearly always bearer securities, but are occasionally registered, and a bond necessarily implies debt. Shares are always portions of a company’s capital, while stock may represent either capital or debt.” Observing that the “word stock has meant many things in the course of its versatile career”, Withers (1910, p.33-4) traces usage of term from Francis Bacon to Ben Jonson to Adam Smith where ‘stock’ refers to “the capital of a firm or company … the monetary resources which have been invested in its business or kept in hand for its daily needs.” From this point, ‘stock’ evolved to mean “securities received by those who subscribed the capital of companies, and then divided itself again to mean marketable securities in general, and a certain kind of marketable security in particular.” Ultimately, Withers (1910, p.34) decides the definition of ‘stock’ “is applied to all the securities dealt in on the Stock Exchanges.” This is consistent with referencing a ‘stock broker’ as an individual “who will buy and sell for you stocks, shares and bonds.” From this point, American practice has come to supplant the historical English convention of distinguishing between ‘shares’, which represent indivisible equity securities typically issued in bearer form, and ‘stock’,
headed by Isaac Le Maire was formed around 1609 to gain by manipulating prices to fall using long dated forward short sales in order to purchase stock in the cash market at lower prices. “It is not clear that the ring did more than help to hold down the already slumping prices, but the company lodged a protest with the States of Holland and West Friesland in the summer of 1609 to have a ban placed on the sale of shares ‘in blanco’” (De Marchi and Harrison 1994, p.51). The result was the Dutch edict of 1610 banning short sales ‘in blanco’, where, at the time of the short sale, the seller does not actually possess the shares being sold. In addition, the edict required that share be made within one month of the sale date. The ban on short sales was not permanent and the “occasion of renewal brought out anew sentiment for and against VOC” (p.51). Despite opposition, the ban on ‘selling in the wind’, or windhandel trade, was repeated in 1624, 1630, 1636 and 1677. It is important to recognize that the de facto impact of the ban on in blanco short selling was to make such contracts unenforceable in the courts. There was no direct criminal penalty for entering into such contracts which provided the basis for difference dealing among the close knit community of brokers and dealers that dominated the stock and commodity trade on the Amsterdam exchange. Though the ban on in blanco short selling technically applied to both commodities and stocks, the character of speculative trading in commodities was less affected due to the practical need for bourse speculators to have a connection to the underlying goods trade. No such constraint was associated with stocks. Without the discipline of exchange trading, the potential for abuse of non-transferable forward contracts with option features in the loosely organized Amsterdam share market was considerable. In turn, the ban did not eliminate speculative trading. Rather, the characteristics of trading were altered. Though the Amsterdam exchange had unrestricted access, the exchange also facilitated concentration of commercial activity. Exchange trading was
shares in the original corporations for trust certificates that possessed a claim to earnings of the trust as well as voting rights to elect the trustees that ran the trust. Standard Oil, for example, had nine trustees. Trust certificates traded like common stocks on the stock exchanges. The trust was a useful legal mechanism for the takeover ambitions of the emerging industrialists. Instead of having to issue new shares to raise new capital for a takeover, trusts could pay for the takeover using trust certificates or internal sources of funds. Due to changes in various state corporation laws, the trusts had a relatively short life span. The legal status of trusts did not prevent various states from initiating legal actions under other grounds, such as the common law restrictions on monopoly, aimed at preventing the increasing monopolization of specific industries. In addition, the public perception of economic and social problems posed by the trusts was addressed in with the passage of the Sherman Anti-Trust Act. Though this Act did not result in many successful prosecutions, it did provide a federal definition and jurisdiction for what constituted a monopoly. The trusts gradually reorganized as holding companies and trust certificates were replaced by common shares. Standard Oil, for example, completed the shift in 1899. Whether it was trading in trust certificates or the common shares, the changes in American industrial structure were good for Wall Street. The importance of trading in shares of these industrial companies gradually came to surpass the railroads. The volume and value of trade on the NYSE doubled between 1875 and 1885 with more growth on the horizon. Yet, despite the growth, the US stock market of that era justly deserved the public perception as a speculator’s haven. Henry Clews (1908, p.19), a veteran broker and investment advisor with fifty years experience on Wall Street from 1857-1907, provides an informed view of “How to Make Money on Wall Street”:
discovery. Yet, speculative activity can have decided disadvantages, such as the increased incentive and ability to manipulate markets resulting in sometimes severe distortions in the pricing process. Periods of turbulence in specific commodity markets – where price discovery apparently failed – are often associated with the entrance of speculators not directly connected to physical trade in the underlying commodity using the leverage associated with derivative contracts to distort market pricing for private gain. Though there were time dealings being conducted in a number of centers throughout the 19th century, the beginning of speculative exchange trading in the US commences with commodity futures contracts traded on the Chicago Board of Trade (CBT) in mid-19th century Chicago, First incorporated as a village in 1833, Chicago had only a population of 4,107 by 1837. In order to promote commerce, the Board of Trade of the City of was founded on with 82 members. This event, in itself, was not particularly noteworthy. The usefulness of boards of trade in promotion had been recognized for quite some time. For example, around 1700 John Law of the infamous Mississippi scheme promoted the creation of a board of trade for the city of Edinburgh (Murphy 1997). From the beginning, there were inherent conflicts between the exchange as a promoter of trade and promoter of the interests of (owner) members. The exchange as a self-regulatory entity was not recognized, e.g., Lurie (1972, p.221): A basic purpose of the Board was to facilitate profitable economic activity by members. Thus its directors had to sense with some accuracy how far they could go in the areas of rule enforcement. If rules were enforced too harshly, board members could either ignore them or decline to remain in the organization. Yet, another purpose of the exchange was to rationalize the commodities market through efficient
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