Stock Exchanges, Stock Market Guide, Stock Trading, Stock market Newsletter, Understanding Stock Markets   Stock Exchanges, Stock Market Guide, Stock Trading, Stock market Newsletter, Understanding Stock Markets 
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Stock Exchanges

Home > Stock Market > Stock Exchanges

History of Stock Exchanges

Stock Exchanges, Stock Market Guide, Stock Trading, Stock market Newsletter, Understanding Stock Markets
By the eighteenth century the first stock exchanges were formed in England, the Netherlands and France. In the American colonies, commerce was significant, but still heavily controlled by England. An informal auction market was established in New York in 1752. As the colonial economy matured and demands for funds were made by local businesses, the auction market grew.

Following the American Revolution, a banking system was established and about 300 corporations were chartered by the new government. These were primarily banks, insurance companies, dock construction firms and mining companies, and represented the first "industrials" of Wall Street.

In 1792, many New York brokers formally agreed how security transactions would take place, what commissions would be charged and what preference would be given to members of the group in these business negotiations and transactions. The pact organized the New York securities market as a definite institution.

The dollar became recognized as a sound investment medium and large amounts of capital, now needed to finance both industry and government, led to the development of investment banking. Because individual brokers could no longer handle the huge amounts of capital necessary to finance government and industry, syndicates, or groups of investment banking houses, would underwrite or provide the necessary funds directly to the corporate or government borrower for a fee. In turn, the underwriters would sell shares to smaller investors.

... and the continuous market was born

Meanwhile, the New York Stock Exchange and Board, as it was then called, continued to use the auction method for security transactions. This was later changed to a more responsive, continuous market, which is the way the exchanges work today. Brokers then began making markets in certain stocks. They would accumulate an inventory of these stocks by buying up shares for their own account, absorbing large client sales and then reselling from these inventories as demand dictated. These specialists had a stabilizing effect on the market, so that when large transactions occurred, the price of the stock was not unduly influenced.

While multiple exchanges proliferated, the lack of communication among them allowed individual stocks to trade at different prices on the different exchanges. Those investors nimble enough to trade on more than one exchange could buy low in one market and sell higher in another market. This procedure was a simple version of the trading technique known as arbitrage, which is used today by sophisticated investors.

Several exchanges

While several stock exchanges now exist in the US, a consolidated tape instantly provides information on every stock traded on the New York Stock Exchange (NYSE) and regional exchanges. Most stock transactions, in dollar value terms, occur on the New York Stock Exchange, also known as the Big Board. Here, the standards for listing have always been the highest. There is also the American Stock Exchange, known as the Amex, as well as several regional exchanges for listed stocks.

So-called "unlisted stocks" are traded in the over-the-counter (OTC) market, which is a market linked together by a communications network available to all stockbrokers. Unlisted stocks are sold primarily on the basis of the spread, or difference, between the bid and asked prices of dealers making markets in particular stocks. Listed stocks are sold primarily on a commission basis, with small bid-ask spreads. The commission varies depending on the price and size of the order. Note, however, that commissions are also charged on OTC stocks.

The National Association of Securities Dealers maintains an automated quotation system (NASDAQ) that enables its members to trade OTC stocks directly among one another. Thanks to this system and its computers, reliable price and volume-of-trading information on OTC stocks is now available, making most OTC stocks as easy to trade as listed stocks. Not all OTC stocks are on the NASDAQ system, however.


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