Stock Market

Stock Market. Stock exchanges are places where the investing public buys and sells shares of companies that are listed on the respective markets. The earliest stock exchanges arose in Holland and Britain in the seventeenth century. Originally called “bourses,” these exchanges traded shares of companies that had raised money for overseas exploration. In the early years of the Industrial Revolution, banks, insurance companies, and manufacturers began to sell public securities that were traded on exchanges. Stock exchanges are called secondary markets because they provide a location where buyers and sellers may agree upon a price for securities.

In the nineteenth century, the European bourses, and especially the London stock market, were the largest and most active in the world. Until World War I London was the world's financial capital, and many companies from around the world had their shares traded there. The New York Stock Exchange (NYSE), on Wall Street in New York City, became preeminent after the war because money could flow in and out of the United States without interference. As a result, the American markets boomed during the 1920s—a boom that ended in the stock market crash of 1929. President Herbert Hoover accused the stock exchanges of manipulation, especially concerning short selling (selling borrowed stock, hoping to profit as it goes down), and blamed them for the country's economic woes during the early days of the Depression of the 1930s. A congressional investigation of stock market practices led to the Securities Exchange Act (1934), creating the Securities and Exchange Commission (SEC) and putting the organized U.S. stock exchanges under government regulation for the first time.

In addition to the organized exchanges, where brokers and dealers agreed to quote prices on stocks, an over‐the‐counter (OTC) market also traded shares of companies without having an organized exchange floor. This market itself became more organized when Congress established the National Association of Securities Dealers (NASD) through the Maloney Act in 1937. This self‐regulating association trades the shares of companies not large enough to trade on the NYSE, American Stock Exchange, or one of the regional exchanges. In the 1970s, the NASD market became computerized and, as a result, began to rival the NYSE for business. While many NASD companies remained small, others grew enormously, particularly computer and Internet companies in the 1990s. Traditionally, the NYSE has been referred to as the first market, the other organized exchanges such as the American Stock Exchange as the second market, and the OTC market or NASD as the third market.

Once the exchanges and NASD came under federal regulation, trading became more orderly and less predatory. In 1937 William McChesney Martin became the president of the NYSE and implemented changes to reform the market according to the spirit of the regulatory legislation passed during President Franklin Delano Roosevelt's first term. Without major reforms, public confidence in the market would have been seriously undermined, in turn affecting the amount of money that companies could raise from the new‐issues market, the part of the market where new stocks are sold, separate from the stock exchanges.

The function of the exchanges and the NASD market is to establish prices at which new stock issues can come to market, and at which buyers and sellers can trade. To facilitate price reporting, the consolidated ticker tape was established in 1975. The smaller exchanges and the NASD also have a centralized quotation system called the Intermarket Trading System (ITS). The consolidated tape, along with other NYSE reforms like negotiated commission rates, which replaced fixed commissions in 1975, helped the markets develop more uniform prices.

Developments in electronic communications in the 1990s added to the volume of shares traded on all the exchanges and NASD. The average volume of shares traded on the NYSE alone was about 400 million per day in 1997, four times that of a decade earlier. In 1997, the NYSE experienced its first billion‐share day. The shares of many American companies are now also traded in overseas markets, while the exchanges and NASDAQ (National Association of Securities Dealers Automated Quotations) trade the shares of many foreign companies as well. All these developments made the markets more international than ever as the twentieth century ended.
See also Banking and Finance; Business; Business Cycle; Capitalism; Depressions, Economic; Economic Development; Economic Regulation; Global Economy, America and the; Internet and World Wide Web; New Deal Era, The.

Bibliography

Robert Sobel , The Curbstone Brokers: The Origins of the American Stock Exchange, 1970.
Charles Geisst , Wall Street: A History, 1997.
Barrie Wigmore , Securities Markets in the 1980s, 1997.

Charles Geisst