Thursday, December 09, 2004

The Evolution of Stock Exchange Structure

Founders of the NYSE sign an agreement to exclude other markets

"The longer you look back, the further you can look forward." --Winston Churchill

With 12/15/2004 quickly approaching and the potential for perhaps the most dramatic change to the US equity market system in generations becomes closer to reality, I thought it would be interesting to take brief look back to how the NYSE started in the first place. You can read a very brief history here:

Here's a quote from the aforementioned link. I
t's evident that having an exclusive club which alienates other markets is in the DNA of the New York Stock Exchange.

"1792, twenty-four of New York City's leading merchants met secretly at Corre's Hotel to discuss ways to bring order to the securities business and to wrest it from their competitors, the auctioneers. Two months later, on May 17, 1792, these merchants signed a document named the Buttonwood Agreement, named after their traditional meeting place, a buttonwood tree. The agreement called for the signers to trade securities only among themselves, to set trading fees, and not to participate in other auctions of securities. These twenty-four men had founded what was to become the New York Stock Exchange. The Exchange would later be located at 11 Wall Street." (Source:

The evolution of the equity market system didn't end with the specialist and open out-cry system. That was one step in an ongoing effort to create a state-of-the-art stock market structure. So called self-regulatory organizations (SROs like the NYSE) don't jive with an information-rich societal structure. In 2004 people have access to more information than ever before. It's only logical that our equity market system will work in such an environment. Keeping secrets (read: floor brokers and specialists knowing more than the public) simply does not fit today's environment. Indeed, history teaches us that stock market evolve.

After approximately 300 years of a floor-based, open-outcry system, The London Stock Exchange managed to break tradition in favor of a more state-of-the-art structure. You can read about their fascinating history here:


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