Stock exchanges allow individuals and business's with a place to trade marketable securities to one another. The primary place where companies or governments issue or redeem securities is on exchanges. To understand the need for exchanges we must first go back in time, very far back in time to be exact to see the first example of a stock exchange. One of the first recorded exchanges was founded in the 12th century to help banks manage and deal with the debts of communities that were economically based in agriculture. This trading idea quickly spread all over Europe. One of the next places that we see history of exchanges is in Venice with bankers during the 13th century trading government securities. Other communities such as Pisa, Verona, Genoa and Florence also began trading securities, mostly government as well. During this same time period we see Bruges, in Belgium explode onto the map. While many speculate the Bruges was possibly the first exchange in the world, one thing no one doubts is how it quickly became the power house of the area. The initial start came as commodity traders gathered inside the house of a individual named Van der Burse. Their idea also spread to places like Ghent and Amsterdam.
The first joint stock company to ever be started was done so by the Dutch. Joint stock companies were a novel idea for the time, they allowed shareholders or owners of the company to invest in a business venture. The difference was that the owners or shareholders of the company would be paid a share of the profits or even losses the venture produced. This was the first time in history that business ventures could be taken on without putting any one single investor at too large a financial risk while ensuring a very profitable opportunity as well. The first ever company that formed as a joint stock company was the Dutch East India Company. The Dutch East India Company in 1602 issued its first shares, which happened to be the first ever IPO in the world, issuing stock and even selling bonds to investors. The sale of shares took place on the Amsterdam stock exchange.
Many decades later, 1688 to be exact, the London Stock Exchange was born. The trade in shares in London (London Stock Exchange) began with the need to finance two voyages: The Muscovy Company's attempt to reach China via the White Sea north of Russia, and the East India Company voyage to India and the east. The trading in the stocks of the second company began in 1688. Unable to finance these expensive journeys privately, the companies raised the money by selling shares to merchants, giving them a right to a portion of any profits eventually made. The idea soon caught. It is estimated that by 1695, there were 140 joint-stock companies. The trade in shares was centered around the City's Change Alley in two coffee shops: Garraway's and Jonathan's. The origins of the Frankfurt Stock Exchange go back to the 9th century and a free letter by Emperor Louis the German to hold free trade fairs. By the 16th century Frankfurt developed into a wealthy and busy city with an economy based on trade and financial services. In 1585 a bourse was established to set up fixed currency exchange rates. During the following centuries Frankfurt developed into one of the world's first exchanges. Bankers like Mayer Amschel Rothschild and Max Warburg had substantial influence on Frankfurt's financial trade. The Amsterdam Stock Exchange is considered the oldest in the world. It was established in 1602 by the Dutch East India Company (Verenigde Oostindische Compagnie, or "VOC") for dealings in its printed stocks and bonds. It was subsequently renamed the Amsterdam Bourse and was the first to formally begin trading in securities.
Over in America it took nearly another century for our first official stock exchange. The first exchange in America was created on the literal street corner of 68 Wall Street in New York City. They called the agreement the Buttonwood Agreement since it was signed by twenty-four brokers under a buttonwood tree. After a few centuries the property was renamed, it now was to be called the New York Stock and Exchange Board. Its kind of funny to look back and think about how cheap it was to rent space especially for something like a stock exchange. The New York Stock and Exchange Board rented a place at 40 Wall Street in 1817 for only $200 a month. This location served them well for almost 20 years but was destroyed in New York's Great Fire in 1835. Finally, about thirty years later, during the Civil War, the name was changed once again, to what we now know it is, the New York Stock Exchange. Back in those days there was no internet or radio or television so most people got their information from either word of mouth, newspapers or short pamphlets. One such pamphlet was the Customer's Afternoon letter which was only a daily two-page financial news bulletin produced by Charles Dow. The idea for this type of bulletin or news service was what would later allow companies like the Wall Street Journal to thrive since there had been a steady demand for that type of information. Since 1884 this letter included a stock average called the Dow Jones Averages. This small list contained nine railroad companies and two industrial companies.. You may recognize that last name of Dow, since it is the same name as a stock index, The Dow Jones Industrial Average. When it did make its transition in 1896 to the Dow Jones IndustrialAverage it included 12 stocks from America's leading industries and was what we call today a dollar average of them.
Many years later, with the computer revolution just starting, the world needed an electronic stock exchange. In 1971, we got just that, the National Association of Securities Dealers or for short NASDAQ. This was at first just a bulletin board for buyers and sellers to see posted prices but did not allow actual orders to take place through computers yet. With prices viewable on a screen to everyone, the spread or difference in the bid price and ask price of a stock traded on an exchange fell significantly. Even though the NASDAQ is a computer based trading system it wasn't until the year 1987, that computers were finally utilized to process trades. Up until the 1987 stock market crash, all orders were made via the phone, where brokers called each other. What was found after the crash was that when brokers tried to call other brokers to sell or buy stock, they didn't answer, meaning there was no liquidity or activity. This was obviously a problem so to solve that they created the Small Order Execution System (SOES) to allow brokers to trade with market makers who would always honor trades made and not try to hide when the markets turned south. Another American commodity, derivative and futures exchange is the Chicago Mercantile Exchange (CME). In the year 1898 the exchange was officially founded, but the name was the Chicago Butter and Egg Board and it was also a not for profit organization as well. Today on the CME many financial instruments are traded like, interest rates, equities, currencies, commodities, weather, real estate derivatives, options and finally futures. An interesting note, the CME is the largest options and futures market in the whole world.
The Chicago Board of Trade (CBOT), established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and e-Trading systems. The concerns of U.S. merchants to ensure that there were buyers and sellers for commodities have resulted in forward contracts to sell and buy commodities. Still, credit risk remained a serious problem. The CBOT took shape to provide a centralized location, where buyers and sellers can meet to negotiate and formalize forward contracts. In 1864, the CBOT listed the first ever standardized "exchange traded" forward contracts, which were called futures contracts. In 1919, the Chicago Butter and Egg Board, a spin-off of the CBOT, was reorganized to enable member traders to allow future trading, and its name was changed to Chicago Mercantile Exchange (CME). The Chicago Board of Trade established the Chicago Board Options Exchange in 1973. The first exchange to list standardized, exchange-traded stock options began its first day of trading on April 26, 1973, in a celebration of the 125th birthday of the Chicago Board of Trade. CBOE's options contracts are cleared by the Options Clearing Corporation (OCC). As of approximately April 11, 2007, the Wall Street Journal estimates that globally the market capitalization of the derivatives markets (futures, options, swaps, etc.) exceeds 450 trillion dollars (while US stock exchanges have approximately 30 trillion and the rest of the worlds exchanges total to about another 20 trillion, to a total of about 50 trillion--while the global fixed income markets total to roughly 65 trillion). The New York Mercantile Exchange (NYMEX) is the world's largest physical commodity futures exchange, located in New York City. Its two principal divisions are the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX) The New York Mercantile Exchange handles billions of dollars worth of energy products, metals, and other commodities being bought and sold on the trading floor and the overnight electronic trading computer systems. The prices quoted for transactions on the exchange are the basis for prices that people pay for various commodities throughout the world. In 1872, a group of Manhattan dairy merchants got together and created the Butter and Cheese Exchange of New York. Soon, egg trade became part of the business conducted on the exchange and the name was modified to the Butter, Cheese, and Egg Exchange. In 1882, the name finally changed to the New York Mercantile Exchange when opening trade to dried fruits, canned goods, and poultry.
The AMEX started out in 1842 as such a market at the curbstone on Broad Street near Exchange Place. The curb brokers gathered around the lamp posts and mail boxes, resisting wind and weather, putting up lists of stocks for sale. As trading activity increased so did the volume of the transactions; the shouting reached such a high level that stock hand signals had to be introduced so that the brokers could continue trading over the din. In 1921 the market was moved indoors into the building at 86 Trinity Place, Manhattan, where it still resides. The hand signals remained in place for decades even after the move, as a convenient means of communication. AMEX's core business has shifted over the years from stocks to options and Exchange-traded funds, although it continues to trade small to mid-size stocks.
David Escobar
eskylessons@gmail.com
http://www.eskylessons.blogspot.com
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