Under a Big Tree: Foundations of the New York Stock Exchange
“Its Profitable to be in this club, so you’re going to follow the rules if you want to remain in this club”, says economic historian Robert E Wright, describing the logic of the original members of the Buttonwood Agreement. “They might lose on one deal, but being in the club is so lucrative that they know they’ll make it back on another day. When you all know each other, why screw each other over?“
The Buttonwood agreement is the agreement upon which the New York Stock Exchange has its foundations on. It was signed by twenty four of New York’s leading merchants and brokers in March of 1792. This agreement stated that members would only trade securities among themselves, that they would agree to the commissions on securities as they were, also that they would not participate in the auctions of securities.
The agreement was an attempt to establish order after the panic of 1792, during which time there were no safeguards or rules, and a lot of the deals at the time fell through. This particular panic had been initiated by William Duer, who lent money to make speculative trades until it was no longer possible for him to lend money. Such is the history of one of the worlds most prestigious financial institutions, albeit a brief one.
As of 2019, the NYSE had a market cap of $22 Trillion, making it the world's largest stock exchange by market capitalization. An interesting fact about NYSE’s parent company, the Intercontinental Exchange, would be that it has a significant investment in cryptocurrency technology. Personally, I am in favor of their involvement in the space, as most narratives around cryptocurrency are centered on negativity.
Recently, Bakkt received a $300 million dollar investment from Microsoft. Bakkt is bringing in institutional investors to deal in cryptocurrencies like Bitcoin, and with investments from institutions like Microsoft, it seems that they are likely to achieve their objective
In the Water: Foundations of Euronext
The oldest stock exchange in the world is from the Netherlands. Other than where it is, a more interesting question would be why it is this particular country that became the birthplace of the stock exchange. A narrative to appreciate would be the one that describes the battle of the Netherlands against inanimate opposition—water. Having to deal constantly with the threat of flooding, the people of this country were familiar with working together in order to fight against the risk in question, this war being waged primarily through collective savings.
It is arsenal in the form of collective savings that enabled citizens of this nation to create the ideal breeding ground for stock market capitalism. A testimony to this history would be that the oldest loan in the world, that still pays interest to this day, is the 1624 bond issued by the Dutch water board. Such is the history of the country that founded the stock exchange
As a stock exchange, Euronext has its foundations in the Amsterdam Stock Exchange, which in turn has its roots primarily based on the trade of shares in the Dutch East India Company. The Dutch East India Company (from here on described as the Company) was a company founded in The Netherlands, established with the intention to trade with countries such as India, Japan and China.
The Company mainly imported textiles, silks, and spices from the Asian Continent. This was mainly because the king of Spain had caused the Netherlands to be locked out of the spice trade from the year 1585.
1602 represents an important year in financial history. From this year going forward, there has been formal trade in securities of a companies. Had the Netherlands not been kicked out of the spice trade by Spain, Stock Exchanges as we currently know them might take on a different function. Thankfully, we do not have to ponder to heavily on that possibility.
Primary Functions of Modern Day Markets
Financial markets in their current form have two primary functions. The first function would be price discovery. The second function is a liquidity function, namely the provision of liquidity. According to the Chicago Mercantile Exchange, price discovery refers to the act of determining the common price of an asset. It occurs every time a buyer and seller interact on a regulated market. Price discovery therefore represents the interaction between supply and demand.
Liquidity provision is the mechanism through which companies on an exchange receive money from investors in exchange for equity. This is different from price discovery, because price discovery is concerned with determining the best price for a particular security, while liquidity provisioning is concerned with the exchange of capital for equity.
Conclusion
The stock exchanges mentioned in this article both have their roots in taking care of the common interests of their founders. With the merchants in America, there was a collective effort to create a system of order after a financial panic; with the merchants in the Netherlands, the collective effort came about as a result to deal with not having access to particular trade routes. One aspect of the stock exchange that is to be appreciated would be that it is a problem-solving tool, from the time it was founded, to the modern day as we currently know it. Complement this article with the following video.
References
How a Financial Panic Helped Launch the New York Stock Exchange, Time.com
The Buttonwood Agreement, btnwd.com
The High Crimes And Misadventures Of William Duer, The Founding Father Who Swindled America, Forbes.com
Intercontinental Exchange History, intercontinentalexchange.com
Bakkt Crypto Exchange Boosted By $300M From Microsoft, ICE During Crisis, Forbes.com
Price Discovery, cmegroup.com
The world’s first stock exchange: how the Amsterdam market for Dutch East India Company shares became a modern securities market, 1602-1700, Thesis
Regulation and Liquidity Provision, ritholtz.com
A brief exchange history of the Netherlands, beursgeschiedenis.nl
Comments