11 Wall Street
The mission of the NYSE is to add value to the capital-raising and asset-management process by providing the highest-quality and most cost-effective self-regulated marketplace for the trading of financial instruments, promote confidence in and understanding of that process, and serve as a forum for discussion of relevant national and international policy issues.
Founded in 1792 amid the budding financial enterprises of lower Wall Street in New York City, the New York Stock Exchange (NYSE) has evolved into one of the world's foremost securities marketplaces. It is the oldest and largest stock exchange in the United States, and one of the most important world-wide. The NYSE currently operates as a not-for-profit corporation, run by a board of directors and its 1,366 members. About 3,000 companies, both domestic and foreign, are listed on the NYSE. These companies have a combined market capitalization of $15 trillion. The NYSE runs a floor-based trading system, where members called specialists are assigned to particular stocks. The specialist is charged with maintaining a fair and orderly market for the assigned stocks. The system requires human beings on the trading floor, but it is also highly automated, and has the capacity to process about ten billion shares a day. Changes in information technology in the late 1990s led to increasing competition from the NASDAQ (National Association of Securities Dealers Automated Quotation) exchange and from alternative electronic brokerages. NYSE announced plans in the late 1990s to transform itself into a public company, though by 2001 no definite date for the change had been set. The NYSE makes most of its revenue from fees on listings and on trading and market data.
Late 1700s Origins
The NYSE took shape in New York City in the 1790s, where merchants and brokers held public auctions and negotiated deals in and around the landmark Tontine Coffee House at the corner of Wall and Water Streets. New York proved a particularly rich market for the government securities which had helped fund the Revolutionary War. As New York commerce evolved, the budding securities market grew accordingly in complexity and scope. On May 17, 1792, two dozen brokers signed the 'Buttonwood Agreement,' founding the Exchange on lower Wall Street. They agreed to avoid public auctions, to collect minimum commissions on federal bonds (public stock), and to 'give preference to each other' in their trading deals.
Following the War of 1812, the stock market experienced unprecedented growth. Increased trade with Britain transformed New York into the leading American port. Private and commercial banks proliferated. Key brokers decided to establish a steady forum--with a fixed location and regular hours--and on March 8, 1817, they adopted a constitution and the name 'New York Stock & Exchange Board' (NYS & EB).
The NYS & EB was governed by distinct rules and procedures. Members were elected on the basis of a ballot-style election process. The exchange followed rules regarding sales and delivery procedures, commission rates, and business ethics. Stipulations also controlled absenteeism, distractions during bidding, and even the wearing of hats. Daily trading consisted of members bidding on securities from designated seats, while the president 'called' out each stock or bond.
The stock market fed off a flow of new capital from the 1820s to the 1830s. Trading of federal securities financed the construction of roads, bridges, canals, and municipal water, sewerage, and lighting systems. New laws brought governmental charters within closer reach of young companies. Consequently, trading volume at the NYS & EB rose from an average of 100 shares per day in 1827 to 5000 shares per day in 1834. By the late 1830s, however, the securities market followed the overall economy into a slump. British cutbacks in American investment, rampant speculation in land and securities, and the 1836 closing of the federally-chartered Second Bank of the United States culminated in the Panic of 1837. Though it lost the momentum it had gathered in the 1820s and early 1830s, the NYS & EB managed to survive until the down cycle reversed in 1843.
Among the many new issues listed at the Board, railroads accounted for particularly high trading volume in the mid-1800s. Though the first railroad issue--Mohawk & Hudson Railroad--was listed on the Exchange in August of 1830, the rail frenzy reached its pinnacle in the 1850s and 1860s. By the early 1850s, the NYS & EB listed over ten rail companies.
In 1863, the Board changed its name to the New York Stock Exchange (NYSE) and began construction of its first permanent building. Designed by John Kellum, in the Italian Renaissance style, the new space accommodated expanded business. The second-floor Board Room was designed to seat the elected members with assigned places from which they negotiated the stock call, held three times daily.
With the end of the Civil War, intense capitalization of American industry spurred unprecedented growth in stock trading and the emergence of new and competing exchanges. In 1869, the NYSE joined forces with two key competitors: the Open Board of Brokers and select representatives from the Government Bond Department. These mergers were accompanied by administrative and organizational changes that would effect the shape of the NYSE over the following century. Trading volume rose substantially to over $3 billion in securities, a figure that was managed by a body of 1060 members, up from 533 before 1867. On October 23, 1868, memberships were made salable, with prices averaging between $7,000 and $8,000. Continuous trading replaced the 'call' system.
Innovations in the Late 19th Century
The latter half of the nineteenth century brought numerous technological advances. Communications between brokers, investors, and different exchanges were catapulted by the development of the telegraph in 1844, the completion of a transatlantic cable in 1866, and, eventually, the development of the telephone, which reduced trading time from roughly 15 minutes to less than sixty seconds after 1878. The NYSE also benefited from the 1867 introduction of the first stock ticker. In order to control accuracy and fair distribution of trade information, the NYSE established its own New York Quotation Company to gather transaction data and distribute it systematically to ticker companies.
Despite efforts to control trading, a combination of financial buccaneering and broad economic influences disrupted the securities market in the late 1860s and early 1870s. Reckless gold speculation in 1869, including an attempt by Jay Gould and James Fisk, Jr., to corner the gold market, prompted the U.S. government to sell some of its supplies, precipitating a sharp break in gold and other securities on September 24. The investor calamity earned the name 'Black Friday.' In September 1873, the failure of Jay Cooke & Company sparked another major market break that closed NYSE offices for ten days and scared the securities industry until the end of the decade.
By the 1880s, the scope and trading volume of the NYSE reflected the rise of large corporations and industry-wide trusts. The Exchange created an 'Unlisted Department' through which shares were traded until a company qualified for regular listing (the department was abolished in 1910). On December 15, 1886, the exchange traded a record 1.2 million shares. When trading volume reached three million shares in April of 1901, plans were drafted for expanded offices. Completed in 1903, the new Exchange building was designed by George B. Post in the classical-revival manner. To embellish the white marble facade, J.A. Ward sculpted the figures of 'Integrity Protecting the Works of Man.'
In the early 1900s, the NYSE saw the rise of oil and steel industries and the tremendous financial clout of such magnates as John D. Rockefeller, Henry Clay Frick, and John Pierpont Morgan. On October 23, 1907, monetary inflation and speculation caused a run on banks and a rapid decline in stock prices. Containment of the crisis was largely attributed to Morgan, who organized a consortium of major banks to hold up the market with a subscription of over $25 million. The Panic of 1907 had almost abated when World War I broke out in the summer of 1914, with foreign exchanges closing down in droves. By July, the NYSE stood as the last major exchange to absorb worldwide investor panic. It suspended trading until December 14. When it reopened, military procurements stimulated renewed trading energy that carried the NYSE prominently into the 1920s. To finance the war, large issues of United States Liberty Bonds were traded, attracting new investors.
After the war, the American economy was powered by retail chain stores and massive holding companies which accounted for rapid expansion in new issues, greater volume of trading, and increasing value of listed shares. The NYSE took several measures to maintain order amid the flux of new activity: the Stock Clearing Corporation was established on April 26, 1920, to facilitate transfers of cash and stock between members, banks and trust companies; Exchange membership was increased from 1100 to 1375 in 1929; and the trading floor was physically expanded and updated to handle higher volume. While the market value of all NYSE listed stocks was $27 billion in 1925, it jumped to approximately $90 billion by 1929.
In the late 1920s, financial optimism persisted despite signs of weakening markets in agriculture, real estate, and construction. On October 24, 1929, however, the market underwent its first sharp break, known as 'Black Thursday.' One week later, on October 29, 1929, the market crashed. Stock prices dropped 11.7 percent and volume soared to a record 16,410,000 shares. The Dow Jones Industrial Average dropped from 386 to 41.
Regulation and Reorganization During the Depression and After
The United States Congress passed corrective legislation, of which the Securities Act of 1933 and the Securities Exchange Act of 1934 directly influenced the NYSE. The 1933 Act mandated the registration of all new issues of securities with the Federal Trade Commission (FTC) and the full availability of all pertinent information to investors. The later Act created the Securities and Exchange Commission (SEC) to monitor price manipulation, speculation, and unfair practices in all securities exchanges. On October 1, 1934, the NYSE registered with the SEC as a national securities exchange. The NYSE initiated substantial organizational change with the June 30, 1938, election of its first full-time paid president and chief executive officer, William McChesney Martin, Jr. Martin restructured the Exchange's Governing Committee and its entire committee system, and paved the way for stricter self-regulation.
After weathering World War II and assisting the federal government in the sale of seven giant defense loans, the NYSE entered the 1950s with a plan to gain the confidence of new investors. In June 1953, the Exchange admitted its first member corporation, Woodcock, Hess & Co., expanding on rules that had limited memberships to partnerships. In January 1954, the Exchange inaugurated a Monthly Payment Plan, in which stocks could be purchased with regular payments. And in February of that year, the push to broaden public ownership fostered a print and radio campaign of public education with the theme: 'Own Your Share of American Business.'
Starting in the 1960s, a virtual revolution in automated data-processing, information, and communication technology effected every level of Exchange activity, from trading practices to regulation and industry-wide organization. In December 1964, the 'black box' ticker was replaced with a 900-character-per-minute model. The old pneumatic tube system was replaced with computer cards. The Market Data System (MDS), completed in December of 1966, used the latest computer technology to integrate the ticker system, the NYSE Common Stock Index and stock-clearing operations. A joint venture between the NYSE and the American Stock Exchange resulted in the 1972 establishment of the Securities Industry Automation Corporation (SIAC), which provided consulting and development services in automated systems for the entire industry. Improved systems utilized by the NYSE also included the 1976 Designated Order Turnaround (DOT) system to electronically route trade information between the Exchange and member firm offices (the improved SuperDOT system followed), and a computerized Stock Watch system to monitor price fluctuations in listed stocks.
Starting in the early 1970s, major organizational changes affected the NYSE and the securities industry at large. In 1970, public ownership of member firms was approved. Then in February of 1971, the Exchange again called on William McChesney Martin, Jr., to overhaul its constitution, rules, and procedures. Changes following Martin's recommendations were numerous: the NYSE was incorporated as a not-for-profit organization; in July 1971, member corporations began listing their stock; alternative listing standards attracted foreign-based corporations, and qualified foreign-based brokers were invited to apply for membership; electronic-access memberships were added to physical memberships to expand broker-dealer participation in NYSE markets; and the fixed commission system was abolished in May 1975. In addition, the Board of Governors was replaced by a Board of Directors in July 1972; by 1993, the Board consisted of 12 public members, 12 industry members, and two NYSE officers, the chair/CEO and the president/chief operating officer.
Market Innovations in the 1980s
With the Securities Acts Amendments of 1975, Congress enacted further changes. A full consolidated tape was introduced to electronically collect and report trades in NYSE listed stocks from all markets in which they occurred. The 1978 inauguration of the Intermarket Trading System (ITS) used computers to connect the NYSE to six other stock exchanges: the American, Boston, Cincinnati, Midwest, Pacific, and Philadelphia. A Composite Quotation System and National Clearance and Settlement System enabled brokers to do comparative shopping between different markets. Those markets grew in number to include, among others, the over-the-counter (NASDAQ) market after 1982.
In the 1980s, the NYSE was influenced by three main trends: the rise of options and financial futures markets; the proliferation of non-Exchange instruments such as limited partnerships, penny stocks, and junk bonds; and the surge of computerized information delivery systems, giving industry professionals unprecedented power to manipulate the market in what the press often called 'market games.' The first trend was manifest in the August 7, 1980 opening of the New York Futures Exchange (NYFE). All three trends contributed to a bullish market throughout the early 1980s.
The September 21, 1987, record price of $1.15 million paid for a NYSE membership reflected confidence in the market's strength. Nevertheless, less than six months later the market experienced a sudden downturn. On October 19, 1987, the Dow Jones Industrial Average dropped 508 points, followed a day later by the highest volume day of 608,148,710 shares at the NYSE. In order to reduce record stock-market volume, on October 20 the NYSE curbed the use of its electronic order-delivery system, forcing many traders to turn away orders. The overall turmoil and tremendous loss to investors earned the name 'Black Monday.' The overall crisis became known as the Crash of 1987.
The Crash of 1987 prompted energetic discussion and planning toward regulatory overhaul of the nation's financial industry. While strategies differed, general consensus supported the basic objectives of national market system legislation: fair competition between market participants; economically efficient and fast execution of customer orders; public access to market information; and the opportunities for investors to interact without broker participation. The exact means of arriving at these objectives remained a subject of heated and ongoing debate. One plan proposed a $1 billion superfund, created with capital advanced by large member firms. In a New York Times editorial on October 21, 1987, Lawrence H. Summers suggested that the stock index futures market should be regulated out of existence, as it 'increased market volatility by creating huge selling pressure following market declines.' Edward A. Kwalwasser, executive vice-president of the NYSE Regulatory Group, proposed a general regulatory structure that would apply the same rules to all securities execution systems. He argued that different regulations too often applied to different trading systems.
Indeed, from the 1980s on, the NYSE faced growing competition by off-exchange trading in NYSE-listed securities. Customers were increasingly drawn to so-called third-market firms for several reasons: they had no exchange fees to pay, they outperformed regional exchanges, and they could execute orders at incredible speeds, often within seconds. Yet critics cited important disadvantages as well: third-market firms permitted their brokers/dealers to funnel order flow to sources of liquidity that might undermine the primacy of the investor and the capital raising function. In an April 1993 hearing on the future of the Stock Market, NYSE CEO William Donaldson defended the Exchange against the encroachment of dealer markets. He noted that 'the fragmented nature of dealer markets combined with flexibility in the time a trade can be reported makes trade reporting in the dealer market inherently unreliable.' Praising the NYSE's combination of computer automation with on-floor communication, Donaldson added that 'It's only at the point of sale where we believe that human intelligence and competitiveness must be brought together in executing an order.'
In January 1992, the NYSE began a year-long series of programs and events in observance of its bicentennial. It also continued its fight to retain any further slippage in its market share, adding policies like the 'clean-cross rule' allowing large institutional investors to cross block orders on the floor without interference from smaller public orders. In addition, the NYSE continued to develop international contacts: in November of 1986 it led a Wall Street delegation to China for a symposium on financial markets; in November of 1988 it opened an office in London to facilitate European access to U.S. capital markets; and in October of 1990 the NYSE established an exchange program with the Soviet (now C.I.S.) Ministry of Finance and Gosbank, the state bank.
Increasing Competition in the Late 1990s and Beyond
The long bull market of the 1990s was good for the NYSE, yet the overall growth of the stock market also helped fuel the company's principal competitor, NASDAQ, and promoted many alternative electronic trading systems. These alternative systems (known as ECNs, for electronic communication networks), such as Instinet Corp. and Bloomberg Tradebook, used advanced communication technology to allow institutions to trade among themselves, cutting out the middleman. These were increasingly viewed as low-cost alternatives to traditional trading. By the mid-1990s, the ECNs accounted for close to four percent of orders in securities listed on the NYSE, up from just over one percent in 1991. As for NASDAQ, it was known as the haven of technology stocks, and by and large it was technology that was thought to account for the long season of prosperity in the U.S. stock market. It became increasingly important for the NYSE to distinguish itself from NASDAQ and its competitors, and to sell itself as the best stock exchange. The principal difference between NASDAQ and the NYSE was the floor trading system. NASDAQ did not have the member specialists who tracked each listed stock, but dealt through so-called market makers, who handled all trades electronically. Different market makers might quote different prices for the same stock, depending on their inventory.
In 1995, Richard Grasso became chairman of the NYSE, and he moved swiftly to bolster the exchange against its rivals. The NYSE struggled to woo firms away from NASDAQ, it reached out to companies just going public, and it set its sights on overseas companies. Many firms went to NASDAQ with their initial public offerings (IPOs), because of that exchange's lower bar for capitalization. Under Grasso, the NYSE tried to capture more of the young companies just going public. The NYSE had 74 IPOs in 1995, and increased that number to 117 the next year. This was still slight compared to 730 IPOs on NASDAQ for 1996. In the mid-1990s the NYSE opened an office in Menlo Park, California, near the heart of Silicon Valley, in order to be closer to many of the up-and-coming technology firms. Over the next few years, NYSE made overtures to about 600 companies listed on NASDAQ, hoping to get them to switch. Companies that made the move included the computer company Gateway 2000 and the internet provider America Online, and both NASDAQ and the NYSE competed heavily for new foreign listings. Here too, NASDAQ had a distinct advantage throughout the 1990s because of its less stringent entrance requirements and its reputation as the place for technology sector stocks. However,1 by 1999, the NYSE had 28 new foreign listings, and in 2000 it gained 32 (compared to 63 and 86 for NASDAQ). To make itself more amenable to foreign markets, the NYSE allowed trading in 16ths (instead of only in eighths) in 1997, and by 2001 had phased out fractions, to trade in decimals. The move to decimals brought the NYSE in line with other world stock exchanges. The stock exchange also announced plans to float itself as a public company, perhaps in 1998. However, these plans were put off, apparently because the NYSE had trouble defining its business model.
The NYSE spent heavily on advertising in the late 1990s, doubling its budget from $7 million to $14 million between 1996 and 1997. It tried to build on the prestige of its long history, which again set it apart from NASDAQ and newer electronic competitors. Nevertheless, talk of the moribundity of NYSE, with its antiquated floor-trading system, persisted through the end of the century. The close of 2000, however, saw a collapse of many of the high-flying new technology firms, and the NASDAQ dropped 40 percent. Moreover, the threat of alternative electronic trading sites seemed to be weakening. NYSE's Grasso argued that the proliferation of new trading venues meant a host of new, and usually hidden, middlemen, who didn't always work to the best interests of the investor. The NYSE had a massive weapon against the ECNs, which was its liquidity. It traded a billion shares a day, while even the largest of the ECNs sometimes traded only in the hundreds of shares after hours. In 2000, Grasso announced the NYSE would soon unveil several new electronic trading tools, giving investors on NYSE the same instantaneous trading the electronic communication networks offered. One was called Network NYSE, and it allowed investors to either work with a broker or to send orders electronically directly to the stock exchange. MarkeTrac was a web-based program that represented the NYSE trading floor in real time, showing 'hot spots' of trading activity, and allowing investors to make instantaneous trades. In a sense, NYSE was positioning itself as the best of both worlds--both the staid, old-fashioned, and mighty stock exchange and the quick, cutting-edge, electronic network. Though by early 2001 it was too soon to tell what would happen to the struggling technology sector, it looked like NYSE had not been brought down by its electronic rivals.
Principal Subsidiaries: New York Futures Exchange (NYFE).
Principal Competitors: London Stock Exchange plc; National Association of Securities Dealers Inc. (NASDAQ); Instinet Group LLC; E*Trade Group, LLC.