Financial History Issue 116 (Winter 2016) | Page 20

Museum of American Finance Interior view of the New York Stock Exchange from a postcard, dated 1903. and registrar approved by the exchange (New York Stock Exchange, 1914, Article XXXIII, Sec. 1); to obtain permission from the Committee on Stock before issuing initial or subsequent shares (Article XXXIII, Sec. 2, Sec. 5); and to comply with various rules of the NYSE Governing Committee, which had the authority to suspend dealings or remove a company’s shares from the exchange (Article XXXIII, Sec. 4). By the 1920s, the exchange required various reports and disclosures from companies. Although each listing and disclosure requirement involves costs to listing firms, they can bestow certain benefits to investors, and in turn to listing firms. One can think of the exchange as solving a sort of collective action problem between individual investors and firms. A listing firm nominally bears the costs of compliance, but it willingly does so because the rules increase the value of its stock. If investors value transparency through listing or disclosure requirements, an exchange can require them. That means individual investors need not visit a company’s offices if they know that a stock exchange and auditors have reviewed the company’s books. A stock exchange helps provide an off-the-shelf package of rules for corporate governance, and the costs and benefits of that package become internalized within the exchange. Competition Among Providers of Private Governance We now know that those associated with the NYSE made a lot of good choices, and that by World War I, the market surpassed its counterpart in London as the world’s most important exchange. But at the time, the success of the NYSE was not inevitable. Adopting stricter rules had the potential to attract more market participants, or it had the potential to push them away to less strict competitors. The exchange always had to compete for business, and throughout the years it faced competition from the Open Board 18    FINANCIAL HISTORY  |  Winter 2016  | of Brokers (which merged with the NYSE in 1869); the Curb Market and its more formal outgrowth, the New York Curb Exchange (founded in 1921 and renamed the American Stock Exchange in 1953); the Consolidated Stock Exchange of New York (founded in the 1880s, it included many mining companies); and regional exchanges including the Boston and Philadelphia Stock Exchanges (founded in 1834 and 1754, respectively, the latter in Philadelphia’s London Coffee House). Investors also could have done business on the Coal and Iron Exchange, the Coffee Exchange, the Cotton Exchange, the Maritime Exchange, the Metal Exchange, the New York Insurance Exchange or the Leaf Tobacco Board of Trade, to name a few. Some, such as the Consolidated Stock Exchange of New York (which opened in 1885 and closed in 1926), were ultimately outcompeted. But the advantage of competition was that each exchange had to try to make its market as attractive as possible; those that did a better job prospered.