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 | www.MoAF.org
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.