Financial History Issue 116 (Winter 2016) | Page 21
leading financial centers that brought
rapid economic development in their
nations and the world. As Wright (2002)
and Rousseau and Sylla (2005) point out,
well-functioning capital markets, particularly secondary securities markets, provide an important explanation of where
and when economic development occurs.
Modern capitalism owes its existence to
stock markets and the private rules and
regulations that made them possible.
Private Incentives for Increasing
Transparency and Reducing Fraud
The system of private regulation made the
market more attractive by screening firms,
creating listing requirements and requiring disclosure for investors. The requirements were not decided by government,
but by the market participants themselves
who won or lost based on the attractiveness of the venue. While it was impossible
to prevent all instances of fraud, the listing
and disclosure requirements made it more
difficult and precluded most fly-by-night
firms.
Although the stricter rules of the NYSE
were considered the Cadillac of listing
standards, an advantage of markets is that
not everyone is required to buy a Cadillac.
Market participants only opted into the
exchange’s stricter rules if they considered
them value added. If firms or investors
found an exchange’s listing or disclosure
requirements too onerous or not appropriate, they could opt into venues with
different rules.
Exchanges that failed to adopt good
rules, or that adopted burdensome rules,
were at a competitive disadvantage; those
that adopted good ones succeeded. Rather
than being “a race to the bottom” in which
anything goes, the NYSE worked to make
its market attractive and only put its stamp
of approval on firms that warranted trading. By providing extra assurances to investors, the exchange increased the demand
for its market and made investing in stocks
more attractive and safe.
Private Governance as
the Historical Norm
Although most politicians would assert
that advanced markets are impossible
without government enforcing the rules of
the game, history shows otherwise — and
not just for a short time, but for hundreds
of years. This form of private governance
has been tremendously important for centuries, but its mechanisms are often not
easily seen or are forgotten. When buyers
do not have to worry about counterparty
default risk in a stock purchase, the time
they spend thinking about the problem
is minimal. Behind the scenes, however,
the stock exchange spent hours making
sure people who are permitted to trade
in a market can actually deliver what they
promise.
dward Peter Stringham, Ph.D., is the
E
Davis Professor of Economic Organizations and Innovation at Trinity College, Hartford, Connecticut. This article
has been adapted from his latest book,
Private Governance: Creating Order in
Economic and Social Life, © 2015 Oxford
University Press. All rights reserved.
The New York Stock Exchange, 1882.
When the Securities Act and the Securities Exchange Act were implemented in
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