Trading Up (August/September 2005 | Volume: 56, Issue: 4)

Trading Up

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Authors: John Steele Gordon

Historic Era: Era 7: The Emergence of Modern America (1890-1930)

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August/September 2005 | Volume 56, Issue 4

 

Wall Street, the world’s greatest capital market, is inevitably a mirror to the global economy. What happens in the world is quickly reflected in Wall Street as market forces and new technology cause old industries to fade and new ones to rise. And nothing illustrates better just how much the economy has changed in the last half-century than what’s happened to the major companies traded on Wall Street.

A Rip Van Winkle who dozed off in 1955 would probably be startled to learn that, of the 30 stocks that then made up the Dow Jones Industrial Average, only 5 —DuPont, General Electric, General Motors, Standard Oil of New Jersey (now Exxon), and United Aircraft (now United Technologies)—are still on the list in 2005. Several of the mightiest companies in the Dow today, such as Home Depot, Intel, Microsoft, and Wal-Mart, did not even exist in 1955. And Rip would surely be flabbergasted to learn that General Motors, the mightiest industrial corporation on the face of the Earth in 1955, would have had its bonds demoted to junk status in 2005.

But Wall Street itself, of course, has been profoundly affected by both market forces and technology. The daily volume in 1955 averaged a few million shares, barely a thousandth of the volume today, while the Dow is about 20 times as high as it was 50 years ago. Standing in the New York Stock Exchange’s visitors’ gallery back then, you could actually see most of the floor and admire one of the grand architectural spaces of New York. Today, much of that space is filled with the electronic gear that makes trading in such huge volume possible.

More important, as far as the New York Stock Exchange is concerned, the NYSE in 1955 had a monopoly of trading on its listed stocks, and the cost of each trade was fixed, assuring fat commissions for the brokers who owned the 1366 seats that symbolized membership on the exchange. But new computer technology opened up new ways to trade stocks, and the Securities and Exchange Commission moved to end trading monopolies and fixed commissions in the 1970s. By the 1990s, as volume soared along with the Dow, new competition began to erode the Exchange’s dominant position. In 1997, there began a new form of trading, done electronically via the internet, and a company called Archipelago started to trade stocks this way. It provided quicker executions than the old system still being used on the NYSE, where specialists and brokers traded stocks on the floor, using “open outcry”—shouting, in other words—to make bids and offers.

In 1998, the daily volume on Archipelago reached five million shares. In 1999, it became a regular, SEC-regulated stock exchange, and the following year, daily volume exceeded 100 million shares for the first time. Heavyweight financial institutions such as J. P. Morgan and Merrill Lynch invested in the new company. By 2002, volume was over 600 million shares.

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