The emergence and development of the London Stock Exchange
The London Stock Exchange has been touted as one of the most organised market in the entire globe. As a result, it has continued to attract a lot of research and attention (Michie 1985, p. 1). Even as contemporaries have written a lot about the history and the development of the London Stock Exchange, on the other hand, its defects and merits has elicited a lot of debates and controversies. The history of the London Stock Exchange dates as far back as 1762. It started when some 150 successful stockbrokers decided to from a club. The stockbrokers decided to rent the Jonathan’s Coffee House to facilitate trade. In order to raise the £1200 annual rent, each of the 150 members was required to pay £8. They became the exclusive members of the club by virtue of their subscription. However, a non-member broker decided to challenge this exclusiveness in court on ground of having been refused entry. The court ruled in favor of the non-member broker on grounds that Jonathan’s had come to be associated with dealers in shares and stocks for a very long time. As a result, the annual subscription fee for membership to the club was maintained at 5 guineas per annum, up to 1801, when the club built a separate building. Thereafter, the annual fee was maintained at 10 guineas until 1876. The members decided to sell 400 shares at a cost of £50 each so that they could raise the money needed to buy the land and also to construct the building (Davis, Neal & White 2003, p. 119). In order to ensure control of the building, each stockbroker was not allowed to possess more than four shares. In addition, a General Purposes Committee consisting of 30 members was also created. Committee members would be elected very year and anybody could gain membership by settling the annual subscription fee, and upon approval by the General; Purposes Committee.
Members of the London Stock exchange were highly restricted from providing additional financial services. Also, member firms were also limited in size by the same rules. The income of London brokers was limited to commissions and in order to increase their revenue, they deemed it necessary to increasing the number and varieties of securities. In contrast, the London jobbers wished to have the number of customers that they were allowed to handle increased and at the same time, maintain the variety and number of securities to a minimum. There are also a number of other major issues that emerged at the London Stock Exchange, such as the issue of fee schedules, and the manner in which the stock market was linked to other securities markets and financial institutions (Neal & Davis 2005, p. 301). Moreover, they had to be scaled to the abilities of an individual broker and to the needs of an individual client.
Listing of foreign exchange
The first listing of foreign securities on the London Stock Exchange took place in after 1688, when London imported Dutch financial practices wholesale following the ascension into power of William III. The first three companies to sell their shares to the public and foreigners at the London Stock Exchange were the New East India Company, the Bank of England, and the South Sea. Foreigners were not allowed to be the office bearers of these companies. However, foreigner with substantial amounts of stocks in the aforementioned corporations had the rare privilege of voting in directors (Neal 2006, p. 6). Because the number of traders trading on the London Stock Exchange were many, it was almost impossible to for them to reach a consensus. From the onset, there were two factions of the members: brokers, who were non-members of the exchange but acted as agents to the customers, and jobbers, who were principle account holders with the exchange where they also traded. The brokers relied on commission as their source of earnings, while the jobbers relied on bid-ask spreads. This also made it hard for the two groups to reach a consensus regarding amending the rules.
Accounting Standards
By early 1900s, the London Stock Exchange had already spelt out detailed requirements for new corporations that wish to list. In addition, the shares of some leading industrial corporations were already listed on the London Stock Exchange. Moreover, the exchange made it a requirement that information related to the stock exchange be advertised in the leading newspapers. Most likely, this requirement was aimed at obtaining information form knowledgeable bankers, competitors, or brokers should the information turn out to be misleading or incomplete (Davis et al 2003, p. 120). The London Stock Exchange was required y the accounting standards to declare the amount of capital stock available to outside investors. In case the capital stock of a corporation was in arrears, and potential investors had access to it more that the founding subscribers, it made little sense for members to trade in it. In case foreign corporations wished to trade in the London Stock Exchange, a member of the exchange had to introduce such a corporation. In addition, such a corporation was also required to show proof that indeed, it had already listed its shares in its home country’s exchange.
Implications for regulation
As a result of the sporadic crises in England, parliament was forced to investigate the practices of London Stock Exchange which was up to this point, self-regulating. The investigations resulted in the enactment of a few legislations design in such a manner as to preserve the prevailing structure of the exchange and also to appease the upper classes. One of the major acts passed by parliament sought to increase the scope of activity of the exchange. To do so, it was deemed necessary to repeal the 1720 Bubble Act. This occurred in 1825, in the middle of a crisis. The 1884 Joint Stock Companies Act also facilitated the establishment of joint stock companies (Neal 2006, p. 7). On the other hand, the Lowe’s Act, passed in 1856, help to created joint stock corporations with limited liability.
Relevance for today
The emergence and development of the London Stock Exchange played a pivotal role growth of the first global capital market. The exchange enjoyed a monopoly in the trading of stocks and securities in London. In addition, investors from across the globe had access to its services. This was the case even when the foreign investors wished to invest in securities hat had been issued by the security exchanges back home (Neal 2006, p. 7). A well-functioning stock market is bound to bring economic benefit to a county. However, in recent years, we have witnessed revolutionary changes in the form of the spread of globalization and information technology, and these have proved to be a source of challenge to not only economists, but the stock exchanges as well. Most stock exchanges have since gone electronic. Some of the emerging questions include whether stock exchanges should remain self-regulated organizations, or if the government should do the regulation. Another issue that has emerged is whether stock exchanges should be treated as not-for profit organizations, or if they should be treated as joint stock companies whose sole goal is to maximize profits. When membership to a corporate is restricted, this helps to lower the counterparty risk. However, rent-seeking might emerge. On the other hand, open membership can raise the depth of liquidity especially in a dominant market. It can also increase costs of congestion. When stockbrokers won an exchange, this can create redistributive issues. Outside ownership can also result in monopoly practices (Davis et al 2003, p. 121). Each of these options may raise transactions cost, in effect reducing the social benefits that could accrue from an efficient securities market. So what lessons can we learn from the London Stock Exchange?
By studying the emergence, development, and structure of the London Stock, Exchange, it emerges that one of the reasons why the exchange was a success is because there was separation between operation and ownership. This enabled the stock exchange to remain successful in the face of global financial turbulence. Limiting the stock holding of the shareholders means that no one shareholder could make a decisions without consulting other members (Neal 2006, p. 8). Membership was not restricted for fear of another competitor emerging. As such, instead of raising the subscription fees, members deiced to raise the number of subscribers. Because members were only required to pay the nominal fee, they had to be innovative in seeking novel sources of income. Brokers, promoters, and jobbers were all competing within the exchange and this made them to be very innovative in order to survive.
Reference List
Davis, L, Neal, L & White, E 2003,’How it all began: the rise of listing requirements on the London, Berlin, Paris, and New York stock exchanges’, The International Journal of Accounting, vol. 38, pp. 117-143.
Michie, R C 1985,’The London stock exchange and the British securities market, 1850-1914’,The Economic History Review, vol. 38, no. 1, pp. 61-82
Neal, L. 2006, The London Stock Exchange in the 19th Century: ownership structures, growth and performance, Oesterreichische Nationalbank, Vienna.
Neal , L & Davis, L 2005,’ The evolution of the rules and regulations of the first emerging markets: the London, New York and Paris stock exchanges, 1792–1914’,
The Quarterly Review of Economics and Finance, vol. 45, pp. 296-311.