Updates from McKinsey

How capital markets keep us connected
Nasdaq’s 50th anniversary reminds us that markets should be more inclusive, share more information, inspire innovation, and bring the world together.
By Tim Koller – Fifty years ago this February 8, a UNIVAC 1108 mainframe computer blinked on in sleepy Trumbull, Connecticut. Thus was born the National Association of Securities Dealers Automated Quotation system, or Nasdaq, the world’s first all-electronic stock exchange, where securities could be bought and sold online in real time.

Well, almost.

While the network did flash “bids” and “asks” of prices, users could not actually buy or sell through their computers. Instead, dealers sat before individual Nasdaq terminals and made their trades by telephone—as they would for the next 13 years. The Nasdaq came into being not as a platform for execution but as a source of information and innovation to help facilitate trades by participants across distant locations.

In that way, Nasdaq took its cues from the first modern stock market, the Amsterdam Stock Exchange (now known as Euronext). It didn’t convene at a single or set address during its early years, nor did it actually sell stock certificates, at least in present-day terms. Founded in 1602, the Amsterdam Stock Exchange arose initially as a means for people to subscribe to, and then to sell, percentages of Dutch East India Company net profits. The selling and reselling of these interests, in an iterative series of individual, bargained-for trades, aggregated into “the market.” Trades took place wherever merchants happened to meet, at any hour of the day.

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As trading proliferated, the imperative for information did, too. Prices weren’t imposed by fiat; they couldn’t be. Why part from your money or your shares if you didn’t believe you would come out ahead in the bargain? Within a few decades of its founding, the Amsterdam Stock Exchange included trades by forward contracts (already well in use in Europe and around the world for commodities transactions), selling securities short and even buying on margin. Investors understood that the value of their trade relied on the probability of future profits, which meant that the advantage tilted to the diligent, the perceptive, and the informed.

Early stock market investors (there were more than a thousand of them, right from the start) were eager to subscribe when the Dutch East India Company “went public” because, as merchants and traders themselves, they could perceive the potential for high returns. It wasn’t unusual for ships sailing back from East India to realize profits of 100-fold. It also wasn’t unusual for profits to be zero; when fleets set out from Amsterdam, Delft, Rotterdam, and Zeeland, all might be lost to weather, pirates, or scurvy. That vessels did manage to travel the thousands of miles and back was a triumph of innovation and risk taking. Pooling investments and sailing multiple times allowed more investors to create wealth. It also helped protect against losing everything in a single, misbegotten voyage. 1

Soon, stock exchanges were forming or emerging out of existing bourses across the Atlantic and Mediterranean. The more people the better. Larger markets meant greater liquidity, the opportunity to sell and resell equity interests to an ever-growing pool of investors. More markets also meant more opportunity to be closer to the action, as shipping, trade, and commerce brought continents and cultures together. more>

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