The History of the Stock Market

Electronic trading

Stock markets were once driven by manual human labor, employing squads of analysts to track trading activity and report stock prices to the public. Late in the 20th century, however, this changed. NASDAQ, arrived on the scene in 1971 as the world’s first-ever completely electronic stock market. Instead of having buyers and sellers consult brokers to determine stock prices, NASDAQ erected a massive computerized bulletin board that listed the prices and their fluctuations in real-time. In years since, NASDAQ has developed and offered automated trading systems which allow investors automate the buying or selling of their shares based on criteria specified in advance. NASDAQ also introduced the Small Order Execution System (SOES), a platform that let individual investors place orders of 1,000 shares or less electronically. SOES solved the then-common problem of small traders being ignored by market makers as they tried to place their orders via phone. Much of the automation and electronic functionality of today’s markets have their origin in NASDAQ’s innovations.

Biggest crashes

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Of course, while stock markets exist to facilitate business growth and investment, things don’t always go according to plan. Every stock market is susceptible to the possibility of a crash. Some are so devastating that their consequences are felt in countries other than where the crash took place. A telling example is the Wall Street Crash of 1929, which precipitated the Great Depression. It began on October 24, 1929 (now known as “Black Thursday”), when the Dow Jones Industrial suddenly lost 50% of its value in one day. Stock prices continued falling for a month after, an unprecedented plunge that reverberated throughout the world. Many believe that the Depression was ended largely by World War 2 which led to higher employment and a need for ammunition and weapons.

Another debilitating crash befell the world markets in 1973-1974, hitting the UK the hardest. According to the BBC,the London Stock Exchange’s FT30 (roughly their equivalent of the Dow Jones at the time) lost a staggering 73% of its value in the crash, which followed the US dollar devaluation and was worsened by the 1973 oil crisis.

Not every worldwide crash originates in the US or UK, however, as 1987′s “Black Monday” demonstrates. Hong Kong (another major finance hub) was the first nation to be hit on October 19, 1987, and the crash spread west all the way to the US, where the Dow Jones dropped 22%, according to the Wall Street Journal. As with many crashes, the mere news that a crash has taken place somewhere is often enough to scare people in other places, causing them to sell stocks in mass quantity thereby deepening the original crash.

Biggest Booms

The stock market typically follows a “boom and bust” cycle, with periods of prodigious growth leading up to crashes like those discussed above. An example of this phenomenon is commonly referred to as, “The Roaring 20′s.” Prior to Black Thursday, the 1920′s had been a time of extraordinary growth and prosperity. Soldiers returned home with money to spend following World War 1. Massive business expansion in the US sent stock prices soaring, and heavy US investment in European debt following the war lifted the British, French, and German economies as well, according to the boom War, Peace, and All That Jazz. Unfortunately, many economists now believe that too much credit was extended to borrowers during the 1920′s and that this was the primary cause of the Great Depression.

A similar boom-to-bust story emerges from the tech boom of the mid-late 1990′s. Fueled by an explosion in new Internet economies, the tech-dominated NASDAQ soared to 5,048.62, double its value from the year prior. Unfortunately, much of this growth was illusory, based on human speculation and hope rather than documented profits. As TechDirt recalls, “…companies were seeing their stock prices shoot up if they simply added an “e-” prefix to their name and/or a “.com” to the end.” The mere perception that a company had a stake in the new, growing Internet economy sent its stock skyward. When the bubble burst, it gave way to the now-infamous “tech crash” of the early 2000′s.

As we have seen, markets are not abstractions, nor impersonal mechanisms. And, in many cases, they could be reduced to the spontaneous interactions of human beings, subject to change course based on the whims, fears, or hopes of their participants.

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