Change of the stock market
Change of the Stock Market
The stock market of any country is a dynamic system that reacts to a wide array of factors of both internal and external nature and changes on a constant basis. This statement is especially true for the exchanges of large countries, such as the USA, that are actively involved in various economic processes. Having survived numerous economic crises, the stock market of the nation has become the largest and most influential in the world. However, such transformation would not have been possible without the utilization of a wide array of technological solutions. Therefore, it is necessary to review the history of the American stock market throughout the XX century and define the changes in its work that were caused by the technology.
The formation of the US stock market in general and the New York Stock Exchange in particular lasted for almost half a century. The gold rush in Alaska and California, the development of farms in the western part of the country, the export of meat to Europe, which allowed the farmers to trade in foreign markets, the formation of the metallurgic industry in Pittsburgh, and oil production in Texas all helped to attract capital and traders. The investors supported the construction of canals, railways, and farms in the country, thus contributing to its attractiveness.
Additionally, the US was in fact the only major state that came out of the First World War with profit. Before 1914, it was one of the debtor countries forced to attract migrants and capital from the Old World, while after 1918 the US became the worlds largest creditor, with its stock markets never stopping their work. It seemed that the golden age had come and the American market would grow forever. The hopes were likewise inspired by the technological progress; it was during these years that industrial production was becoming automated. However, by 1929, the demand for goods began to fall, the prices for agricultural products had declined, meaning that installments could no longer support sales. In just three months, the industrial production fell by 20%, and the level of crediting of enterprises and households increased considerably. Fearing margin calls, traders started selling stocks, because they had invested borrowed funds in the market and now had to sell assets at any cost. The use of telegraph and telephone has exacerbated the problem since most investors learned about bad news immediately and were able to provide instructions on the sale of securities quickly. As a result, the stock market collapsed, followed by the Great Depression.
The collapse of 1929 affected investors, brokers, and banks, and the illusions that the market and the economy would quickly recover were dispelled. In turn, it became obvious that the stock market and the entire financial system needed regulation. Investors confidence had to be returned, meaning that it was necessary to build a whole system of protection for their rights and restrictions on risks associated with trading on the exchange. Brokers and banks had to act primarily in the interests of their clients and investors and not manipulate the market. Thus, the government developed the foundations for regulating financial markets and a system that remains relevant even nowadays.
With the return of investors to the US stock market, the organization and operation of the investment process started changing, resulting in the emergence of an alternative to the organized exchange trade over-the-counter securities market (OTC). Its introduction was accompanied and facilitated by the appearance of electronic trading systems. Investors were looking for ways to save on exchange commissions, and entering the deals directly was an obvious decision. The electronic trading systems made it possible to put forward proposals for buying and selling into a single network, providing suitable conditions for negotiation. In 1967, Instinet the first of such platforms was registered for the purpose of providing securities trading services through a computer system to professional market participants that were connected to it (banks, funds, and insurance companies). The transactions were automated and confidential, which contributed to the reliability of the technological solutions. The unification of buyers and sellers of securities through a computer network has resulted in a revolution in the stock market, with its OTC counterpart growing almost uncontrollably. Trying to address this issue, the National Association of Securities Dealers (NASD) registered the system of the National Association of Securities Dealers Automated Quotations (NASDAQ) in 1971. At first, its role was limited to that of an electronic quotation board, meaning that it was impossible to conduct transactions with its help. However, the technology changed the situation once again. During the 1987 stock exchange fall, it became clear that telephone deals should be a thing of the past as market participants that did not want to perform the transactions simply did not answer phone calls. As a result, NASDAQ introduced electronic solutions that tracked the deals, along with the institution of market makers in order to maintain liquidity, finally turning into a full-fledged stock exchange.
During the same period, derivatives were developing quite actively, especially futures and options for a variety of assets. The new technologies, including computer analysis and the possibility of transactions within computerized systems, the quick access to information on quotas from various exchange sites, and the development of derivatives, led to the activation of such forms of trade as arbitrage and hedge strategies, as well as a variety of activities constructed on a combination of transactions with derivatives. Thus, the players in the American stock market received a wide array of options in terms of trading.
The 1990s strengthened the described trends, because they were the time of development of Internet trading. The filing of applications and the execution of transactions with securities could now take place in less than a minute, which resulted in an increase in the number of the former. In turn, data processing systems capable of analyzing large amounts of information on prices and trade volumes coming from an unlimited number of trading platforms in real time became a necessity, resulting in the further computerization of the market. In turn, the exchange operations moved to the Internet. Specifically, in 1998, the private investors made only 20% of all transactions via the Internet, with their share reaching almost 100% by the 2000s. In other words, the web has become an integral component of the American stock market.
At the same time, exchange trading no longer required reliability and transparency. In fact, previously the information about the state of the issuing organization or about market trends could have been obtained only through a broker. With the advent of wide access to the worldwide network, this process has become simplifies, often being completely free of charge, with stock markets publishing quotations and graphs on a regular basis. The priority was given to the speed of execution of the transactions and the number of commissions paid from them. In this regard, the electronic communication networks (ECN) was considerably more advantageous as compared to the regular stock markets. Specifically, they could provide investors with access to information about the applications of other bidders. Most importantly, in the 1990s, with the development of computer trading, the ECN already allowed such participants to make deals with each other. Moreover, unlike the exchanges, ECN worked almost around the clock, primarily depending on the availability of bids for purchase and sale. Thus, they were more convenient for the traders.
The turning point in the life of ECN and their participants occurred in 1997. Prior to this year, the specifics of the regulation of the US stock market limited the formers activity, with trading on such platforms being conducted only with shares that were not registered on exchanges, including NASDAQ. However, in 1997, an act was passed that allowed the ECN members to trade securities with NASDAQ. During that time, several thousand issues were traded on the site. Two years later, the regulation was expanded, meaning that ECN could now be registered as an alternative trading system and their participants had the opportunity to operate with any securities registered on any exchange. As a result, ECN became even more active in competing with stock exchanges.
Another element of the new picture of the exchange trade included the so-called discount brokers, the intermediaries that provided access to exchanges for the minimum possible commission. Since there was no need for employees accepting applications by phone and investment advisors, because anyone could get all the necessary information and make a decision without leaving home, brokers were able to focus on technological solutions. Thus, by minimizing the commission fee, they benefited from a radically increased number of transactions provided by the latter.
Internet-based trading made it possible to make an almost unlimited number of transactions. In turn, such concepts as scalping (attempts to profit from the smallest price movements of assets) have become quite common. The emergence of trading robots (special algorithms that allow making hundreds and thousands of transactions by pre-registered rules) has facilitated the technological progress. Simplification of access to the stock market has attracted a large number of new private investors. In turn, margin trading has become the norm, and the liquidity of the stock markets has grown. At the same time, the number of investors not wishing to actively trade, but interested in shares and forming a portfolio of securities has also increased. Thus, the contemporary American stock market has changed significantly under the influence of technology, becoming larger, as well as more democratic and capitalized.
The US stock market has undergone considerable changes during the XX century, with many of those being facilitated by the technological progress. Of course, it is impossible to deny the actions of the countrys government after the crisis of 1929, which laid a foundation for the modern system. However, the utilization of the technological solutions (ECN, trading robots, and so on) has contributed to the shift of the entire market to electronic trade, with many occupations in this field becoming nearly obsolete. Moreover, the ECNs have become major competitors of the traditional exchanges due to their convenience and accessibility, meaning that more and more people can perform transactions and contribute to the growth and development of the system as a whole. Thus, it is possible to state that the technological solutions have shaped the modern American stock market and contributed to its efficiency and reliability.