Who runs the exchanges?

As temples of free enterprise, the world’s stock exchanges have traditionally been run by the people who set them up in the first place. They are much like private, very exclusive clubs. In many countries, membership can be bought, provided the current members agree to the admission and a vacancy, or ‘seat’, exists. The price is high – up to about $375,000 in New York and a staggering $6.6 million in Tokyo. In other countries, such as Britain, membership is not limited to a fixed number of `seats’, but open to any firm able to meet the entry requirements.

The members make the stock exchange rules, which must conform with the laws of the country. In some countries, an independent body, such as the Securities & Exchange Commission in the United States, has been created to watch over their day-to-day conduct on behalf of the public.

Market makers and brokers

The ultimate privilege safeguarded by stock exchanges for their members is the right to be a ‘market maker’ in securities that is, to be the central point through which the securities are bought and sold.

The second, equally important privilege is to be a ‘broker’ – the person who has direct access to the market makers to buy or sell on behalf of investors. In London, the market maker is the key figure. On the New York Stock Exchange, a ‘specialist’ fulfils a similar role. Each specialist is allocated exclusive rights to deal in certain securities, which he can then buy or sell to brokers who approach him, or which he can buy or sell on his own account.

Trading is in the form of a loose auction on the stock exchange floor, in which brokers, with instructions from their clients, cluster round the specialist, shouting out the prices at which they are willing to buy a security (`the bid’) or to sell it (`the ask’). The specialist matches buyers and sellers as best he can, using his personal holdings to correct any imbalances.

On the Tokyo exchange, the equivalents to New York’s specialists are called `saitori’. They operate in a similar way, except that they are not allowed to buy or sell securities on their own account. They are strictly intermediaries in transactions on the exchange trading floor.

Market makers derive their income from the `spread’ in their transactions – the difference between bid and ask rates.

A COMPUTER-LED CRASH? The use of computers by some stock market investors has created a procedure called stop-loss selling which could threaten the stability of national and even world markets.

The owners of securities instruct brokers to program their computers with a price for each security. If the securities fall below that price, they are sold to cut the owners’ losses.

Even on the most automated exchanges, the process is not yet entirely automatic; the broker still has to speak to the market maker to carry out major trades. But as computer-to-computer systems emerge, the financial world could face a computer-led crash. A slight downturn in the stock market would trigger off a few stop-loss sales, causing a further downturn, which would then set off others, and so on.

The domino effect is no different from what has happened in all stock market crashes, as people sell to preserve some of their money. But computers could make it happen faster – almost literally overnight making it more difficult to control and sending the crash to greater depths.

 

Computer know-how Since the computerisation of the London Stock Exchange in 1987, brokers have been working from their offices. The screens show the market state.

DIVIDING THE GLOBE

The world’s 130 or so stock exchanges trace their origins back to 13th-century France and the Low Countries (Belgium and the Netherlands). Dealers traded bills of exchange – IOUs issued by merchants in return for loans. If a person holding a bill needed money before it was due to be repaid, he could sell it on to someone else.

But it was only in the 17th century that stock exchanges began to develop in their present form. Amsterdam Stock Exchange claims to be the oldest, founded about 1611. An early system for regulating dealers in stocks was introduced in England in 1697.

Until the beginning of the 19th century, most stock exchanges were informal gatherings of dealers in the merchants’ quarters of cities. In London, business centred on coffee shops, including New Jonathan’s in Threadneedle Street which displayed a sign saying ‘Stock Exchange’ above its entrance from about 1750.

In New York, dealers met outdoors under a buttonwood tree in what has become Wall Street. But the 19th-century growth of industry, and the explosion in the number of stocks and shares on offer, created the need for permanent trading premises.

The New York Stock Exchange is the biggest single marketplace, accounting for 60 per cent of world trade in securities, and listing about 1500 companies.

The Tokyo Stock Exchange holds second place in the world league, quoting almost as many companies as New York, but with a share value of less than half.

Panic stations Dealers stand around in dismay as the New York Stock Exchange plunges in October 1987. There are tense moments as dealers watch their screens for the latest market moves.

Brokers generally work on commission which is linked to the value of the securities they buy or sell for their customers.

The price of securities

Publicly quoted securities are first issued with a nominal or face value – called ‘par’ for ordinary shares or common stock. For example, a company wanting to raise £10 million might put on sale through the stock exchange 10 million shares, each with a face value of £1. However, once the securities begin to be traded their market price may be higher or lower than the face value. When more people are buying a security than selling, the price goes up. When more are selling, it goes down.

In ‘bull market’ conditions, people buy securities expecting them to rise in value, when they can be sold at a profit. In ‘bear markets’, security prices are falling; speculators can still make money by agreeing to sell, at a fixed price, securities they have not at that moment paid for. They hope that, when they do have to settle, the price will have fallen further. Then the amount they pay out will be less than they receive.

The price of securities is governed by the performance of the particular company, and also by national or world economic and political conditions.

National developments affecting security values are easy to identify, but their impact is difficult to predict. They could include a change of government, forecasts of economic downturns or uplifts, or sudden surges in the costs of key raw materials. Broking companies and big investors such as insurance companies are spending increasing sums on economic forecasting departments.

The value of securities is constantly changing as they are bought and sold. But it is convenient to ‘freeze’ them at regular intervals so that the performance of the market and of individual securities can be compared between one interval and the next. For each trading day, the closing price of each security is quoted in the newspapers. And the progress of the whole market is measured by an index consisting of selected key securities.

The best-known indexes include the Dow Jones Industrial Average (New York), the Financial Times/Stock Exchange 100 (London) and the Nikkei 225 Stock Average (Tokyo). Index ‘fixes’ are flashed around the world twice or more a day.