Stock exchanges are physical testaments to financial development. Their buildings are often prominent within their home cities. They evidence commercial success, perhaps even heralding more forthcoming success. They help fund growing industries and the firms within them, the purveyors of future riches.

           Just the same though, new industries have also helped form new stock exchanges, as have periods of financial exuberance. While largely a duopoly today, there have been dozens of stock exchanges in the United States in business over the past two centuries. Regional exchanges in cities smaller than New York were once a common sight, serving niches that gave them a stake in the financial world, even in a business prone to concentration of market power.

New York Stock Exchange

           The New York exchanges, and the New York Stock Exchange most notably, have periodically had their primacy challenged. In the first few decades after American independence, shares in banks, insurance companies, manufacturers, canals, and turnpikes were traded on their local exchanges, Pennsylvania firms listed in Philadelphia and Massachusetts firms in Boston. Besides the larger exchanges in New York, Philadelphia, Boston, and Baltimore, others existed in Alexandria, Charleston, New Orleans, Norfolk, and Richmond. In the early 19th century, federal government bonds and shares in the Bank of the United States were the only securities listed on multiple exchanges – otherwise it was a fragmented market.

           By 1900 however, the New York Stock Exchange was by far the largest in the United States. It had grown with the frequent listings of railroad stocks in the preceding century. Unlike earlier listed firms, railroads were by their nature very extensive operations, regularly crossing state lines. So, listing on an exchange that may not have been their most local one hardly seemed peculiar.

           The New York Stock Exchange had also benefited from improved communications, such as via telegraph. Faster communication enabled stock trading to be centralized in one place. Since no market had a meaningful information advantage over any other, liquidity was increasingly what mattered and here the New York Stock Exchange had the clear advantage.

           A more liquid market should attract more orders, making it even larger. So, industry dynamics favored concentration. Indeed, the New York Stock Exchange held a market share of 90% through the first two decades of the 20th century, as measured by its share of the aggregate value of brokers’ seats on American exchanges.

Rebirth of Regional Exchanges

           That said, exchanges in other regions were hardly driven out of business. In fact, new stock exchanges were formed in Pittsburgh, New Orleans, Chicago, San Francisco, Washington, Cincinnati, Cleveland, Los Angeles, St. Louis, and Detroit between 1864 and 1907. However, the old East Coast exchanges that constituted New York’s early competition, like those in Philadelphia, Boston, and Baltimore, had actually declined in importance in the meantime.

           What little intimidating competition the New York Stock Exchange faced, much of it came from other exchanges in New York. The regional exchanges cumulatively had less than 2% market share in stock trading by 1920. That would be close to the nadir of their market share though. The regional exchanges recovered during the 1920s stock market boom, at least on an aggregate basis. The recovery was admittedly uneven though, with many of the Eastern exchanges hardly growing at all compared to those newer ones sprouting up further West.

           Regardless, the market share of the New York Stock Exchange fell from roughly 90% in 1924 to about 75% in the late-1920s. True, a large part of this market share was taken by the New York Curb Exchange, but some of it too by exchanges outside New York. The regional exchanges listed many new companies during the late 1920s. For example, the number of stocks listed on the Chicago Stock Exchange more than doubled, ballooning from 238 at the start of 1928 to 519 two years later. Chicago’s became the most active regional exchange in the country.

           More broadly, the five most active regional exchanges saw their average annual trading volumes grow to 155 million shares from 1928 to 1930. This compared to a mere 26 million share average in the first three years of the century.

Niche

           The regional exchanges benefited from embracing new industries. While the New York Stock Exchange counted many railroads among its listed firms, it had fewer listed issues in other sectors. Recognizing this, the New York-based Consolidated Stock Exchange, which had evolved from the older New York Mining Stock and National Petroleum Exchange, focused on mineral and energy companies.

           Further, while regional stock exchanges often traded in shares also listed in New York, they too found a niche facilitating trading in new industrial and mineral issues as well. Regional exchanges often specialized in serving local industries. The stock exchange in Detroit covered automobile stocks, oil stocks were traded in Los Angeles, and San Francisco’s exchange listed many mining shares.

           As with the others, the Cleveland Stock Exchange focused comparatively less on railways than the New York Stock Exchange and more on other issuers. This differentiation grew with time. Railroads made up 52% of the firms listed on the New York Stock Exchange and 40% of those in Cleveland in 1900. Ten years later, they still made up 48% of New York listed firms but in Cleveland they now made up just 15% of the market’s constituents. Banks, trust companies, utilities, and industrial firms made up the difference and the number of manufacturing firms listed on the Cleveland Stock Exchange doubled between 1910 and 1914.

           Regional exchanges were more willing to list new issuances whereas the New York Stock Exchange had the strictest requirements. The exchange in New York was also less eager to list smaller companies’ shares, finding them more easily manipulated. Unlike the New York Stock Exchange, most regional exchanges either did not require that listed companies file financial statements or had requirements that were less onerous.

           Over time, regional stock exchanges listed thousands of companies whose shares were not traded on the New York exchanges. Regional exchanges were also more open to listing smaller companies whose shares would not trade as frequently and where much of the trading would occur in small lots and odd lots, those in batches of less than 100 shares, the minimum required by the New York Stock Exchange.

           While larger, more mature firms in established industries might prefer to list on a larger exchange, a smaller company in a new industry might prefer its shares trade on a smaller exchange at least if less extensive disclosures were required. The additional liquidity provided by a larger exchange might be less relevant to a small firm. More established exchanges, keener to diligence prospective members, would have found it difficult to distinguish between low- and high-quality firms in new industries anyway.

           The New York Stock Exchange did have an Unlisted Department for trading in securities for which less information was published but this department was closed in 1910. During the boom of the 1920s, applications by companies to list their shares on the New York Stock Exchange rose sharply. Whereas 300 were received in 1927, an impressive 759 were received in the first 9 months of 1929. Nonetheless, the exchange maintained its customary selectivity and most of these applications were denied. Only 80 new stocks were listed in 1929 compared to over 750 applications.

Members of the ‘Standard’ (Spokane’s Stock Exchange) – Northwest Museum of Arts and Culture/EWSHS, photo L87-1.38882-29

           This selectivity may have protected investors and the regional exchanges may very well have sheltered shadier practices. Even very small cities could house an exchange in this period; one was founded in Spokane, Washington in 1897. The Spokane Stock Exchange most prominently hosted trading in the shares of mining companies from Western Canada and the Northwestern United States. On the Spokane exchange, shares of the Pend Oreille Lead-Zinc Company rose from $0.50 to $13.50 within a month in early 1928. However, the movement was the product of Canadian brokers trading amongst themselves to give the appearance of a genuine increase in the company’s value. The scheme intended to exploit those who bought at the high prices believing the company was truly becoming more valuable.

Decline

           The rebirth of regional markets was inexorably tied to the stock market mania then underway. The Crash of 1929 brought an end to the boom that lifted the value of the regional exchanges. In its aftermath, their trading volumes fell by more than that of the New York Stock Exchange. In small markets like Spokane, just as in New York, dealers who had financed their stock holdings with borrowed money were ruined.

           By 1930, the niche targeted by the regionals was no longer so underserved in any case. The New York Stock Exchange had been diversifying away from railroads for years. Whereas in 1900, railroads still made up the majority of listed stocks, they made up just 12% of the exchange’s constituents by 1930. Industrial firms were now the most common among listed companies in New York.

           Perhaps a more permanent threat than the evaporation of investor euphoria was regulation. New legislation would force regional exchanges to surrender one of their advantages, or at least supposed advantages, namely laxer listing requirements.

           The Securities Exchange Commission was created with the Securities Exchange Act of 1934. The new law and the new regulator effectively ended competition between exchanges on the basis of listing requirements. The law also made no distinction between large and small exchanges. Requirements were raised nationally to the level previously required by the New York Stock Exchange. Not only were the regulations a threat to many of the existing regional exchanges, they also arrested the development of new ones.

“Federal regulation itself seemed to be favoring Manhattan markets at the expense of the little exchanges. They have lost a good number of securities because corporations preferred delisting to filing a registration statement. Furthermore, because a listing on a small exchange requires the same painful revelations as on the New York Stock Exchange, corporations tended to seek listing there in addition to a listing on a local market. When that happens local trading generally begins to dry up. Some small exchanges, like those in Buffalo, Denver and Hartford, have simply closed their doors.”

“Business: Little Markets”, Time, June 1, 1936

           Firms that chose not to meet the higher requirements had to live with delisting. Their shares would now change hands on the ‘over-the-counter’ market exclusively. Simply listing on a regional exchange with looser standards was no longer an option. The market transformed; the niche served by the small exchanges was essentially closed and the value of seats on these exchanges fell. One of the fifty seats on St. Louis’s stock exchange sold for $20,000 in 1929. By 1936, a seat could be had for just $1,500. On a busy day in the mid-1930s, just a thousand shares might trade on this small exchange.

           In the subsequent decades, the number of regional exchanges dwindled and to attempt survival, many consolidated. Some of these exchanges were tiny after all. Cincinnati’s exchange, the 14th largest registered exchange in the country in the mid-1930s, operated out of just two rooms and saw only $400,000 in trading volume per month. The Midwest Stock Exchange, formed in 1949, was the product of an amalgamation of exchanges in Chicago, Cleveland, and St. Louis. Those in San Francisco and Los Angeles merged to form the Pacific Stock Exchange in 1953. Consolidation continued and when the NASDAQ, a computer network for trading stocks, was launched in 1971, much of what remained of the old regional exchanges was killed off.

Lesson

           By their very nature, stock exchanges are an industry ripe for consolidation. Where market depth seems to be what matters most, it would appear inevitable that the number of exchanges in operation would eventually dwindle to just one as the largest exchange in business would always seem to have the clear advantage. Nonetheless, in the late 19th century, numerous new regional stock exchanges were formed and in the 1920s, these exchanges appeared to offer increased competition with New York. Yet, their decline proved just as swift as their earlier revival. The evaporation of the stock market mania and new regulations posed existential threats to the previously numerous regional stock exchanges across America.

More from the Tontine Coffee-House

            Learn about the streetside New York Curb Exchange. While on the topic of outdoor stock markets, read about the origins of the London Stock Exchange, Exchange Alley. Also, read some historical accounts of the operations of the financial markets in the days before meaningful regulation of markets. Lastly, consider subscribing to this blog’s newsletter here.   

Further Reading

1.      “Business: Little Markets.” Time, 1 June 1936.

2.      Fahey, John. “Optimistic Imagination: The Spokane Stock Exchange.” The Pacific Northwest Quarterly, vol. 95, no. 3, 2004, pp. 115–125.

3.      Lamoreaux, Naomi R., et al. “Financing Invention during the Second Industrial Revolution.” Financing Innovation in the United States, 1870 to Present, 2007, pp. 39–84.

4.      O’Sullivan, Mary. “The Expansion of the U.S. Stock Market, 1885–1930: Historical Facts and Theoretical Fashions.” Enterprise & Society, vol. 8, no. 3, Sept. 2007, pp. 489–542.

5.      Taylor, Bryan. “Regional Stock Markets in the United States.” Global Financial Data, 11 Nov. 2020.

6.      White, Eugene N. “Competition among the Exchanges before the SEC: Was the NYSE a Natural Hegemon?” Financial History Review, vol. 20, no. 1, 6 Mar. 2013, pp. 29–48.

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