The evolution of share markets

Welcome to Finance and Fury. This episode will be a little lighter than normal – as we will be looking at the history of share markets – focusing on the ASX, to look at how we ended up with the system we currently have? Also be looking at the makeup of the ASX 100 years ago and how this has changed over time

1. As I said – this is a lighter episode with no theories or predictions – just something that I find interesting and hopefully you do to

In simple terms, the share market is a market that allows people to buy and sell shares – sounds redundant to explain this, given both terms are in the name – but these two independent factors played a massive role in the formation of a share market –

1. Markets have always existed in one way or another – it is the process of people trading with one another to fulfil a need – be it in the form of barter, where I trade you a cow for three goats, or exchange some coin for your cow instead, or send money electronically to WOW to have milk delivered to my house from a supermarket
   1. These are all markets in one way or another – when people have a need for goods and services that they cannot provide for themselves, there is a market that emerges to help fill this demand – even for illegal goods on a black market
   2. So, when shares were first offered to the public – there was a demand for these and a market formed to help meet this demand
2. Looking at the history of financial markets – This dates back to a business venture as old as time – trading of goods
   1. This story dates back to the late 1400s: In Antwerp – a city in modern day Belgium on the border with the Netherlands – this became a centre of international trade – where merchants would flock to, to buy goods anticipating that prices will rise in order to net them a profit
   2. By 1531, the bourse(French word for exchange) opened in Antwerp, providing a place where traders could exchange promissory notes and commodities – Paper trading for goods under the promise of delivery
      1. Revolutionised trade – a now people could speculate on goods/commodities and not have to physically store of hold these – a trader could trade these notes and market prices were soon established for certain commodities that were being traded
      2. word started to spread of this – and similar exchanges started to pop up – where a similar exchange was opened in London in 1571 by Queen Elizabeth I
   3. These exchanges started to serve a secondary function – instead of trading on the prices of commodities – brokers began to offer shares in speculative trading expeditions that British merchants were undertaking around the globe
      1. Under royal charters – explores and merchants used to take expeditions across the world – to the new world and other nations to set up a trading empire – but this cost a lot of money to buy ships, pay crews and pay for provisions – so to raise the capital – entrepreneurs chasing their fortunes would sell a stake in their company, and the profits to be had to others – they used to have to go door to door to raise the capital – but now markets allowed access to all – needless to say most went poorly –
   4. One that didn’t was the Dutch East India Company or VOC – which was traded through the Amsterdam stock exchange
      1. The VOC was created in 1602 to better manage the burgeoning spice trade with the Dutch East Indies, present-day Indonesia.
         1. In 1611, the first official stock trading was created in Amsterdam to help facilitate the demand for VOC shares – as the Dutch East India Company was the first publicly traded company, and for many years, it is the only company with trading activity on the exchange
         2. This was done by the VOC to raise capital – where they would also pay dividends of the shares to investors
      2. At this point, other countries began creating similar companies, and buying shares of stock was all the rage for investors
         1. This saw a huge level of excitement that blinded most investors and they bought into any company that became available without any investigation or rational thought – this resulted in financial instability – leading to crashes such as the South Sea Bubble – which has been covered
      3. Over time – markets evolved as more and more companies were being created in economies around the world and needed to raise capital

To explain how this happened over time – bring things back to Australia – looking at how we ended up with the ASX –

1. Looking at the history of the Australian market – important to note that today, the ASX is both an exchange and a publicly listed company on the Australian Market – but it didn’t start out that way
   1. As the Australian Stock Exchange Limited was only formed in 1987 after the Australian Parliament passed legislation enabling the amalgamation of six independent state-based stock exchanges.
      1. But each of these exchanges have their own history and share activity
      2. In 2006 the Australian Stock Exchange merged with the Sydney Futures Exchange to become the Australian Securities Exchange – either way the official name is ASX Limited.
   2. Looking back in Australia – The first company founded in the colony of New South Wales was The Bank of New South Wales – which was incorporated in 1817 – this is now known as Westpac Banking Corporation Ltd
      1. To meet demand for shares in companies such as these, From the 1850s, numerous stock exchanges were formed in cities such a Melbourne, Bendigo and Ballarat – almost all of these were short-lived. 
      2. Arguably, the most successful exchange company was founded in 1871 – The Sydney Stock Exchange formed – this continued to operate until it merged with the other five state-based exchanges to form the Australian Stock Exchange on 1 April 1987
      3. The Sydney Stock Exchange implemented Business Rules for stockbrokers governing their trading and relationships with customers. Other state exchanges followed this example. The original Business Rules comprised 17 rules on 6 pages – in comparison, today’s ASX Operating Rules book is approximately 500 pages long
   3. In the earlier days of the share market in Australia – there was no one market – buy many across many states
      1. Similar to today, where companies choose to list on one market or another across international borders – but think much smaller, where you could have a number of different exchanges in one state – also, many QLD companies wanted to list on a QLD based exchange, or a VIC company list on a VIC exchange, as communication was not great going back 150 years ago and notoriety to raise capital was often limited to your local area – After NSW, many other states followed suit:
         1. 1882 – saw the introduction of the Hobart Stock Exchange, in 1884 – The Brisbane Stock Exchange was established (the premises this operated in is now a bar, the Stock Exchange Hotel, Stocky for short)
         2. In the same year, the Stock Exchange of Melbourne was formed by a small number of sharebrokers following a number of attempts to form a lasting stock exchange over the previous 32 years, all of which failed

• 1887 – saw the Stock Exchange of Adelaide being created and in 1889 – The Stock Exchange of Perth opened its doors for trading

1. These all continued providing services to their local investors until we saw the first opening up of boarders in 1903 – The first interstate stock exchange conference was held in Melbourne – where the Sydney, Brisbane, Melbourne and Adelaide Stock Exchanges were represented.
   1. Meetings were held annually until the arrangement was formalised
2. This brings us to 1937 – The Australian Associated Stock Exchanges (AASE), the forerunner to the ASX, was established – initially exchanges in Adelaide, Brisbane, Hobart and Sydney were part of the association, with Melbourne and Perth joining soon after – this brought uniform brokerage and rules for stockbroking firms
3. Things continued as usual up until 1959 – Until the auction-based bidding system of trading was fully replaced with the post trading system at the Sydney Stock Exchange – allowing continuous trading throughout the day
   1. This was a big change, as if someone wished to sell their shares, they would auction them off to sellers – but now you had a system where brokers would gather at ‘posts’ on the trading floor to deal in specified shares through matching the bid and offer prices that we have today – this is where what was referred to as ‘Chalkies’ were employed by the Stock Exchanges to record in chalk the bid and offer prices and the sales made
4. Think about this shift in dynamics – previously, the market was based on auction practices – where a company or individual would be selling their shares and the highest bidder wins – this might only happen once a day, or week depending on the share and the demand – but now, markets started to see an introduction of a much more liquid nature – where it introduced a new system of markets being open 5 full business days per week –
   1. All shares were traded this way by May 1960 – this style of trading at posts is what you see in old movies about wall street, with hundreds of people screaming over the top of one another to buy or sell a security at a bid or offer price
5. What further shifted the way markets operated was that by the mid of the 1960s – the Sydney Stock Exchange receives its first computer, an IBM 1460 – being the first computer to be installed an at Australian exchange – this is nothing like the computers we have today – as it had to be shipped from Canada in 7 sections, with the heaviest section weighing almost a tonne – but it was used to streamline the clearing house functions and broker-client accounting
   1. This was fully into gear by 1969 – where the Stockmaster electronic price dissemination system was being used – this enabled stockbrokers to receive bids, offers and last prices in their offices electronically – rather than needing to be in the physical exchange to do so – this again was a massive shift – and increased the capacity for the number of brokers who could operate in the market – think about the capacity for people to physically fit around a post to get prices – now they can do so from their office
6. By 1987 – The Australian Stock Exchange Limited (ASX) was formed on 1 April, through incorporation under legislation of the Australian Parliament. This involved the amalgamation of the six independent stock exchanges that had operated in the states’ capital cities – forming one exchange where all companies listed on each independently, would be on the ASX moving forward

4. In 1994 – First phase of the Clearing House Electronic Subregister System (CHESS) began to replace manual settlement of trades commenced
   1. CHESS is the electronic means through which the entry or registration of approved securities is done, as well as the transfer of the holdings of such securities from the seller to the buyer – this helps to simplify the administration through a centralised system and do so electronically – instead of being over the counter deals between individuals – or mailing a bank cheque to the seller, who would mail you the physical share certificate – the ownership of which was often recorded by each individual company – now this ownership was being tracked through one central hub and done so electronically rather than physically

Needless to say, the operations of the market has changed but the concentration hasn’t much – as some of the largest companies still on the market have been around for a long time in one form or another

1. Like the modern ASX – the Sydney Stock Exchange was dominated by large, old companies. The largest 10 listed companies have accounted for around half the market capitalisation of the top 100 shares on average from 1917 until 2018
   1. This level of concentration peaks during periods of high commodity prices such as the 1960s and 1970s – as the price of resource companies boom – as resources along with the financial sectors are, and have always been the most concentrated end of the market.
   2. Australia has more legacy companies in the form of banking, resources and consumer staple companies (Wesfarmers)
      1. Looking back to 1917 – going through the top companies positions then versus today
         1. No 1 – Bank of New South Wales – Merged with Commercial Bank of Australia in 1982 to form Westpac – which is sitting at number 5
         2. No 2 – British Tobacco – Delisted from ASX in 2001 following acquisition; British American Tobacco currently listed in the United Kingdom
         3. No 3 and 4 – Bank of Australasia and Union of Australia Bank respectively – Two banks merged in 1951 to become ANZ – sitting at number 6
         4. No 5 – Colonial Sugar Refining Co. – Today known as CSR – Sold its sugar refining
            operations in 2010, now produces building products – today sitting at 163
         5. No 6 – Commercial Bank of Sydney – Merged with National Bank of
            Australasia to become NAB in 1982 – today is sitting at number 4
         6. No 7 – Broken Hill Proprietary Limited – listed in 1885 – Today known as BHP Group – it is sitting at number 1 today
         7. Number 8 – Union Steam Ship Company of New Zealand – Acquired by P&O and later closed
         8. Number 9 – Howard Smith – Acquired by Wesfarmers in 2001 – where WES is sitting at 9 today
         9. Number 10 – Mount Lyell Mining Co – Several rounds of acquisition and mergers in the interim – Today is Iluka Resources – sitting at 104
      2. The identity of these top 10 companies has been persistent – even though their names have changed – of the top 10 companies in 1917, 6 were still in the top 10 at the end of 2017, and 2 more remained in the top 200 – the listing of CBA and Telstra also helped to increase the market cap of the ASX
         1. In contrast, only one of the top 10 US companies in 1917 is still in the top 10 today – In fact, in comparison to other major equity markets, Australia’s listed corporations by market cap are some of the oldest in the world – when weighted by market capitalisation, the average listed company in Australia today is 105 years old, compared with 77 years in Japan, 82 in the United States and 95 in the United Kingdom.
         2. 55% of the AUS top 100 companies were listed before 1910 – vastly different to other develop economies markets – which makes up around 25% listed before 1910 on average

So – what this means for the ASX – many of the large companies on the market are referred to as Blue Chip for a reason – they are big stable companies that when looking at the top 20 – are likely to continue to be companies on the ASX for some time – in terms of growth and performance, that is a topic for another episode – but I hope you like todays episode – bit of history – and the evolution of markets