Oh yes, the New York Stock Exchange, while the epicenter of the trading universe, is a bit more like an amusement park or a playground, isn’t it? Close your eyes and you can imagine it, the hustle and bustle, the merchants screaming on the floor, the grown men sweating through their suits and button-down shirts gesturing like a wild bunch of kids playing football on an open field.
But why, in this modern age, do traders and brokers still act like an angry mob? Don’t we use computers for most trades these days anyway? Isn’t this the information age, an age dominated by instant and sterile communication? How did this madness start? Why is it still going on? This article will examine and explain why Wall Street and many other trading pits are more like a riot after a football game than a gathering of big business trying to amass a fortune for themselves and their clients.
First of all, there are a number of stock exchanges and trading pits, from the bond pits in Chicago to the Nikkei in faraway Japan, but the most famous trading exchange in the world, without a doubt, exists at the intersection of Wall Street. and Broad Street in Manhattan. The New York Stock Exchange (NYSE) has been around since 1792 when the famous Buttonwood Agreement was signed by 24 New York brokers and businessmen. Most people think of the Dow-Jones Exchange when they think of the stock market. This consists of thirty of the largest companies in the United States, from GE and McDonald’s to Walmart.
The principle is simple; People use stock brokers to buy shares or percentages of ownership in a company (and its profits or losses) in exchange for cash. Money has always flown across the room at a fast and furious pace, as has the action, hence the total hoopla. Essentially, these shares are “auctioned” to the highest bidder who agrees to a purchase price, so each broker tries to get their bid accepted before a share’s price rises. This is where the shouting originated, with brokers trying to shout their price and acceptance as loud as possible in an attempt to drop out and beat competing brokers at the purchase price they want. Getting an offer a fraction of a second earlier at pennies a share can mean the difference between millions of dollars of profit on a large stock purchase, so the immediacy and force used can be understandable when so much is at stake.
Originally, the tenor of the room was more gentlemanly, as respected businessmen and brokers traded stocks at a reasonable rate, and wealth simply moved between wealthy individuals, from one family to another. A Rockefeller could buy a piece of the Ford or Vanderbilt interests, knowing that these rich and successful men would generate more wealth.
However, as America grew and the American Dream was born, ordinary people wanted in on the action. After the Industrial Revolution took place in the United States in the late 1800s, a middle class emerged as factory workers fought for a bigger share of the company pie and eventually got better wages and working conditions. The idea that any American could get rich and get rich quick took hold, and what better way than through the New York Stock Exchange.
By the 1920s, many Americans were investing in the stock market. The New York Stock Exchange was booming. Instant millionaires appeared everywhere. There was a whole new level of wealthy Americans with ticker machines in their living rooms that gave them instant updates on market prices. That’s when the shouting and gesturing started in earnest, as brokers were overwhelmed with buyers, new clients and buy orders. They yelled and yelled and waved their arms to get their orders first. The country’s position was positive. The era was known as the Roaring Twenties, and its theme song was Blue Skies because everything was turning out rosy for most Americans. Consumer credit was born to help sell products that were produced in excess thanks to massive investments in stocks. The only problem was that this whole wealth explosion was built on a house of cards almost like a Ponzi scheme. Stocks were being sold in startups that weren’t making a profit, they were just filling their coffers with investment cash, and too many people were fully leveraged in the stock market. For 9 years, from 1920 to 1929, stock prices rose with no end in sight.
That is until October 24, 1929, better known as Black Thursday. That was the day of the Great Stock Market Crash that ushered in the Great Depression, the greatest economic catastrophe America has ever faced. The pits erupted with noise as brokers yelled “sell, sell, sell”, trying to cut losses before it was too late, but there were no buyers. Investors fled en masse, most of them broke, broke and penniless.
However, the New York Stock Exchange persevered and, like any stock or market, has had its turbulent ups and downs ever since. There have been a number of peaks and valleys on the New York Stock Exchange over the years. The most recent collapse occurred in 2008 after the housing bubble burst. The market is still recovering. Numerous regulations have been put in place to make trading more fair and acceptable. Day traders’ trades from their home computer indicate buys and sells in an instant. In fact, most transactions are done through computers these days.
So why do grown men in suits keep yelling and gesticulating like a five-year-old throwing a tantrum? That’s the one thing that never seems to change.
Because at its heart, the New York Stock Exchange is still an auction house system, and all DOW transactions ultimately happen on that famous floor. Even if you make a purchase on E*Trade, the trade is accepted and consumed on the floor of the New York Stock Exchange, facilitated by a broker. Shouting is not as necessary or as frequent as it used to be, thanks to computers and technological advances in communication systems, but there are still runners on the floor who have to punch the competition. In fact, hand signals are more important now for brokers so they can quickly point to the floor specialists who place the actual buy or sell order. That explains all the crazy people gesticulating..
“Orders come in through brokerage firms that are members of the exchange and flow into floor brokers who go to a specific spot on the floor where the stock is traded. At this spot, known as the trading booth, there are a specific person known as the specialist whose job it is to match buyers and sellers.
By using obvious and wild gestures and shouting when necessary so that the order can be heard, brokers communicate with their own partners these days, not so much with the auctioneer. The sound and fury become so loud as the old mass chaos rears its ugly head and to an outsider it looks like a rugby scrum has broken out. In fact, it simply means that a lot of trades are sweating before his eyes and to the detriment of his ears.
There will probably come a day when all is quiet on the New York Stock Exchange, but it certainly wouldn’t be as entertaining. However, in all likelihood, there will always be human traders on the floor making sure your trade goes through, and that will always mean yelling and hand signals. So you know, the next time you watch a frantic video clip of the New York Stock Exchange, the brokers aren’t practicing to become professional wrestlers or politicians. They’re not learning how to guide a plane down the runway or mimic their favorite NFL head coach on the sidelines of a close football game. They are just trying to make money or save money for their clients. If you happen to be one of those customers and it’s your money at stake, even if you only have a 401K or retirement fund, you might think these transactions are worth it.