McKinsey Quarterly

How capital markets keep us connected

Nasdaq’s 50th anniversary reminds us that markets should be more inclusive, share more information, inspire innovation, and bring the world together.

Fifty years ago this February 8, a UNIVAC 1108 mainframe computer blinked on in sleepy Trumbull, Connecticut. Thus was born the National Association of Securities Dealers Automated Quotation system, or Nasdaq, the world’s first all-electronic stock exchange, where securities could be bought and sold online in real time.

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Well, almost.

While the network did flash “bids” and “asks” of prices, users could not actually buy or sell through their computers. Instead, dealers sat before individual Nasdaq terminals and made their trades by telephone—as they would for the next 13 years. The Nasdaq came into being not as a platform for execution but as a source of information and innovation to help facilitate trades by participants across distant locations.

In that way, Nasdaq took its cues from the first modern stock market, the Amsterdam Stock Exchange (now known as Euronext). It didn’t convene at a single or set address during its early years, nor did it actually sell stock certificates, at least in present-day terms. Founded in 1602, the Amsterdam Stock Exchange arose initially as a means for people to subscribe to, and then to sell, percentages of Dutch East India Company net profits. The selling and reselling of these interests, in an iterative series of individual, bargained-for trades, aggregated into “the market.” Trades took place wherever merchants happened to meet, at any hour of the day.

As trading proliferated, the imperative for information did, too. Prices weren’t imposed by fiat; they couldn’t be. Why part from your money or your shares if you didn’t believe you would come out ahead in the bargain? Within a few decades of its founding, the Amsterdam Stock Exchange included trades by forward contracts (already well in use in Europe and around the world for commodities transactions), selling securities short and even buying on margin. Investors understood that the value of their trade relied on the probability of future profits, which meant that the advantage tilted to the diligent, the perceptive, and the informed.

Early stock market investors (there were more than a thousand of them, right from the start) were eager to subscribe when the Dutch East India Company “went public” because, as merchants and traders themselves, they could perceive the potential for high returns. It wasn’t unusual for ships sailing back from East India to realize profits of 100-fold. It also wasn’t unusual for profits to be zero; when fleets set out from Amsterdam, Delft, Rotterdam, and Zeeland, all might be lost to weather, pirates, or scurvy. That vessels did manage to travel the thousands of miles and back was a triumph of innovation and risk taking. Pooling investments and sailing multiple times allowed more investors to create wealth. It also helped protect against losing everything in a single, misbegotten voyage. 1

Soon, stock exchanges were forming or emerging out of existing bourses across the Atlantic and Mediterranean. The more people the better. Larger markets meant greater liquidity, the opportunity to sell and resell equity interests to an ever-growing pool of investors. More markets also meant more opportunity to be closer to the action, as shipping, trade, and commerce brought continents and cultures together. A map of the great exchanges of the 17th and 18th centuries traces closely where the great ships would depart and call, including Antwerp, Copenhagen, Dublin, Lisbon, and Philadelphia, as well as New York, where stockholder rolls of some companies showed a substantial number of women.

Imperfectly, but inexorably, markets were becoming more inclusive, which only heightened the need for fairness. As investors became more distributed, it became more important to ensure that the information they traded upon was true. How reliable were the vessels? How sturdy and sure their crews? Investors couldn’t firetest the ships or hire and drum out sailors and officers, but they could decide on whether a given investment bid fair. They could also insist that companies keep good records and honor investors’ interests, which had already expanded beyond just seafaring ventures. Factories, pharmaceutical companies, breweries, publishing houses, and more could be financed by investors eager for new opportunities, trading ideas, and capital to work together.

The London Stock Exchange, founded in 1773, introduced a trading rule book in 1812, requiring, among other things, that stock price reporting be accurate and regular—first twice a week, then, starting in 1825, daily. By the 1840s, telegraphs were clacking financial information in close to real time. Stock price information also traveled by runners, horseback, and carrier birds. By 1866, traders on the floor of the London Stock Exchange could see price changes on the New York Stock Exchange after a mere 20 minutes instead of the more than two weeks it once took the same information to travel down Wall Street, out to New York harbor, across the Atlantic, and up the Thames.

Information improved not only by moving more quickly but also by diffusing more broadly and reflecting an ever-expanding pool of inputs, analyses, and people. Some of the names come down to us still, titans such as John D. Rockefeller and John Pierpont Morgan (who, when asked what the market would do, famously answered, “It will fluctuate”). But historians now also appreciate the contributions of investors such as Joseph Penso de la Vega, a Spanish–Portuguese Jewish refugee who as early as the 17th century mused that stock market profits were “goblin’s treasure” as he described principles of behavioral finance, and Henrietta “Hetty” Green, who helped pioneer value investing in the late 19th century and built a fortune in the process.

By the beginning of the 20th century, the number of stock exchanges worldwide had reached 89 (only slightly more than half of those being in Europe) and included 20 million investors. A hundred years later, in 2015, the number had more than doubled: 189 stock exchanges around the world, including Africa, Asia, and the Middle East, with hundreds of millions of investors worldwide. More Americans are likely to own stock (55 percent) than to have a Netflix subscription (52 percent), let alone hold a passport (42 percent) or attain a four-year college degree (about 34 percent). Markets function better when they include more people and, when they meet evolving consumer and regulatory expectations, become a force to help societies confront widening inequality, narrow the racial wealth gap, and help solve the social challenges ahead.

But then, markets were created to be facilitators—a source of information, innovation, and inclusion. Today, we can peer back to Nasdaq’s UNIVAC 1108 with appreciation for the same reasons that we can look forward to the future of securities markets and understand what helps make them go: timely knowledge, rapidly diffused, and advanced technology, available to more people. That was the magic of Nasdaq on that February morning 50 years ago. Our world has been shrinking, and growing, ever since.

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