The Day that Wall Street's Wall CrumbledSubmitted by HearthStone | Private Wealth Management on August 18th, 2015
APRIL 13, 2015
The Day that Wall Street's Wall Crumbled
Friday, May 1, was the 40th anniversary of one of Wall Street’s most fateful days. On May Day 1975, fixed-rate commissions were abolished by regulators. Until then, a broker who tried to charge customers less than the fixed rate to trade shares risked expulsion from the stock exchange. Where once a broker would charge 2% or more for a typical trade, the tables were forever overturned. Charles Schwab and others entered the market. Today, with online brokers and other free market options, buying stock can come with a combined cost more like 0.4%. So the cost of trading has fallen by more than 80%.*
This game-changing shift merits a look at Wall Street’s history and genesis.
In the 1600’s there literally existed a 12-foot, wooden wall that divided lower Manhattan from the rest of the island. The wall was built to protect the residents of New Amsterdam, living inside the wall, from the Native Americans, pirates, and others living outside the wall.
Over time the wall was removed. But the street that ran next to where the wall had stood was aptly named Wall Street. Then and now, Wall Street has symbolized a barrier between insiders and outsiders.
After the American Revolution in the late 1700’s, the rapidly growing young country needed capital to finance its growth. Companies issued stocks and bonds to raise the needed capital. In turn, there was a need for a marketplace in which to facilitate trading of these stocks and bonds between investors.
One of these marketplaces began in an open area under a Buttonwood tree at the foot of Wall Street. On any given day, anyone could walk up to the area under the tree and begin trading.
That open access didn’t suit a small group of traders. They thought it better to trade amongst themselves, and keep everyone else out. In 1792, this small group of traders formalized an association in what was called the Buttonwood Agreement. That association became what we now know as the New York Stock Exchange.
With that agreement, they literally and figuratively put up a new wall separating the insiders from the outsiders. The original association was a very exclusive club. Today, there’s still an aura of that clubby exclusivity surrounding Wall Street.
Despite Wall Street’s worst fears 40 years ago, deregulation did not bring it to its knees, as many expected. Instead, deregulation ushered in explosive profitability. As Charles Schwab noted, “It turned the whole industry upside down and led to this great mass flourishing of services and pricing and technology.”
HearthStone recognizes that every club has its secrets, and that Wall Street is no exception. We are dedicated to spreading light and understanding of how Wall Street and the financial industry work, and continuously helping consumers to make intelligent decisions.
*Source: “Lessons of May Day 1975 Ring True Today,” The Wall Street Journal, May 1, 2015.