The Corner

[This is the fourth in a four part series on the development of stock exchanges.]

In Germany two bourses developed, in Berlin and Frankfurt. The Berlin stock exchange goes back to 1696, when Prussia was a small country with an agrarian economy, its influence not comparable with that of England, Russia, France or Austria. But that situation changed—initially for the worse from a financial perspective. After the Seven Years War (1756-63) that Frederick the Great waged against Russia and Austria, the necessary reform of the coinage—a sharp devaluation—was carried out with disastrous effects for the financial markets on the continent, above all in Amsterdam, where several banks went bust.

The Frankfurt Stock Exchange dates to the ninth century. However, it only held trade fairs. By 1585 it dealt in currency trading. In 1949 it was established as a stock exchange.

The Berlin exchange soared when in Germany railroad companies stared springing up like mushrooms around 1840. From that time onward, the stock market dealers were able to trade in more dividend-bearing shares, whereas previously trade was limited to fixed-income bonds. It was not a peaceful period however, and economic growth was interrupted by revolutions and wars. After the Franco-Prussian war in 1870-1871, Germany’s economy grew by leaps and bounds. These were years of rapid industrial expansion. Many new companies were founded and they were often no more stable than the English ones during the South Sea Bubble. After 1874 a depression set in, lasting five years, which gave way to an even stronger upturn; in the 1920s there were 4,000 companies listed on the stock exchange. Today there are fewer than 800 listed on Deutche Bourse, which operates the Frankfurt Stock Exchange.

The Paris stock exchange was responsible for a number of major issues of which the Suez Canal is probably the best known. The colonial period gave the market a host of new securities, which in many families became a much sought-after inheritance. At the Paris stock exchange, which, unlike its counterpart in London, was always strictly regulated by the state, an important step forward was made which was adopted by all the other stock exchanges: only the agent de change or broker was permitted to trade. A broker’s job was defined by law for the first time in 1791. The stock exchanges of the world also have Paris to thank for the distinction between the market floor for trading in officially admitted securities, coulisse for the semi-official market and hors-cote, the unregulated market.

Over the decades European exchanges and bourses were operated independently by countries—each listing their own country’s companies’ shares. The big operations were in England, Germany and Amsterdam. Almost every European country operated a stock exchange. England and Amsterdam were especially adapt at building futures and options (derivatives) markets along with their stock exchanges. Today, Deutche Bourse is big in the derivative business with its large ownership stake in future and option exchange operator Eurex.

A number of European exchanges merged in September 2000 to form what was known as Euronext. The Amsterdam Stock Exchange, Paris Bourse and the Brussels Stock Exchange were among this group. Then in December 2001, the London International Financial Futures and Options Exchange (known as LIFFE) was acquired by Euronext. In 2002 the Portuguese stock exchange Bolsa de Valores de Lisboa e Porto (BVLP) was merged into Euronext and was renamed Euronext, Lisbon. This all led to the April 2007 merger between NYSE Group and Euronext to form NYSE Euronext. Come by next week for an epilogue.

Quote of the Week: “The basic objective of every account should be to first show a net profit. To retain profits you must sell and take them”—Joe Kennedy

Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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