Crypto exchanges and the great leap forward
Financial exchange and trade have been a fundamental part of our economic life for over a thousand years.
Agricultural debt was traded in France way back in 1100.
The bourses of Bruges and Antwerp through the 1400s and 1500s inspired the early Royal Exchange in London.
The pace of exchange development has accelerated over the last 500 years. These exchanges have grown to represent trillions of dollars in listings and trading. They have accomplished this through war, changes in economic conditions, and governments.
Much of this growth has been in the last thirty years.
Until recently, building any kind of financial exchange required many decades. But with the advancement of technology, telephony and fibre optics, exchanges have cut their development to years.
The NASDAQ was the first to accelerate this process with an all-digital offering in the 70s. Then Jeff Sprecher developed an exchange empire inside of 20 years.
Coinbase has cut the development of an exchange from startup to publicly-listed, in less than ten years.
While technology is the key element of this advancement. It is built on a foundation of trading and exchange that goes back a millennium. It also involves lots of financial innovation.
Exchanges are a key part of a financial fabric
Exchanges have evolved to provide an essential service to billions of people and trillions of value exchange.
Exchanges provided a way to price a variety of goods effectively. Over time, they have become part of an intricate web of financial services across the globe.
Financial exchanges are venues for participants to assume, hedge or transfer risks. Participants can also make future commitments for commodities and financial products with agreed-upon contract standards.
Exchanges are a critical part of the capital formation process.
They provide crucial secondary markets for transfer and liquidity.
And exchanges provide transparent price discovery for all trade in every asset across the world.
In the last ten years, we have witnessed the emergence of the latest iteration of the exchange.
Although modern exchanges stand on the shoulders of 1000 years of innovation, the idea of shares and exchange began in 1600.
The East India Company and the joint-stock model
The history of exchanges shows development born of necessity. As trade in goods across the expanding world increased, so did the need for various trading innovations.
The first joint-stock company was the East India Company in 1600. This is considered the origin of the limited liability partnership. This innovation was designed to share the risks of sea-born voyages with high failure rates.
The East India Company is also considered to be the first issued “stock.”
The first “stock” exchanges appear to have started in Belgium. The exchanges in Bruges and Antwerp influenced a powerful British merchant named Thomas Gresham.
The Royal Exchange gave birth to two modern-day exchanges
In the 1560s, Thomas Gresham began what would become known as the Royal Exchange.
The original exchange structure was a place for the trade of various goods. The area surrounding exchange was used for other kinds of commerce.
Stock trading in London is said to have grown to around 100 companies by 1690.
But what makes this exchange important is that it is considered the birthplace of two successor exchanges.
These are the London Stock Exchange and the London Metals Exchange.
Coffee houses, the original stock exchange
Those of you who like coffee may be surprised to learn that coffee houses had a role in developing early stock trading in London.
In London, stock jobbers worked in various Coffee houses. The most notable was Jonathon’s Coffee House, founded in 1680 and Garraway’s Coffee House.
At the coffee houses, traders could get posted prices on stocks and various commodities. They could also get news, rumours and touts coming directly from the docks close by. Financial lists of prices and news were posted starting in 1698.
Coffee Houses’ stock and commodities trading increased in 1698 when stockbrokers were expelled from the Royal Exchange for bad behaviour. This supposedly included a plot against the King.
In 1801 a group of brokers from these coffee houses got together and founded the London Stock Exchange.
But there was a problem.
No stock was traded in 1801 or any year from 1720 until 1825 because it was illegal.
The South Sea Bubble made stock trading illegal
The ban on stocks was a direct result of a famous financial debacle. No, I’m not talking about the recent GFC, this was its predecessor, the South Sea Bubble.
In 1720 the British parliament reacted to the massive failure of the South Sea Company with punitive legislation. They enacted the Bubble Act banning joint-stock trading without a Royal Charter.
The ban lasted for over 100 years.
However, due to difficult economic conditions, parliament allowed joint-stock trading to begin again in 1826. So there was no stock trading on the LSE until 1825 when the ban was lifted.
After the Banking Acts of 1826, the British government enacted several reforms from 1833 to 1860. These were designed for the benefit of industries like banking and insurance.
The London Stock Exchange grew with the economy and rapid industrialization. The LSE provided crucial capital formation and the growth of the modern capital model used across the world today.
The LSE became part of the London Stock Exchange Group with the Italian Boursa in 2007. The Group today provides a wide range of trading, data, settlement and clearing services.
In just over 200 years, the LSE grew from a handful of brokers and no stocks to a market cap for all listed issues of £3.8 trillion.
Trading copper and tin for the empire
On the commodities side, the second child of the Royal Exchange, the London Metals Exchange, started in 1877. It was founded to meet the growing demands for metal from industrializing England and the increasing trade across the British Empire.
Initially, trade was focused on copper and tin. Over its history, the LME has evolved to trade a wide range of metals.
The LME was acquired by Hong Kong Clearing and Exchanges Limited in 2012.
In 2018 the LME traded 185 million lots valued at $15.7 trillion. According to the LME, trading on the exchange exceeds world metal production by a factor of 40.
London was also important for Canada before the development of our capital markets.
All capital formation for Upper and Lower Canada was conducted in London during Canada’s early pre-confederation years. But that was about to change.
The Montreal Exchange was Canada’s first
Although the Montreal Stock Exchange was officially the first Canadian exchange, Toronto would eventually dominate.
A small group of businessmen unofficially started the Toronto Stock Exchange in 1852. It became official in 1861 with a framework for trading. It began with 18 listed financial and real estate securities. An Act of the Ontario Legislature recognized the exchange in 1878.
The TSE merged with the Standard Stock and Mining Exchange (an unregulated junior exchange) in 1934 during the depression.
In 2001, the TSE acquired the Venture Exchange. It combined with the Montreal Exchange in 2008 to become the TMX Group. Maple Group subsequently acquired TMX in 2012.
The TMX Group today provides trading across equities, fixed income, derivatives and energy markets. From a modest 18 stocks in 1861, the TMX Group today ranks as a top 10 exchange internationally with a total listed stock market cap of over $2 trillion.
There were, of course, some earlier exchanges in North America started by our neighbours to the south.
The New York Stock Exchange and the Buttonwood tree
The first stock exchange in the United States was the Philadelphia Exchange in 1790. But it was the gathering of 24 brokers and merchants at the Buttonwood Tree in New York that would provide the foundation for the New York Stock Exchange in 1792.
They had a mere five stocks at the time.
The New York Stock and Exchange Board was formed in 1817. It became officially known as the New York Stock Exchange in 1863.
The NYSE was officially registered with the newly created Securities and Exchange Commission (SEC) in 1934.
It became a publicly-traded company in 2006 as the NYSE Group and merged with Euronext in 2007. The Intercontinental Exchange Group took over the organization in 2013, and the Euronext portion was spun off shortly after.
Today the NYSE has 2,800 listed companies and a market cap for all listed shares of over $24 trillion.
The stock exchanges of the past grew slowly at first and then advanced rapidly with the economy. However, this long slow incubation period of exchange development started to change with advances in technology.
The Chicago Board of Trade
On the commodities side in North America, it starts with the Chicago Board of Trade in 1848. By 1858, 83 merchants were trading grain on the CBOT.
The legislature of Illinois granted the exchange a charter in 1859, allowing the CBOT to establish trading and contract rules.
Contract standards specified quality control, grading and inspection standards for the grain business.
These standardized grain trading contracts were implemented starting in 1865.
As technology increased and financial products expanded. The CBOT added financial contracts in 1975, futures contracts in 1982, and options on futures in 1997.
But the CBOT also developed a couple of important spinoff exchanges.
The CME Group
The first spinoff was the Chicago Butter and Egg Board in 1898. This went on to become the Chicago Mercantile Exchange (CME) in 1919. The CME became a powerhouse in futures trading, including currency futures starting in 1972 as the US left the gold standard.
The second CBOT spinoff was the Chicago Board Options Exchange (CBOE) in 1973. It was created using a licence provided by the SEC in the 1930s. Previous options trading had been haphazard with no contract standards, formal pricing mechanisms or settlement.
The CBOE standardized contracts, strike prices and expirations starting with call options on 16 stocks when it opened. Put options were added on some listings in 1977. And in 1990 came long-term LEAP put and call options.
The CBOE traded 2.05 billion options contracts in 2018.
The CBOT merged with the CME in 2007 to form the CME Group. This is a name you should recognize if you are trading Bitcoin.
Today they provide a trading venue for options and futures across a range of products. In 2018, 4.844 billion contracts were traded across rates, equities, currencies, and commodities.
Now they offer trading of alternative investment products like Bitcoin futures and options on futures.
NASDAQ, the exchange for innovators
The first all-electronic exchange, the NASDAQ, was started by the National Association of Securities Dealers in 1971.
The NASDAQ benefited from several technological, financial and government innovations. Development of the silicon chip, vast government support for innovation were key developments supporting a nascent NASDAQ, As was the formalization of the LLC model for venture capital.
What had previously taken hundreds of years to achieve was accomplished in less than half a century. One could argue that in the case of the NASDAQ, it took only 30 years.
The NASDAQ merged with the OMX in Sweden to form the NASDAQ OMX group in 2007.
Today the NASDAQ covers a wide range of financial products, including equities, futures, options and fixed income. The NASDAQ has 3,900 listed issues and a market cap for all listed shares of over $19 trillion.
From a buck to 11 exchanges and Bakkt in 2 decades
The advancements in telephony and technology created an opening for an ambitious all-electronic futures exchange. The Intercontinental Exchange was founded in 1997 by Jeff Sprecher when he bought an electricity pricing startup for $1 and assumption of debt.
He planned to take advantage of the deregulation of the power industry provided by the Energy Policy Act of 1992.
The all-electronic commodities trading platform launched in 2000.
They bought the International Petroleum Exchange in London in 2001.
They listed in 2005 and then bought the New York Board of Trade in 2006.
They also developed a series of clearing centers across the globe for their platform that serves 70 countries.
Then ICE bought NYSE Euronext in 2012 and spun off Euronext in 2014.
Today ICE operates eleven exchanges and six clearinghouses across the globe.
In less than 20 years, a small group of entrepreneurs transformed a defunct startup into a global exchange and clearing business and a Fortune 500 company.
Then he built and launched Bakkt, a digital assets futures and options exchange.
Coinbase goes public in under a decade
Brian Armstrong was looking for a founder in the YC chat in 2012. He took his idea for crypto, raised money and launched shortly after.
Over that period, Coinbase was developed from a modest idea to a household name in the crypto space.
In 2021 after a strong run, Coinbase was finally listed on the NASDAQ with the symbol COIN.
At a $77 billion market cap, COIN even exceeds its predecessor, the Intercontinental Exchange’s $67 billion market cap.
And we know that crypto is still in the early part of its long-term development.
Crypto exchanges are the future of finance
The history of financial exchanges is one of upheaval, government changes and innovation.
Regulation hasn’t stopped the development of these innovations. Nor has war, financial failures or vast economic changes.
The exchanges have grown and evolved along with these changes and new economic demands.
The first exchanges took hundreds of years to fully develop into trillion-dollar powerhouses. The exchanges that leveraged technology and advancements in communications networks like the NASDAQ and ICE cut this period to less than a couple of decades.
Coinbase reduced this period to 9 years before listing.
Standing on 1000 years of progress and learning, crypto exchanges like Coinbase and Bitvo are taking the next big step forward.
Cryptocurrency exchanges bridge the gap between the legacy financial system and the development of the frontier financial system.
They are helping to drive new forms of value exploration and discovery.
And with the combined crypto market cap of ust under $2 trillion, crypto exchanges are well on their way to matching their legacy competitors.
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