Day Trading Encyclopedia

Stock Market History

Stock Market History

The United States stock markets recognized as the most liquid and widely followed equities markets in the world. Where the US markets go, the world markets tend to follow. It is a bell weather and benchmark that still leads the world in terms in volume, price action and innovation.

New York Stock Exchange Opening

The New York Stock Exchange (NYSE) has a storied history the represents the American brand. While the London Stock Exchange was formed in 1773, liquidity and volume were extremely limited with overbearing restrictions on shares. The NYSE was originally conceived by the Buttonwood agreement in 1792, which unified twenty-four brokers setting various trading protocols including commission standards and trading agreements. The exchange grew in members and quickly became the world’s dominant stock market exchange famously located on 11 Wall Street, New York. The NYSE merged with Archipelago Holdings in 2006 to rename itself NYSEArca, where equities and options can be traded electronically.

The Great Depression

Stock speculation activity grew at a frenzied pace through the “roaring 20s” as wealth and disposable income skyrocketed. The markets entered a bubble that burst leading to Black Thursday, October 29, 1929, when stock prices collapsed. Investors tried desperately to contact their stockbrokers who didn’t answer their phones. An onslaught of margin calls were issued as banks called in loans as an estimated $30 billion of market capitalization vaporized setting ushering in the Great Depression decade. By 1930, there were 3.2 million people unemployed in the United States. The New York’s Bank of the United States goes out of business vaporizing $200 million of deposits in 1931. Bank closures, soup and bread lines, homelessness, food riots and street corner apple sellers are images that depicting the hopelessness and desperation of the times. The unemployment rate skyrockets from 3.2% in 1929 to 24.9% in 1933. Eventually the US economy recovered as the country entered World War II, putting 10 million Americans back to work. The 1929 crash caused exchanges to implement trading halts and suspensions moving forward.

American Stock Exchange Open

The nation’s second largest stock exchange was conceived in 1908, when curbside brokers united to form the New York Curb Exchange. Companies not meeting the NYSE listing requirements began listing on the underground exchange, which officially changed its name to the American Stock Exchange (AMEX) in 1953. The AMEX is credited for the first exchange-traded-fund (ETF) with the rollout of the Standard & Poor’s Depository Receipts (SPDR) that invested soley in the S&P 500 index. Eventually, more benchmark index ETFs were added like the QQQ and DIA. The AMEX became a popular home for ETFs. The NYSE officially acquired the AMEX in 2008.

Nasdaq Stock Exchange Open

The world’s first electronic stock exchange opened originated as a quotation network under the name National Association of Securities Dealers Automated Quotations. As the system delivered accurate quotes, it created a by-product of lower the spreads, which didn’t sit well with stockbrokers, who profit from the wide spreads. Eventually the NASDAQ adopted an electronic trading system that allowed multiple market makers to compete for orders rather than having a single specialist on the auction floor like the NYSE. The electronic platform grew in popularity as it added more details like time and sales and volume information and automated trading systems including electronic communications networks (ECNs). NASDAQ represented innovation and technology, which made it the preferred exchange for the red-hot technology sector. Dominant technology players like Microsoft, Cisco Systems, Oracle and DELL Computers all came on board with their listings, which legitimized the credibility of the exchange. The NASDAQ exchange Unlike the NYSE and AMEX, the NASDAQ (National Association of Securities Dealers Automated Quotations) exchange had no physical trading floor, which offered the convenience of direct access and remote trading.

Day Trading Mania and the Bubble

The Federal Open Market Committee (FOMC) lead by Alan Greenspan had cut interest rates 11 times to avert the Pacific Rim crisis and inadvertently sparked the rally in the markets that would turn into a bubble. NASDAQ was the exchange of choice for day traders especially during the Internet boom era. Internet IPOS were doubling and tripling the same day. Electronic communications networks (ECNs) like ISLAND, Instinet and ARCA were born and surged in popularity. This ushered in the electronic trading era. With instantaneous order fills, cheap commission and unprecedented access to the markets through ECNs, the day trading mania grew. Stories of quick wealth creation from day trading reached the mainstream and sparked an epic rise in online trading from 1997 to 2000. Internet stocks exploded as the frenzy sucked in more participants. Technology IPOs regularly doubled and tripled on opening day. Momentum trading was flavor of the era. Even junk stocks like K-Tel, a record label, exploded from $7 to $80 in days, sparking more insane parabolic moves amongst any stock remotely related to the internet. This excitement powered the Nasdaq over 5,000. Worried about the “irrational exuberance” in the markets, Greenspan set forth to raise interest rates over 10 times, eventually taking the luster off the wildly overextended US equities markets.

Ultimately, the good times lead came to an abrupt end as the epic Bubble finally burst hard and ushered in bear market that collapsed the NASDAQ 78% from a record high of 5,048 on March 11, 2000 to a low of 1,114 on October 9, 2002. Margin calls and forced liquidations were commonplace as day traders and their blown up trading accounts vaporized. Day traders went the way of the dinosaurs as the hobby traders quickly found out that piling into a rising stock didn’t mean equate to skillful trading. The exchanges also implemented decimal increment pricing in an effort to slow down the carnage and the SEC implemented the Pattern Day Trading rule (PDT), which required a minimum of $25,000 in order to day trade, make more than three roundtrips during a rolling five business day cycle.

The Housing Bubble and Financial Crisis

Markets eventually recovered and the S&P 500 and Dow Jones Industrial Average (DJIA) powered to all time highs as financial and real estate stocks lead the way higher thanks to more interest rate cuts. Cheap money, leverage and heavy emphasis on home ownership during the Clinton administration lead to the Housing Bubble and next bear market in 2007. Again, Greenspan overshot the rate cuts and implemented interest hikes, which not only took the steam off the markets, but also ushered in another bear market as the Dow Jones dropped over 54% from a peak of 14,165 on October 11, 2007 to a low of 6,443 on March 6, 2009. The S&P 500 lost over 50%. Lehman Brothers imploded and bank stocks were teetering on the verge of insolvency as the sovereign debt crisis sent shockwaves around the world.

The FOMC stepped into action with a zero interest rate policy (ZIRP) as the new chairman of the FOMC, Ben Bernanke, engineered a series of intervention programs like TARP and many rounds quantitative easing to not only put a bottom in the markets, but also rally them back through prior all time highs. Critics argue the artificial intervention by global central banks are setting up the market for another crash. Only time will tell.