A Brief History of the European Stock Market
From the Forum Romanum to the Frankfurt Stock Exchange
It’s possible that not too many people care about the history of stock trading, but its roots are worth knowing something about, at least as a curiosity. It’s often the case that we think something is new only because we don’t know about its origins. The stock market is a perfect example of this: Capital markets, exchanges, and trading venues have been around for centuries, and, like everything else the human mind has invented, it has evolved over time. This short article briefly looks back at how stock trading has started in Europe to provide a macro perspective on how we got to where we are now.
How stock trading started in Europe
1. The Romans
Rome is often credited with the invention of the world’s first shareholder companies, called the publican societies. Investors could provide capital and acquire shares (“partes“) in corporation-like businesses that serviced the Roman state, with tax farming contracts being the more lucrative ones. These shares would fluctuate in value based on the success of the business, and Cicero even writes of “shares that had a very high price.” Like their modern counterparts, Roman stock traders supposedly congregated on the Forum Romanum to buy and sell them.
2. Italian city-states
However, it was not until much later that a genuine capital market would develop in Europe. During the 13th century, Venice and Florence were among the first city-states to offer government bonds that could be bought by the general public. The Venetians, for example, needed capital to finance their war against the Byzantine emperor and his Genoese allies. So they sold bonds that guaranteed a fixed maturity date and an annual rate of return (or a coupon if you like).
These were among the first “securities” in Europe, and even though they did not trade on an exchange, there was still a demand for them. And it didn’t take long for this public debt to migrate into secondary markets. These markets were dominated by specialist bond brokers, who arranged deals between buyers and sellers from their “trading desks” (actual wooden desks) and collected a commission for their services.
3. The Dutch East India Company
But many people point to the Amsterdam Stock Exchange (modern Euronext) as the first modern stock exchange due to its sophistication. It began as a commodities market (a place to buy and sell physical things) before expanding into a securities market in 1602 for investors to buy shares in the Dutch East India Company.
The Company offered transferable shares, and buyers began to trade them immediately. Quickly a speculative short-term trading frenzy developed around the city. Traders were conducting all kinds of sophisticated transactions, including futures, bull and bear raids, shorting, which famously culminated with the Tulip Mania. By the end of the century, the methods employed in Amsterdam were as sophisticated as any we use today.
4. Stock trading in Europe today
Just as the Dutch merchants issued the shares to fund their expeditions, modern businesses do the same to finance their operations. When a company goes public, it sells shares in itself on a stock exchange, and anyone who buys them becomes a part-owner of the company. Investors, looking for a place to grow their money, can trade these shares on an exchange through a broker, almost like how shares were traded through specialist dealers back then.
The first pan-European online broker was Saxo Bank, followed by DEGIRO, Swissquote, in addition to Interactive Brokers which offered its services from the US to European clients through its UK entity. More has followed since then, and today the amount of stock brokers available is incredible.