Historical Evolution of Financial Exchanges

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Author Information : Kenneth Kavajecz (Whitman School of Management, Syracuse University)

Year of Publication : Social Science Research Network (2011)

Summary of Findings : There were many more exchanges in the United States than previously thought. Births are associated with periods of uncertainty (e.g. gold rush, internet boom) while deaths are associated with tighter regulation and advances in communications technology.

Research Questions : 1. How have the number of exchanges evolved over time?

2. What causes exchange births and deaths?

Novel Findings : Many experts argue that exchanges should consolidate to one exchange because of economies of scale, but in fact this historical review illustrates that one should expect multiple exchanges, particularly during periods of great uncertainty.

Implications for Policy: Findings demonstrate exchanges open when there is innovation and/or turmoil and uncertainty in the marketplace. It argues newly formed exchanges can vet shares for the long-established exchanges (e.g. NYSE), and then close/consolidate when they are found to be trading legitimate stocks.

Implications for Society: This research demonstrates the ongoing effect of innovation and technology on the market, illustrating that new exchanges will crop up to “test” new companies and ventures, closing when those shares/stocks are found to be legitimate enough to be ongoing concerns and then adopted/listed by the long-established exchanges.

Full Citations : Jorgensen, Bjorn N., Kenneth A. Kavajecz and Scott Swisher, 2011, Historical Evolution of Financial Exchanges, University of Wisconsin – Madison, Working paper.

Abstract : This research reviews the history of stock exchanges in the United States, exploring why the more than 250 exchanges that existed in the late 19th and early 20th centuries opened and subsequently closed. Findings explain that exchanges open during times of great innovation and/or turmoil and uncertainty, to vet firms/shares and identify them as true ongoing concerns. Once they are found to be legitimate, those exchanges close/consolidate into the established exchanges in place today. The researchers find that one should not expect to have a steady consolidation of the number of exchanges in the world, but rather, the number of exchanges increases and decreases with the level of economic uncertainty.

Kenneth Kavajecz

Kenneth Kavajecz

Professor Kavajecz is a professor of finance. He has focused much of his research on the structure of financial markets, with an expertise in liquidity, trading, risk management, market structure and regulation.
Kenneth Kavajecz
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