Initial Impact of the Computer on Securities
Markets The invention of the computer after World War II had a profound
impact on the securities markets and the way that business was operated
therein. In the 1960's, the complete value of the computer was not realized.
It was considered only in terms of cost-reducing techniques, and was not
initially appreciated for the value that it would later bring to the markets.
It wasn't until the early 1970's that the exchanges would begin to develop
and implement the electronic trading devices, which would have such a profound
effect on shaping the industry. In the late 50's, and almost the entire
decade of the 60's, computer technology was all about increasing convenience
and efficiency in order to keep up with higher annual volumes of securities
By the 1950's, the securities markets in the United States were experiencing steady rates of growth in the amount of securities traded every year. Volumes were hovering around 350 million shares per year at the beginning of the decade, but had climbed to a level of around 800 million shares per year by the end of the decade. With this increase in volume came an increase in clerical functions, accounting and paperwork. By the sixties, with volumes climbing to 1 and 2 billion shares per year, it was becoming more obvious that the exchange markets would not be able to handle any more growth. The computer, with its capability for performing these types of tasks, was initially recognized as a tool to reduce costs by performing clerical functions. The introduction of the computer in this facet allowed the markets to handle twice the volume of any previous era. It was this recognition of the computer's skill at performing clerical tasks and reducing paperwork that marked the first stage in the propagation of information systems technology in securities markets.
Although many people had already recognized the computer's usefulness in the office, most people in the sixties either did not realize, or did not want to consider the computer's usefulness in operating the markets. In the latter end of the 1960's, the New York Stock Exchange had been pondering the effect of the computer in a type of electronic market, which would allow traders and buyers to collaborate through the use of computers. This type of automation was certain to have a huge effect on the Exchange, but under heavy pressure from its specialists, who thought that automation would eliminate their position in the Exchange, the NYSE turned its back on the development of an electronic exchange.
The organization of the National Association of Securities Dealers (NASD), which had been formed by Congress in 1938 to provide some regulation of the over-the-counter (OTC) dealers, actually did realize the potential of automation. Without the pressure of specialists, the Association realized that an electronic market was not only feasible, but could actually serve as a competitive weapon for the NASD to compete the NYSE. Due to a lack of money and expertise, however, it wasn't until 1968 that the Association finally entered into an agreement with Bunker Ramo, a small electronics company. The company agreed to create a system for NASD, operate it for a small profit and give the Association an option to purchase it in 1976. The NADS' system was a small success, but it would have been a bigger success if they had been the first to develop a system of automation.
the same year Alan Kay, a computer designer, created the first automated
exchange, which he called AutEx.
Armed with an AutEx console, the operator could transmit messages regarding his willingness to buy and sell
ecified amounts of stock. His offer would go out to all subscribers, like a broadcast, and should one of them
be interested, he could contact the operator by telephone and consummate the deal.
Initially Kay hoped that he would sell his idea to the NYSE, but after he was rebuffed, due to their aversion to an electronic system at the time, he decided to start his own system. In 1969 he signed up his own subscribers and experienced some success, but by this time, the NASD and others had already begun implementing their own systems. Even the NYSE had come with an electronic system called the Block Automation System, which was supposed to perform the same function as Kay's system, except that it operated through specialists. Other computer designers were getting in on the business as well; Jerome Pustilnik designed the Instinet system in 1970, which was basically the same type of system as AutEx, except that it provided for the anonymity of its customers.
By the beginning of the 1970's, the securities industry was finally beginning to feel a real effect from computers and electronic markets. Brokers and traders were realizing the full potential of the computer, not just for its clerical and bookkeeping capabilities, but for its ability to transform the market into a more efficient, electronically controlled system. In mid-1970 NASD announced the creation of an alternate operation, called NASDAQ, which was billed as an electronic stock market. 1972 saw the Securities Industry Automation Corporation established, which many people believed marked the beginning of a new stage in computer-driven markets. This second stage was "characterized by the proliferation of automated aids designed to support the prevailing trading philosophy." In 1971 the annual volume of stocks traded was nearly 4 billion shares per year, and these annual figures were climbing faster every year. In the past decade, computers had enabled that growth, but in the coming decades computers would be responsible for the growth.
1. Amihud, Ho, and Schwartz. Market Making and the Changing
Structure of the Securities Markets, Lexington Books, Massachusetts, 1985.
2. Sobel, Robert. Inside Wall Street, W.W. Norton & Company, New York, 1977.
3. Wyckoff, Peter. Wall Street and the Stock Markets, Chilton Book Company, Philadelphia, 1972. :wq