Tuesday, May 27, 2014

Petram, The World’s First Stock Exchange

In his famous book Confusión de confusions Joseph Penso de la Vega wrote: “If one were to lead a stranger through the streets of Amsterdam and ask him where he was, he would answer ‘among speculators,’ for there is no corner where one does not talk shares.” And, Lodewijk Petram adds, “the people of Amsterdam were talking about options, too, and forward selling, quotations and prices, risk and speculation—all relating to the trade in the shares of the Dutch East India Company (the Vereenigde Oost-Indische Compagnie, VOC), which had been established in 1602. Fortunes were made and lost, and the men who engaged in this trade were wholly in thrall to it.”
(p. 1)

Petram did extensive archival research, including mining the records of active traders, to shed new light on de la Vega’s account of the Amsterdam stock market. The Dutch edition of his book appeared in 2011. Columbia Business School Publishing/Columbia University Press has just released the English edition, The World’s First Stock Exchange, skillfully translated by Lynne Richards. It’s an engrossing tale.

Futures contract 1611

Traders in Amsterdam occasionally used questionable strategies--strategies that have endured, in both legal and illegal manifestations. They engaged in “short selling through forward contracts, spreading rumors, buying even more shares.” (p. 78) These “vile practices” were decried in petitions to the government by the directors of VOC, who argued that they were “very disadvantageous to the investors and particularly the many widows and orphans.” (p. 61) Petram notes that “the number of widows and orphans who were dependent on an investment in the Company would have been very small indeed, but playing on their painful situation pricked the puritanical conscience of the authorities.” (p. 62) In February 1610 the government issued an edict banning naked short selling, a ban that share dealers blithely ignored.

Large numbers of VOC investors had no direct experience in trading. “If these shareholders wanted to sell their shares … they had to [travel to Amsterdam and] brave the bear pit of the exchange, where they were complete novices.” (p. 102) By 1633, however, they were offered an alternative—to do business with a market maker (initially, the Raphoen brothers) who would make “a small margin on every deal because they always offered a little under the market price when buying and asked for slightly more when selling.” (p. 103)

The Raphoen brothers also played a major role in standardizing the VOC share at 3,000 guilders, a huge sum at the time. “And as the share price rose, the amount that actually had to be paid for a share became even larger. In the 1640s the price of a Company share stood almost continuously at above 400, which meant that over 12,000 guilders had to be paid for a share with a nominal value of 3,000 guilders. To put this in perspective, in 1645 the substantial and prestigious canal-side mansion (with a rear annex) at 105 Herengracht was sold for 5,100 guilders.” (p. 110) The always shrewd Raphoen brothers bought up odd lots of VOC stock and combined them into 3,000-guilder shares, which could be sold for a better price.

VOC paid a dividend—somewhat sporadically in the first twenty years and then, starting in 1623, every two years, and finally, from 1635 on, every year or every six months. “The dividend was still often paid in kind, primarily in the form of cloves, but the higher frequency and above all the regularity with which the payments were made caused the share dealers to change their forecasts about the Company’s profitability. The future now looked very bright.” (p. 113)

The Netherlands was experiencing a golden age in the first half of the seventeenth century and people’s purchasing power was rising. VOC shares also rose in price, as (more famously) did the price of tulip bulbs. Petram notes that “tulip mania has always attracted a great deal of attention because so much money was offered for something as commonplace and perishable as a bulb, but the scale of the trade in tulip bulbs should certainly not be exaggerated. There were some 285 people actively involved in bulb trading in Haarlem, with an estimated sixty traders in Amsterdam. By way of comparison, in 1639 in Amsterdam 264 people carried out one or more share transfers. The total number of active share dealers … would have been around 350. Amsterdam’s bulb trade was thus nothing more than a peripheral phenomenon compared with the dealing in shares.” (p. 120)

I’ve recounted bits and pieces of only about half of the story that Petram tells. He describes the domination of Jewish traders in the share market in the second half of the seventeenth century, the rise of information networks, and the split between the “princes” and the “gamblers” or “players.” The gamblers/speculators “did not have significant capital in their VOC account but traded in derivatives on a grand scale” (p. 164) in trading clubs. They “played fast.” (p. 172) Petram also recounts the events of the “disaster year” of 1672 when the VOC share price sank like a stone as well as the crash of 1688.

The World’s First Stock Exchange is a fascinating book which I can recommend unequivocally to anyone with even a modicum of interest in the history of financial markets.

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