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Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6* x 9” black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. Bell & Howell Information and Learning 300 North Zdeb Road, Ann Arbor, Ml 48106-1346 USA 800-521-0600 UMT “INNOVATIONS IN COMMUNICATIONS TECHNOLOGY AND THE STRUCTURE OF SECURITIES MARKETS; A CASE STUDY OF THE TELEGRAPH AND THE RISE OF THE NYSE TO PREEMINENCE. 1830-1860.’ DISSERTATION Presented in Partial Fulfillment of the Requirement for the Degree of Doctor of Philosophy in the Graduate School of The Ohio State University By Sonali Garg, M.A. The Ohio State University 2000 Dissertation Committee: Approved by Prof. Richard H. Steckel, Advisor Prof. Lucia Dunn Advisor Prof. Huston McCulloch Department of Economics UMI Number 9982563 Copyright 2000 by Garg, Sonali All rights reserved. UMI UMI Mlcroform9982563 Copyright 2000 by Bell & Howell Information and Leaming Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. Bell & Howell Information and Leaming Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, Ml 48106-1346 © by Sonali Garg, 2000 ABSTRACT Although the NYSE has enthralled the capitalist world for over a century, little is known about its early origins and its rise from a regional exchange to the colossus it is today. Competition among the exchanges in Philadelphia, Boston and New York was vigorous from 1830-1860 and any one of them could have emerged as the national leader. Innovations in communication technology during the 1840s and early 1850s transformed the structure of securities markets, adding leverage to New York’s slight advantage. Once the telegraph became a reliable means of communications, markets that were earlier insulated from each other began to compete for the first time. An exchange could serve a larger geographic area and trade in cross-listed securities increasingly became concentrated at one exchange. Prior to the advent of the telegraph, the NYSE was the most efficient of the three exchanges studied. Using contemporary data on bid-ask spreads, price and volume of securities traded, I show that this advantage helped it become the national exchange, while the others reverted to being regional exchanges. The impact o f the telegraph is similar to that of the Internet today, brining into competition markets that were earlier relatively insulated from each other. Just as regional investors, securities, and markets transformed into national ones due to the telegraph, so today national investors, securities and markets are being transformed into international ones. National exchanges are competing to become the international exchange. Ill To My Parents and all My Other Teachers tv ACKNOWLEDGMENTS I could not have completed this dissertation without the help and support of my friends and family. I would like to thank my dissertation committee; Professor Richard Steckel, Professor Lucia Dunn and Professor Huston McCulloch. I cannot imagine a better group of individuals to supervise my research. I received very helpful comments from Tim Opler, Richard Sylla, Larry Neal, Jeremy Atack, Paul Evans, Charles Calomiris, Lance Davis, Margaret Levenstein, Eugene White, Rene Stulz, Paul Shultz, James Angel, and Bennett Baack. I received helpful comments from fellow graduate students, in particular Shinichi Nishiyama, Kiyoshi Matsubara, Kiyoshi Taniguchi, Glenson France, Robert Dietz, Rosin O’Sullivan and Sougata Kerr. I received helpful feedback from friends in particular Shomik Raj Mehndiratta, Ranjit Nayak, Ravi Shankar, and Sanjay Reddy. The librarians at the Boston Public Library, the Free Library of Philadelphia, the New York Public Library, the Ohio State University Library, the Baker Library at Harvard University, the NYSE archives, and the library archives at the Smithsonian in Washington D C. IV were very knowledgeable and helpful. I thank everyone that helped me search for data and other information at each of these institutions. This research was supported by a Dissertation Improvement Grant (Grant # SBR -9806872) from the National Science Foundation. I thank the Dice Fellowship Committee (Department of Economics, The Ohio State University) for their Fall 1998 grant. I thank the office staff at the Department of Economics for all their help. 1 thank my friends: Monica, Pushkin, Mukul, Kathleen, Troy, Anusuya, Ashish, Deepa, Mathangi, Priya, Ajay, Patti, Renu, Sharon, Tom, Sum, Garima, Rashmi, Sapna, and the Bantra, Sharma and Gupta families for their support during the course o f this dissertation. I would like to thank my brother Vishu, my sister Priti and my brother in law Deepankar. Finally, I thank my advisor Professor Richard Steckel without whose support and encouragement this dissertation would not have been possible. VITA January 1,1968 Bom , Delhi, India 1986-1989 B.A. Economics, Delhi University, India 1989-1991 M.A. Economics, Jawaharlal Nehru University, India 1994 M.A. Economics, The Ohio State University 1995-1999 Graduate Teaching Associate, The Ohio State University FIELDS OF STUDY Major Field; Economics vu TABLE OF CONTENTS Page Dedication ..................................................................................................................... iv Acknowledgements ........................................................................................................v Vita...............................................................................................................................vii List of Tables ................................................................................................................. ix List of Graphs................................................................................................................. x Chapters: 1. Introduction .................................................................................................................I 2. Chapter I : Suggested Explanations ........................................................................14 3. Chapter 2: Data........................................................................................................22 4. Chapter 3: Evaluating the Hypotheses.................................................................. 49 5. Chapter 4: Implications for the Evolution of Financial Markets .......................... 72 List of References .......................................................................................................91 Data Appendices ....................................................................................................... 93 viii LIST OF TABLES Table Page 1 Table 1 : Population of City ............................................................................... 6 2 Table 2: Value of Imports of Merchandize, Coin, and Bullion at the ports.. ..6 3 Table 3 : Value of Exports of Domestic Merchandize, Coin, and Bullion at the ports ................................................................................................................................ 6 4 Table 4: US Securities Markets, Sales in 1910 .................................................... 7 5 Table 5: Chow Test: New York ........................................................................42 6 Table 6: Results of regressions on New York using Exim and Population.. ..44 7 Table 7: Results of regressions on New York using proportionate data ..........45 8 Table 8: Results of regressions using pooled proportionate data ...................... 46 IX LIST OF GRAPHS Graph Page 1. Graph # 1: Value of Shares and Bonds Traded 1835-1854 ................................. 37 2. Graph # 2: Value of Shares and Bonds Traded. 1835-1863 ................................ 38 3. Graph #3:60 Month Moving Average 1832-1862 Value of Securities Traded...39 4. Graph # 4: Actual Vs. Predicted Value of Securities Traded on the NYSE 48 5. Graph # 5: City Population 1820-1870 ...................................................................51 6. Graph # 6: Exports + Imports 1821-1863 .............................................................. 52 7. Graph # 7: Average Bid-Ask Spreads 1832-1856 ..................................................55 8. Graph # 8 A: Large Trades. Number of Trades of Size (500 +) Shares, 1846-1857 .................................................................................................................... 62 9. Graph # 8 B: Medium