Stock Market Before Internet

The history of stock trading extends well over a century. These days, we can order stocks online by logging into an online brokerage company. This has resulted in an increase in Internet day trading since the mid-1990s. Stock trading, on the other hand, is not new and has existed from the beginning of the markets. Then, how did stock trading occur before the internet? Read on as this article explains about Stock Market Before the Internet.

Stock Market Before Internet: Introduction

Buying and selling stocks was a cumbersome procedure before the invention of computers and the internet. Trading stocks involved manually drawing out graphs and placing trades by calling a broker. You needed to be present at the exchange in person to make a deal before phones. This implies that in the years preceding the 1990s, one would have needed to be proficient in graphing stocks independently before initiating a trade.

Everything depends on how quickly information can be sent from the trader or investor to the market. Trading stocks would have taken a long time before computers, but with the age of computers, data transfer is nearly instantaneous.

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Stock Market Before the Internet

Before computers took over the stock market, you needed three things to become a skilled stock trader. Initially, it would have been necessary for you to have an office capable of creating charts. Secondly, your company would need to be connected to the exchange by phone. Third, someone loud and aggressive enough to give orders using the open outcry approach would need to work for your company.

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The Era of Hand-Drawn Graphs and Stock Ticker Tape

We are accustomed to computer-drawn graphs nowadays. These graphics enable quick trade transmission and are automatically updated with the most recent data. We take for granted the subtle art of hand-drawn stock graphs, and everything happens with ease. Every price adjustment made on an exchange before the 1960s required documentation. You had to record the moment and price increase when a stock increased by one dollar. You may eventually develop a stock chart that you could use as a guide for trading.

All stock market data was sent over telegraph lines between 1870 and 1960. Subsequently, a machine would receive this telegraph message and output the most recent stock data on volume and price. This invention was known as ticker tape, and it served as the informational foundation for all professional traders. Individuals skilled at creating precise graphs from these ticker tapes would be employed by reputable trading companies. These individuals would graph and show charts to management for the day, after which they would place trade orders. William Peter Hamilton, one of the pioneers of technical analysis, wrote a whole book in 1897 about the idea and subtleties of investing with a focus on graphs.

To send precise financial data on stock exchanges, stock tickers would eventually be replaced by rudimentary computers in the 1960s. The volume and the most recent pricing were the only things these incredibly outdated computers could display.

Professional Stock Graph Drawers

Professional stock graph drawers were in existence until businesses began using computers to automate their work in the late 1970s. Hand-creating graphs from stock ticker tape significantly slowed down the trading lifestyle, as you might expect. We can make trades instantly these days. Drawing out a graph and making a judgment would take an hour before the invention of computers in trading.

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Telephones

A well-established trading company has decided to execute a deal. They would now have to send that information back to the exchange so that a representative of that company could place the stock trade.

To trade a specific stock at the market before 1878, your trading company would have needed to send a runner to deliver the message. Fast stock runners received excellent compensation, but this required significant time. In actuality, the main factor influencing stock prices in the 19th century was public information dissemination.

The first telephone was put on the New York Stock Exchange in 1878, making it a significant year. The stock market was transformed by the telephone. Businesses could now forecast by reading the ticker tape, and then call the floor to execute their trade. There were more than 88,000 telephones on Wall Street alone by 1920, demonstrating the significance of these devices.

The telephone revolution had thus commenced. What used to take hours to complete might now be finished in a couple of minutes. The United States sectors began to be interconnected as a result of this massive increase in information transmission speeds. One of the reasons for the 1929 Great Depression would be this interconnection and the ensuing rise in volatility.

Trading would still be dominated by telephones until the 1990s when retail investors could easily access internet trading. Nevertheless, regardless of computer-driven orders, all trades had to go through a face-to-face encounter on a trading floor until 2009.

Placing Trades via Open Outcry Method

Before computer trading became popular in the 1990s, all traders had to be shouted at the exchange. A buyer would stand up and announce, “I am selling 10 shares of X company for $10.95,” and everyone would record the sale order in their notebooks. Another person would yell, “I’m buying 10 shares of company X at $10.30,” and everyone would record this amount on paper. Now multiply this on an exchange by three thousand companies. Open outcry trading, which involves buying and selling orders, dominated the stock market until the 1990s. There is a structure known as a trading pit. It is here that traders stand and yell their sell and buy orders.

This would get busy. Thousands of orders would be screamed out every hour on a single trading day. As more and more calls and texts began to arrive at the brokers’ phones, these orders would vary frequently. Successfully navigating the trading pit was an art form. Getting the greatest price for a client was imperative for a stock trader. Therefore, a skilled stock trader would try to trick other traders into agreeing to a trade that would benefit them.

Since the late 1980s, all of the world’s main exchanges have gradually transitioned to electronic trading. All significant exchanges, except one, switched to electronic trading between 1987 and 2017. You can still participate in open outcry trading at the Chicago Board of Trade market. At the moment, the main purpose of open outcry trading is to get competitive pricing on intricate futures contract investing techniques. These tactics are usually only available to hedge funds and institutional investors. The trading pit craft is quickly becoming obsolete.

Stock Market After Internet

A significant paradigm shift has been brought about by one of the most disruptive and innovative technologies in history: the Internet. It has significantly changed how people converse, purchase and sell goods, watch movies, and listen to music. It has also had a significant positive impact on investment, particularly among retail investors. Let us look into some differences that came into the trading industry after the  introduction of the internet,

Information Availability

The greatest advantage of the Internet for investing may be the abundance of information available. The ideal course of action for a retail investor before the Internet was to visit their local library, study financial publications, and conduct due diligence on stocks, bonds, and mutual funds, among other companies and assets.

The investor would have to wait until the report was printed and mailed by the firm’s investor relations department, which may be expensive in terms of postage for large financial reports. Alternatively, the investor could contact a corporation directly to request the most recent financial report.

An investor can access an organization’s report as soon as it is uploaded online by using the Securities and Exchange Commission (SEC) website. It takes only a few seconds to download large financial records and perform keyword, topic, or financial statement searches. These same files are also available on the online investor relations website that companies maintain, along with annual reports and other investor presentations presented at conferences.

Additionally, hundreds of websites update and gather financial data that is meant to be understood and analyzed by investors. Individual investors were not as well-off as financial intermediaries like investment managers and brokers. This includes allocating additional funds to get comprehensive financial reports or paying high-end security analysis services. These days, a lot of websites offer financial data for free, while some that offer more specialized data need small annual fees.

Reduced Fee

The reduction of investor costs is the other main advantage that the Internet has brought to investment. Specifically, commission rates paid by regular investors to trade securities have dropped dramatically. These days, it’s not uncommon to come across an internet broker that offers $10 or so for a standard stock trade. Full-service brokers were able to maintain their dominance of the industry and charge what now seem to be outrageous commission rates before discount brokers became widely available. Electronic networks that can transmit trade data via Internet pipelines have helped to trade itself. High-frequency traders (HFT) are frequently the focus of intense debate and are charged with causing stock market volatility that is higher than usual. But these dealers have also been attributed with lowering bid-ask spreads, or the difference in price between purchasing (the bid price) and selling (the asking price) of an asset. The gap used to be considerably broader and gave brokerage firms another chance to take money out of investor pockets and put it in their own, but these days it is down to pennies.

Other Benefits

First, there was transparency, which refers to the capacity of a larger pool of investors to evaluate data and determine for themselves how securities should be priced.

Additionally, it defined differential pricing, which refers to the decline of full-service brokers that imposed exorbitant fees before the industry’s ability to drastically reduce costs through the use of the Internet to conduct financial transactions.

Lastly, the topic of disintermediation was covered, which once more alluded to investors’ ability to transact securities without the assistance of traditional, full-service brokers and advisors.

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Stock Market Before Internet: Conclusion

Before the invention of computers, stock trading was more difficult to enter. The skills of graphing, pit open outcry trading, and reading ticker tapes have long since vanished. But as computer-aided trading has grown in popularity, we are witnessing an increase in sophisticated investing strategies and a quicker cash transfer. In general, the Internet has given people a great deal of power, which has a significant impact on how investors can access financial data. More importantly, it has resulted in significant cost savings for the majority of financial market players.