"We the subscribers, brokers for the purchase and sale of public stock, do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day for any person whatsoever, any kind of public stock, at a less rate than one quarter per cent commission on the specie value and that we will give a preference to each other in our negotiations."
Participants in New York's loosely organized outdoor market had long wished to systematize their actions. Amid the tumult of the 1792 market crash, twenty-four of them met—under a buttonwood tree at 68 Wall Street, as legend has it—and pledged to deal primarily among themselves and to honor minimum commission rates.2
The brokers soon moved into the nearby Tontine Coffee House to socialize and to trade. Some retained a reputation for being little more than gamblers, but a maturing market for government debt convinced the majority to put actions on a more formal footing.
On March 8, 1817, a group that included four of the signers of the Buttonwood Agreement created an organization called the "New York Stock and Exchange Board," informally known as the "Board of Brokers." The Board of Brokers patterned their constitution on that of the Philadelphia Exchange with seventeen rules that governed trading, provided for admission and discipline of members, and sought to tighten their control over the industry.3
The original exchange followed a simple auction format; the president sat before the members and "called the stocks." The rules required members to attend all auction sessions, provided for one-day delivery of securities, and forbade "fictitious trades" such as matched orders or wash sales commonly used to imitate genuine trading activity and stimulate outside investment. Penalties imposed for violations of these rules ranged from fines to suspension and expulsion.4
It was hoped that, however, that admission standards would make sanctions unnecessary. From the start, members had to have practiced in the city for at least a year. In 1820, initiation fees were imposed to provide evidence that a trader could make good on losses. All new members were elected by the full membership, with one blackball sufficient to keep a questionable applicant out. The Board of Brokers also sought some control over the industry at large, screening listed securities and identifying unscrupulous traders in a "black book."5
Members enjoyed the advantages of participating in an industry cartel that continued to regulate commission rates. The 1817 constitution set the same formula for commission rates as the Buttonwood Agreement had: one-fourth of one percent of transaction value. It also allowed members to split fees with other members, although not with outsiders.6 In addition, members controlled market information in order to retain superior knowledge of prices. A month after the founding, members passed a rule fining those "leaving the room during the calling of the stocks." Other early rules forbade visitors, communications with the outside, and even publication of prices. After members realized that the exchange could exert influence over the securities markets at large by carefully disseminating rather than completely restricting price information, prices were published on a weekly and then a daily basis.
(2.) The role of the Buttonwood Agreement as precursor to the New York Stock Exchange has been challenged. Peter Eisenstadt, "How the Buttonwood Tree Grew: The Making of a New York Stock Exchange Legend," Prospects 19 (1994): 75-98.
(3.) Robert Sobel, The Big Board: A History of the New York Stock Market (New York, 1965), 21-30; February 25, 1817 Transcript of Constitution of the New York Stock & Exchange Board.
(4.) Sobel, The Big Board, 30; J. Edward Meeker, The Work of the Stock Exchange (New York, 1922), 64.
(5.) Banner, Anglo-American Securities Regulation, 254-64.
(6.) February 25, 1817 Transcript of Constitution of the New York Stock & Exchange Board
