Stock brokerage firms have been an established feature in the financial industry for nearly one thousand years. Dealing in debt securities, brokers employ a variety of systems to aid investors with the purchase and sales of stocks and bonds in a variety of markets. The firms have changed over the years, growing to massive organizations that can affect the entire financial sector positively or negatively with their performance. Changing with the times, the early twenty-first century saw a rise of online trading that enabled the average investor to take part in the stock market for the first time.
During the eleventh century, the French began regulating and trading agricultural debts on behalf of the banking community, creating the first brokerage system. In the 1300s, houses began to be set up in major cities like Flanders and Amsterdam in which commodity traders would hold meetings. Soon, Venetian brokers began to trade in government securities, expanding the importance of the firms. In 1602, the Dutch East India Company became the first publicly traded company in which shareholders could own a portion of the business. The stocks improved the size of companies and became the standard bearer for the modern financial system.
The earliest brokerage firms were established in London coffee houses, enabling individuals to purchase stocks from a variety of organizations. They formally founded the London Stock Exchange in 1801 and created regulations and memberships. The system was copied by brokerage firms across the world, most notably on Chestnut Street in Philadelphia. Soon, the U.S. exchange was moved to New York City and various firms like Morgan Stanley and Merrill Lynch were created to assist in the brokering of stocks and securities. The firms limited themselves to researching and trading stocks for investment groups and individuals.
During the 1900s, stock brokerage firms began to move in a direction of market makers. They adopted the policy of quoting both the buying and selling price of a security. This allows a firm to make a profit from establishing the immediate sale and purchase price to an investor. The conflict with brokerage firms setting prices is the concern that insider trading can result from the sharing of information. Regulators have enforced a system called Chinese Walls to prevent communication between different departments within the brokerage company. This has resulted in increased profits and greater interconnection within the financial industry.
The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns, created a system of consolidation. Working with hundreds of billions of dollars, the larger firms began to merge and takeover smaller firms in the last half of the twentieth century. Firms like Smith Barney were acquired by Citigroup and other investment banks, creating massive financial institutions that valued, held, sold, insured, and invested in securities. This conglomeration of the financial sector created an environment of volatility which caused a chain reaction when other firms like Bear Sterns and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were tied together in different companies and resulted in a large economic collapse in late 2008.
A large share of the brokerage firms have moved to an online format. Smaller brokers such as E*Trade, TD Ameritrade, and Charles Schwab have taken control of most individual investors accounts. The added convenience and personal attention paid to the small investor has resulted in a large influx of activity. In addition, the fact that the online resources offer up-to-the-minute pricing and immediate trades, makes their format appealing to the modern user. Discounted commissions have lessened the price of trades, giving access to a wider swath of people and adding liquidity to the market. The role of the stock brokerage firm is ever-changing and proves to be a boon for the future of the financial industry.