A Nation of Investors

Market historian and former banker Charles Geisst on the biggest events on Wall Street of the last 30 years

It is often said these days that we are a nation of investors or, as some pundits say, a “shareholder nation.” But in the mid-1970s-1976, to be exact, the year this magazine was launched — you would have been laughed at for uttering such a fantastic prediction. It's true that the NASDAQ automated quotation system, a boon to the small investor, was already up and running. But business was so slack in the mid-1970s on Wall Street that on May 1, 1975, to stimulate trading, the SEC abolished fixed-minimum commissions, a tradition that dated all the way back to the original 18th century Buttonwood Agreement. Brokers were now free to charge whatever they chose — or, rather, whatever investors were willing to pay.

The small investor revolution really only began in earnest on that first day of May in 1975. From our vantage point today, we can see that it truly was a revolution, making retail investors a significant force on Wall Street. By 2000, 30 percent of Americans had a brokerage account. Directly or indirectly, 243 million owned stocks. Only 10 years before, just 153 million Americans owned stocks — and that was a record at the time.

To attract the growing retail crowd, discount brokers like Charles Schwab appeared, offering lower commissions while providing plain-vanilla services (stock research usually was not included, and the individual often did not have a permanent broker). The results were quickly felt. By the end of 1977, after-tax profits from commissions fell to $188 million in 1977 from $415 million in 1975. On the other hand, exchange volume jumped by 13 percent in two years. As the discounters began to grow and capture business from the full-service wirehouses, commissions began to fall further and full-service brokers responded by offering new products like money-market accounts.

Party Pooper

Unfortunately, oil prices and rising inflation spoiled the party, and stocks couldn't seem to bust out. But then came along Paul Volcker, who became Federal Reserve chairman in October 1979. Volcker is admired today, but when he started his fight to rein in inflation, Wall Street was not prepared. The Fed orchestrated a series of interest rate hikes that saw the prime rate soar over 20 percent and T-bill rates rise to 14 percent. The stock market sank and stayed depressed until President Reagan introduced a new tax bill in 1982 that gave the markets heart. A bull market began in 1983 and continued climbing until, of course, October 19, 1987, when the Dow Jones Industrial Average fell by about 22 percent — the largest one-day percentage drop since 1929.

A Wall Street recession followed the market collapse, lasting two years. But it was offset in that period by the greatest boon brokers had seen in years — the introduction of the 401(k) plan. Investors were now able to direct their retirement savings by choosing their own investments. The effect was dramatic.

The role of the financial advisor took on new and important significance. And as assets in 401(k)s and mutual funds grew, the number of financial advisors increased along with it, demonstrating that investors wanted more than just a good stock pick or cheap commissions. The increase in wealth during the bull market underlined the need for advisors who could tell investors how to preserve it as well as make it grow.

Corruption

Despite all of the positive developments in the stock markets from 1975 on, the matter of market integrity continued to rear its ugly head from time to time. The very public display prosecutors made when rounding up suspected insider traders during the Boesky and Milken affairs in the late 1980s left many investors with the uncomfortable feeling that the Street might, in fact, be rigged after all.

But illegal insider trading was not the only problem. For years, prices quoted by specialists and market makers, both on the exchanges and on NASDAQ, were questioned by institutional investors. Sophisticated investors knew that the size of NASDAQ spreads and reporting prices in fractions were costing them millions. If they were not addressed, the integrity of the markets would remain under a cloud. The drive to report prices in decimals began about the same time that studies began to show that NASDAQ spreads were, in some cases, obscenely wide. The pricing controversy ended with 30 NASDAQ market makers paying over $900 million in fines; in 2001, decimal pricing began.

Another less obvious reason for the change was the Internet: Suddenly, retail investors could bypass humans and trade securities even more cheaply on their own. And it would make no sense to quote stocks online in fractions. The era of the retail daytrader, with mouse in hand, arrived and had a significant impact on the markets.

It's hard to understate the lingering impact of the Enron and WorldCom scandals. So much has been written on the subject that there is no need to dissect the details again. But the scandals underscored something that institutional investors had known for years: The quality of sell-side research was highly suspect. Say what you like about New York Attorney General Eliot Spitzer and the much-maligned Sarbanes-Oxley law: Both gave the disillusioned public some new confidence that Wall Street and corporate boardrooms would be cleaner places. For a while.

The Most Important Events of the Last 30 Years (After “May Day” 1975)

1970s:

  • Change in monetary policy, down markets

1980s

  • Introduction of 401(k) plans
  • Market crash
  • Milken and Boesky, public display of offenders

1990s

  • NASDAQ pricing scandal
  • Rapid growth of 401(k) plans
  • Internet trading

2000s

  • Dot-com collapse
  • Decimalization on exchanges
  • Wall Street research under a cloud as a result of WorldCom, Enron, etc.
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