The Origins of the London Stock Exchange

Updated on April 16, 2014
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Stock Exchanges in History

The London Stock Exchange is an English financial institution, it has played an important role in banking, money and investment for hundreds of years. The idea of a ‘stock exchange’ has been thought to have originated with the Ancient Romans where people could own the equivalent of today’s shares in different organisations. Since the Roman times, there have been examples of people buying and selling shares in organisations and businesses, however, in terms of English stock exchanges the important turning point was the formation of the Dutch East India Trading Company.

Financial Developments

In 1602 the Dutch East India Trading Company was formed, it was set up as a ‘joint-stock’ company and had shares that could be traded. It was a crucial moment in investment history and many historians believe it had a great influence on the organisation of English financial institutions. The formation of this trading company paved the way for new developments in England under William III, or ‘William of Orange’. William was keen to fund wars and update the English financial system and during his reign the first government bonds were issued in 1693 and the Bank of England was established. These developments eased the way for the formation of more English ‘joint-stock’ companies and eventually led to the beginnings of the London Stock Exchange.

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The Royal Exchange

The London Stock Exchange was, however, by no means the first English stock exchange. The Royal Exchange was set up by Thomas Gresham and opened by Queen Elizabeth I in 1571. The London Stock Exchange, arguably now the more well-known exchange, did not come into being until over a century later and it began in a rather surprising place. Instead of a bank or in a financial company, the origins of the London Stock Exchange can be found in coffee shops. Stock-brokers in the 17th century were forced to use this rather unlikely location after they were banned from the Royal Exchange for being overly rude and ‘rowdy’. Instead of being able to meet in the Royal Exchange, stock brokers had to make do with finding somewhere else. They made local coffee shops their base and the most popular of these shops for the stock brokers was Jonathan’s Coffee House, located in Change Alley.

The Coffee House Meetings

The meetings of the stock brokers in the coffee shops soon became more organised. A man called John Casting took the initiative and began to list the prices of commodities, provisions and exchange rates, this list was published a few times a week and only for a few days at a time. Using this list, that was known as ‘the Course of the Exchange and other things’, the stock brokers could hold auctions. The auctions that they held only lasted for as long as a candle would burn and became known as ‘by the inch of candle’ auctions. The popularity of these auction soon grew, more stock brokers began to take part and new companies put their stocks and shares up for sale. Due to the burgeoning popularity of these auctions and meetings, a larger location was required and Garraway’s Coffee House was chosen. Historians of this period have claimed that these meetings in the coffee houses were the first evidence of trading marketable securities in London.

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Rules & Regulations

Though the stock brokers were initially forced to find a new location for their meetings when they were banned from the Royal Exchange, there were also benefits of not going through the official Royal Exchange channels. The Royal Exchange was the first stock exchange in England but many brokers continued to frequent the coffee shops instead of the Exchange even after they were allowed to return. 1697 saw the introduction of legislation that put heavy penalties and fines on any brokers that were unlicensed. Only one hundred stock-brokers were actually authorised to trade in the Royal Exchange, which left many stock-brokers unable to carry out their business. Meeting in coffee houses was actually a much more preferable option for the majority of stock-brokers in London, there were fewer harsh restrictions and more options in the coffee shops of Change Alley than there were in the Royal Exchange.

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The London Stock Exchange

Stock brokers continued to visit the coffee shops to buy, sell and trade for many more years and the coffee houses were particularly popular after the Seven Years War. The situation became more formal when 150 stock brokers, who had been meeting at Jonathan’s Coffee House, decided to start a more official organisation. The group of brokers moved into a new building in Sweeting’s Alley in 1773, a building that had a dealing room for making transactions and a coffee room to keep with their roots. It was a popular move and the building became unofficially known as ‘The Stock Exchange’. Initially brokers only had to pay an entrance fee in order to take part but after several cases of fraud, the Stock Exchange introduced annual membership fees in 1801. The introduction of membership fees led the organisation to become a regulated exchange - the London Stock Exchange. Since then the London Stock Exchange has been an important centre for all things related to stocks, shares and investment. The exchange is now the largest in Europe and is the fourth largest in the world.

Investment Trusts

Though the London Stock Exchange was popular with stock-brokers and those with large amounts of funds at their disposal, it was not as easy for smaller investors to take part. The introduction of investment trusts changed this situation as through an investment trust, those with smaller resources could pool them with other investors and make bigger investments. This change meant that shares were more easily accessible to buy and sell for everyone, not just the hugely wealthy. One of the first investment trusts was the Foreign & Colonial Government Trust (F&C) set up in 1868. Other early investment trusts are still running today, such as the Witan Investment Trust, which was founded in 1909 to manage the funds of Lord Farringdon but has since become one of the largest trusts on the Stock Exchange. The London Stock Exchange has come a long way since the 17th century coffee houses and is highly important to the English financial system.

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    • Randy Godwin profile image

      Randy Godwin 

      2 years ago from Southern Georgia

      I seriously doubt you even know you've finally won a HOTD, Izzy. Some of the best writers seldom do as they've given up on this site. I miss you on the clique and hope you're doing well. Please check in and let your friends know how you are. :)

    • RJ Schwartz profile image

      Ralph Schwartz 

      2 years ago from Idaho Falls, Idaho

      Great job in achieving the coveted HOTD status !

    • Kristen Howe profile image

      Kristen Howe 

      2 years ago from Northeast Ohio

      Congrats on HOTD Izzy! This was an interesting hub about the London Stock Exchange. I've learned a lot. Thanks for sharing.

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