The Retirement Corporation of America

The Information Age Comes To Wall Street

THE WALL BETWEEN investment insiders and outsiders didn't just collapse suddenly one day. The wall eroded away—bit by bit—over the past 170 years.

The first investment market in the United States was the forerunner of the New York Stock Exchange, which started trading under a buttonwood tree on Wall Street in 1792. What it amounted to was a handful of New York City merchants meeting informally to trade stocks and government securities. If you weren't part of that small group of merchants, you couldn't trade at all. Eventually, the New York Stock Exchange became a formal institution, and moved indoors to a real trading floor. But only a very small group of men could trade on the exchange floor.

The Beginnings of a Revolution

No one knew it at the time, but the first crack in the wall between insiders and outsiders came with the invention of the telegraph in 1837—and, later, the stock ticker, perfected by Thomas Edison in 1869. Until those devices came along, you had to be there—on the exchange floor—to trade stocks. But the telegraph, and the stock ticker threw the stock market wide open. Now, you could get stock quotes and place orders from anywhere that a telegraph line could reach.

Next step was the beginning of government regulation of the investments markets. The telegraph opened the door to outsiders investing in the stock market. Government regulation of the market made it safer for the average investor to come in.

Regulation followed the worst episode in stock market history—the Stock Market Crash of 1929. Out of the Crash, and the Great Depression that followed, came:

* Deposit insurance to safeguard our savings.
* Securities regulation making financial information public and outlawing market fraud.
* Regulation that made mutual funds into investment vehicles for the general public.

Information—The Last Investment Frontier

Still, one more breakthrough was needed to break the hold of the insiders and really open up the stock market to outsiders. Average investors had to have the same access to information that had set the insiders apart.

And that breakthrough was a long time in coming. Full disclosure of all relevant investment information became the law of the land through the Securities Act of 1933. That meant that issuers of stock had to reveal all the important information about that stock—how much the company earned, what businesses it was in, how much its executives earned.

Mostly, though, that information was hard for the average investor to read—and harder to interpret. It was written in legalize—and an awful lot about the stock was left unsaid. Insiders still controlled the information—only sharing a tiny bit of it with investors. Investors had to dig for anything beyond what was legally required for companies to report.

The Information Revolution Changes the Landscape

Lots of things happened in a relatively short period of time to change the world for individual investors.

1. Until 1975, brokerage commission rates were fixed. No matter what broker you went to, you paid the same commission to buy stock. That ended in 1975, with what was called the "big bang," which ended fixed stock market commission rates and introduced negotiated rates. Negotiated commissions brought discount brokers and price competition for your business. Once brokers had to compete for your business, information became a prime selling tool—meaning more knowledge available to you.
2.  The age of personal computers made it possible to deliver investment information right to you. By the end of the 1980s, there were stock-screening programs for home computers—giving everyone investment tools that once only a few possessed.
3. The Internet made it complete. It provided individuals—sitting at home—with the same high-quality, up-to-the-minute investment information that once only the professionals could get.

The easier it became for individuals to compete with the Wall Street insiders, the more individuals flocked into the markets. That further increased the demand for the sort of financial information that once belonged only to the insiders. And that fed an explosion in the supply of information directed at individual investors.

1. Older publications—such as The Wall Street Journal and Business Week—began targeting more of their investment coverage at individual investors.
2. New publications appeared, to deliver investment information to the general public: Money, SmartMoney, Worth, Individual Investor, Mutual Fund magazine, and more.
3. More investment newsletters appeared, aimed at individual investors.
4. As the mutual fund industry boomed, more fund companies began developing products to educate individuals and teach them more investment skills.

The boom in tax-sheltered retirement plans—such as 401(k) plans and Individual Retirement Accounts—turned more individuals into investors. That boom, in turn, further increased the demand for quality investment information—thereby further increasing the supply.

Now the information revolution is complete. Markets are more accessible, safer and cheaper for all investors. The knowledge explosion gives all investors nearly equal access to all relevant investment wisdom. And the Internet ends the private club forever—empowering individual investors as never before.