“Watching the tape or watching the wheel –  what is the difference morally?”

Visualizing History

Stock Market Democratization (1900 – 1928)

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The Diffusion of Stock Ownership in the US (1930)

Sunday Reads

SEC Chairman’s Testimony

Gary Gensler, the new Securities and Exchange Commission Chairman, appeared before the House Financial Services Committee this week to discuss a range of critical issues facing modern markets. In today’s post, however, we are going to focus on two particular excerpts from Gensler’s testimony: Gamification & Social Media.

Gensler dedicated a standalone section of his testimony to discussing “Gamification & User Experience”:

Mobile apps have done a lot to expand access to capital markets, making it easy for investors to sign up, start trading, get wealth management advice, and learn about investing. These apps use a host of features that have come to be familiar in our increasingly online world — features such as gamification, behavioral prompts, predictive analytics, and differential marketing.

There isn’t a settled definition of gamification, but broadly, it refers to the use of game-like features — such as points, rewards, leaderboards, bonuses, and competitions — to increase customer engagement.

Beyond gamification, there are also behavioral prompts that encourage users to engage more with an app, much like push notifications we receive on breaking news stories. Other features, such as social trading or copy trading, allow customers to see what others are buying and selling and make trades influenced by that information…

Many of these features encourage investors to trade more. Some academic studies suggest more active trading or even day trading results in lower returns for the average trader…

In addition, many of our regulations were largely written before these recent technologies and communication practices became prevalent. I think we need to evaluate our rules, and we may find that we need to freshen up our rule set. If we don’t address this now, the investing public — those saving for their futures, retirements, and education — may shoulder a burden later.

Equally important was Chairman Gensler’s thoughts on social media:

This winter’s events also highlighted the rapidly changing face of social media and its intersection with our capital markets. Online forums can serve as a real community, expanding access and participation. On Reddit, individuals gather in online communities to discuss a variety of topics anonymously, including investing; the subreddit r/wallstreetbets has about 10 million members. A lot of people follow capital markets through various online communities — not only on Reddit, but also on other social media platforms and within trading apps.

New communications channels have long brought opportunities and challenges for markets. Today’s social media tools have far greater reach, scale, and anonymity than previous technologies. This raises a potential issue: the possibility that wrongdoers will attempt to use these powerful forums to hype certain stocks or manipulate markets.

To be clear, I’m not concerned about regular investors exercising their free speech online. I am more concerned about bad actors potentially taking advantage of influential platforms.

Furthermore, it’s no longer just retail investors or even humans who are following these online conversations, but institutional investors and their algorithms. Developments in machine learning, data analytics, and natural language processing have allowed sophisticated investors to monitor various forms of public communication to see relationships between words and prices.

This practice, called sentiment analysis, has picked up steam in the last couple of years, and it has grown to include online communities. With that comes the risk that nefarious actors may try to send signals to manipulate the market. This is an area for which we will continue to deepen our understanding, resources, and capabilities.”

The Great Game of Speculation

Wow, so much to unpack. While I certainly do not mean to imply that this is not an important issue to address and resolve, it is interesting to note that the concept of financial markets as a “game” stretches back to the very inception of markets itself.

In the first ever behavioral finance book published in 1688 (pictured above), the author refers to investing as a “game” on several occasions. I’ve provided two of these excerpts below:

This business of mine [investing] is a mysterious affair, and that, even as it was the most fair and noble in all of Europe, so it was also the falsest and most infamous business in the world.

The truth of this paradox becomes comprehensible, when one appreciates that this business has necessarily been converted into a game, and merchants [concerned in it] have become speculators.

The Exchange business is comparable to a game. Some of the players behave like princes and combine strength with tenderness and amiability with intelligence, but there are some participants who lose their reputation and others who lack devotion to their business even before the play begins.

– Confusion de Confusiones (1688)

In 1874 there were hundreds of references to markets as a “game” in financial books at the time:

“It must be so obvious to every reflecting mind, that so dangerous a game as stock Exchange speculation… if it be only partly to satisfy a craving for some sort of excitement, is a very unwholesome pastime.”

Written across many centuries, these quotes illustrate the fact that investing and financial markets have been thought of as a game since time immemorial. The question, therefore, should not be how do we stop markets being “gamified”, but rather how do we ensure that the game is fairand that all participants know how to play.

I’ll end this section with one of my favorite quotes from an 1864 book on the market as a “game”:

“This fresh phase in the great game of speculation terminated in 1837, the lessons of the past were evidently altogether forgotten…”

Social Media & Herding

Before getting in to today’s incredible articles, I want to focus on a second key section of Chairman Gensler’s written testimony. In particular, I thought that this excerpt was interesting as it highlighted a problem for investors stretching back centuries:

New communications channels have long brought opportunities and challenges for markets. Today’s social media tools have far greater reach, scale, and anonymity than previous technologies. This raises a potential issue: the possibility that wrongdoers will attempt to use these powerful forums to hype certain stocks or manipulate markets.

While this seems obvious on its face, the deeper and more fascinating issue underlying this issue is the fact that throughout history investors have not become better-informed about financial markets even when technological innovations equip investors with more information, data and resources to make good decisions. The amount of data and information available on the modern investor’s smartphone is truly mind blowing. Armed with this plethora of information and data, in addition to an increasingly wide set of assets to invest in, one would think that there would be less herding behavior. Why just invest in the same “meme” stocks as everyone else when you have so much insight on thousands of other investments?

Oh, right, human nature.

See, despite technological innovations producing more information and data than ever, no amount of innovation can override our human nature and tendencies to follow the herd. This clip from my history course shows how even back in 1694, when investors had roughly 100 stocks to choose from on the London Stock Exchange, they herded into the 8 most popular stocks covered in a widely-read financial newsletter.

The larger problem, however, is when bad actors take advantage of this behavioral bias and launch fraudulent scams. As the article on the NYSE in today’s post discusses, a great example of this comes from John “Jake the Barber” Factor in the 1920s:

 “For those involved in the sharepushing game, this sense of confusion amongst investors over which newspapers to trust was certainly something that they sought to exploit for their own advantage. Perhaps the most skilled proponent in this respect was the shadowy figure of Jacob Factor (a.k.a. ‘Jake the Barber’ — brother of the famous cosmetics magnet Max Factor and long-time associate of Arnold Rothstein and the New York mafia), who is estimated to have swindled the British public out of well over £2 million during the 1920s through a series of well-orchestrated sharepushing scams.

Central to Factor’s illicit schemes was a small publishing firm called the Broad Street Press Company (owned by Factor), which published a series of weekly financial newspapers with grandiose-sounding titles such as The Stock Exchange Observer, City News, The Financial Observer, and Finance. Unlike standard financial newspapers, these publications were generally not available to buy in the shops. Instead, free sample copies were distributed by post to specific regions/districts of the country that Factor and his associates felt would be particularly receptive to his message. Those recipients who wanted to receive more copies could then subscribe for three months for a cost of five shillings.”

The article goes on to point out that increased information and choices actually leads to more bad decisions and herding as investors become too overwhelmed by the deluge of information. Essentially, investors find themselves stuck in the paradox of choice.

Alright, after that lengthy intro, let’s dive in!

Strangling Speculation: The Effect of the 1903 Viennese Futures Trading Ban

Speculators Outside the Vienna Stock Exchange

Why This is Relevant:

While there can obviously be a certain limit at which speculation no longer serves society for the better, history shows that government’s attempts to curb speculation have often led to unintended negative consequences. This paper assesses some of those unforeseen affects following the 1903 Viennese Futures Trading Ban.


“How does futures trading affect the volatility of spot prices? This paper uses a unique early-twentieth century setting to test what happens when futures trading no longer exists. In 1903, futures trading in the Viennese grain market was banned. The permanency of this ban makes it ideal for studying the prohibition’s effect on volatility. Prices from Budapest, a market operating under similar conditions but unaffected by the ban, are used as a control. This paper finds increased spot price volatility and lower pricing accuracy because the information-transmission and risk-allocation functions of the futures market were no longer maintained.”

Visualizing History:

Notable Quote:

“The consequences were to be more severe than expected by contemporaries: the Viennese grain market lost attractiveness at both the local and international level. The socio-political strings pulled to carry through this permanent prohibition of futures trading were strongly linked to populism and a fear of “undue”, uncontrollable speculation. Strangling speculation, however, may have come at too high a cost: the market was abandoned and the supply of grain severely affected.”

A Shackled Revolution? The Bubble Act and Financial Regulation in 18th Century England

Why This is Relevant:

Whether it be Robinhood and other brokerage firm’s decision earlier in the year to curb speculation on one side of the ledger by halting purchase orders on popular “meme” stocks, or the calls for short-selling bans seemingly every time the market crashes…. there are almost always attempts to curb speculation when things run too hot.

SEC Chairman Gary Gensler’s statements to Congress about apps that “gamify” investing (i.e. Robinhood) provides good reason to review another interesting example from financial history of trades being halted in the “meme” stocks of 1720.

To provide an even better description of what happened, here is a free lecture clip from my financial history course in which South Sea Bubble expert Professor William Goetzmann of Yale University explains the act / implications:

“In 1720 there was a market for all sorts of new ventures, and some of these were crazy and some had possibilities. In 1720 the Bubble Act was enacted by Parliament which basically said any trades anybody does in these companies are null and void and they are not legal trades. This killed the whole venture capital aspect of the 1720 bubble.

So, not a perfect parallel to Robinhood shutting down one side of a trade, but this is another example of trading suddenly being halted in the popular speculative stocks in a given time period.


“Revisionist estimates of growth rates during the British industrial revolution, though largely successful in presenting a more modest picture of Britain’s ‘take-off’ prior to the 1830s, have also posed fresh analytical difficulties for champions of the new economic history. If 18th-century Britain was witness to a diffuse explosion of ‘useful knowledge,’ why did aggregate growth rates or industrial output growth rates not more closely shadow the pace of technological change? In effort to explain this paradox, Peter Temin and Hans-Joachim Voth have claimed that a few key institutional restrictions on financial markets – namely the Bubble Act, and tightening of usury laws in 1714 – served to amplify the crowding out impact of government borrowing. Against this vision, the present paper contends that the adverse impact of financial regulation and state borrowing in 18th century Britain has been greatly overstated. To this end, the paper first briefly outlines the historical context in which the Bubble Act emerged, before turning to survey the existing diversity of perspectives on the Act’s lasting impact.

It is then argued that there is little evidence to support the view that the Bubble Act significantly restricted firms’ access to capital. Following this, it is suggested that the “crowding out” model, theoretical shortcomings aside, is largely inapplicable to 18th century Britain. The savings-constrained vision of British capital markets significantly downplays the extent to which the Bank of England, though founded as an institution to manage the public debt, provided the entire financial system with liquidity in the 18th century.”

Visualizing History:

Notable Quote:

“That the Bubble Act was passed at the behest of the South Sea Company does not, of course, automatically imply that it had no lasting effects on the process of industrialization. Though unchartered corporate partnerships developed throughout the hundred-odd year period that the Act remained law, partners in these companies did not enjoy limited liability, possibly limiting the number of investors that could be attracted to industrial ventures. Indeed, Temin and Voth are not alone in elements of this supposition, despite being more forceful in their conclusions. Alfred Marshall10 (1919), and Armand DuBois (1938) long ago suggested that the more widespread adoption of the joint-stock form was markedly constrained by the Act.”


The “Free and Open” “People’s Market”: Public Relations at the New York Stock Exchange (1913-1929)

Why This is Relevant:

It is always interesting when the interpretation of a company’s marketing quickly gets inverted following a bout of controversy. Take, for example, Robinhood. As every reader surely knows already, the company’s name references the 700 years-old story of Robin Hood, an outlaw from Nottinghamshire that steals from the rich, and gives to the poor. For Robinhood the company, their name, mission and marketing all revolved around the idea of bringing commission free-trading to the masses. This was and is a big deal, as legacy firms did not commit to commission free-trading until Fall of 2019.

Yet, after all of the controversy swirling around Robinhood for the last twelve months related to halting buy orders on certain “meme stocks”, and their relationship with Citadel securities. The company’s name suddenly made it an easy target as the public’s view of Robinhood turned negative. It did not take long for the King of Meme Stocks to point out the irony:

Well, it turns out that the New York Stock Exchange had somewhat of a similar problem back in the early 1900s. Representative Arsene Pujo’s famous report to congress in 1913 detailed the darker side of Wall Street, and highlighted rampant manipulation and collusion among financial institutions. These “pools” of capital would manipulate prices to encourage “outsiders” to buy at high prices, before then re-manipulating prices to force outsiders to sell low.

Congress and other government entities leaders began heavily considering the prospect of regulating the NYSE as a “federally incorporated” entity, which the NYSE strongly opposed / feared as its members enjoyed the autonomy. The government’s argument revolved around the notion that the NYSE served a “public” interest. The NYSE governors, however, flipped this argument on its head and used it as their own marketing campaign to argue that the government should stay out of regulating the exchange because it was it’s own form of public democracy / “public” interest.

“Appropriating the sobriquet of Louis Brandeis, the “people’s lawyer,” the “people’s market” met critics on their chosen field of public opinion. Exchange publicists transformed criticisms into a legitimizing ideology. They reframed the stock market as a direct democracy, where investors’ trading choices on member-regulated exchanges funded and legitimated corporate capitalism. According to the Exchange, “‘the people” must be allowed to trade securities based on their own judgment, without paternalistic and inefficient regulatory handholding. NYSE listing requirements and self-policing via committees of member-governors already prevented manipulation in listed securities, according to the Exchange’s defenders.”

Robinhood tries to curry favor by proclaiming to be the defender of small investors, and it appears that the NYSE took a similar route in the early 20th century.


“In 1913, the New York Stock Exchange (NYSE) stumbled into public relations to counteract threats of regulation in ‘the public interest.’ Transforming criticism into a legitimizing ideology, publicists conceptualized the stock market as a direct democracy, where investors’ trading choices on member-regulated exchanges funded and legitimated corporate capitalism. While the NYSE accepted a public role rhetorically, it labored to ensure that no regulatory oversight would enforce public accountability. Its Committee on Library initially pursued a reactive strategy, including publication, image control, on-site library, press management, bucket shop elimination, and behind-the-scenes political pressure.

World War One Liberty Loan and investor protection campaigns taught Exchange publicists the value of pre-emption and cooperation, which culminated in the development of Better Business Bureau investor sections. External competition and internal rivalries precipitated strategic shifts in the 1920s. Public outcry after member Allan A. Ryan’s corner in Stutz Motor Co. provided the final catalyst. After 1921, the NYSE’s new Committee on Publicity transformed defensive publicity into proactive public relations, adding visits and hosting, speaking tours, movies, and academic programs. From 1913 to the Crash of 1929, publicists defined the NYSE as the ‘free and open’ ‘people’s market’ first to build a community of political sympathizers, then to expand NYSE members’ retail markets.”

Visualizing History:

Notable Quote:

“To confront progressive inroads, NYSE publicists selectively drew upon academic economic discourse and populist political idioms to craft a particular ideology of investment democratization. It promised to dissolve economic and political boundaries separating producer from consumer, labor from capital, and big business from the small proprietor. It naturalized financial markets as adhering to common-sense economic laws. Developing concurrently with the consumerist imaginings of the good life examined by William Leach, as well as the corporate PR efforts narrated by Roland Marchand, shareholder democracy served as a lynchpin argument in a broader cultural and political project to legitimate corporate capitalism.”


A Nation of Investors or a Procession of Fools?

Why This is Relevant:

I think this is one of the most interesting articles I’ve read in a while, so definitely take the time to go through. Using Interwar Britain as an example, the author’s highlight the fact that despite increased access to information and a broader set of investments to choose from, British investors were no smarter or more informed about financial markets. They still herded into the same few stocks, and fell victim to fraud at the same rate as their predecessors armed with even less information. This line really packs a punch:

“Ultimately, what it suggests is that, whilst the early-twentieth-century British investor may well have had far more potential sources of advice and information open to them then their nineteenth-century forebears, this did not necessarily mean that they were any better informed about the workings of the British securities market.”


“In recent years, there has been a notable increase in the amount of scholarship on the history of shareholding in Britain. One area that still remains relatively unexplored, however, is the problematic issue of how British investors actually went about the process of choosing their respective investments. The purpose of this article is to make a start at redressing this gap by using the sharepushing crime wave that swept across Britain between 1900 and 1939 as a prism through which to evaluate the behavior of Britain’s shareholding population at this time.

Ultimately, what it suggests is that, whilst the early-twentieth-century British investor may well have had far more potential sources of advice and information open to them then their nineteenth-century forebears, this did not necessarily mean that they were any better informed about the workings of the British securities market.”

Visualizing History:

Mafia Don & Con Artist: John “Jake the Barber” Factor

Notable Quote:

For some investors, the presence of more potential sources of information and investment advice seems only to have increased their sense of confusion about which source to turn to for accurate information. As a result, they not only found it hard to navigate around the expanding informational environment of the interwar period, they also became far more susceptible to the false promises and misleading advice put forward by sharepushers like Jacob Factor in bogus publications such as Finance or The City News.

In a similar vein, although the interwar British investor may have had more potential conduits through which to invest in the securities market than his or her predecessors, this did not necessarily mean that they were better able to distinguish between a trustworthy intermediary and an untrustworthy one. Indeed, as the preceding paragraphs of this article have shown, there were a number of investors who mistakenly entrusted their savings to individuals whose sole intention was to rob them of their money. Whilst such decisions can be partly be attributed to the difficulties that many small investors still faced in terms of gaining direct access to a licensed London Stock Exchange broker, they also appear to reflect a wider lack of understanding amongst some investors about how the stock market in Britain operated and which agents to trust.”


Why This is Relevant:

Referring back again to the SEC Chairman’s congressional appearance this week, Chairman Gensler stated that the SEC would be scrutinizing the relationship between social media and online trading following the wild swings in stocks like GameStop this year.

In general, the market is seemingly moved more by news headlines than ever before. This paper dives into the relationship between media coverage and stock returns on the London Stock Exchange between 1828 – 1870. Was there a difference in returns for stocks that were covered in the news and those that weren’t?


“News media plays an important role in modern financial markets. In this paper, we analyze the role played by the news media in an historical financial market. Using The Times’s coverage of companies listed on the London stock market between 1825 and 1870, we examine the determinants of media coverage in this era and whether media coverage affected returns. Our main finding is that a media effect mainly manifests itself after the mid-1840s and that the introduction of arm’s-length ownership along with markedly increased market participation was the main reason for the emergence of this media effect.”

Visualizing History:

Notable Quote:

“The main finding of this paper is that media coverage of stocks grows substantially after the emergence of arm’s-length and diffuse ownership in the UK from the mid1840s onwards. We argue that the media were playing an important informational role for the new cadre of middle-class investors which emerged at this time and that the additional information generated by the press increased investor recognition for covered stocks. Consistent with this, after the mid-1840s, we find that companies not covered by the media had higher returns relative to media companies.

In other words, as in modern developed country stock markets, there was a media effect in the nineteenth-century London market, but this only emerged after ownership became arm’s-length and diffuse.