How a Market Is Run
In January 1920 America banned alcohol. And Giuseppe Masseria, a small-time crook with two convictions for theft who lived in a room over a bar, woke up rich. Without lifting a finger.
On his turf in Lower Manhattan, Dash writes, there happened by pure chance to be a stretch of pavement on Kenmare Street known as the Curb Exchange. Without any sign over it, liquor dealers from all over New York gathered there. Critchley adds that the wholesalers met there to match supply with demand. Whoever held the pavement skimmed a little bit off every bottle sold in the city. A few months went by, and Masseria was already heading a powerful syndicate. And by 1921 he was second only to the “boss of bosses” himself.
The Curb Exchange on Kenmare Street didn’t last long. Can you guess why? In 1922 people started shooting around it, and the police stepped in.
A Stock Exchange on the Pavement
And a few blocks away, on Broad Street, people traded on another street exchange. A perfectly legal one. For decades brokers had bought and sold shares right there on the pavement, in the open air, in all weathers. The clerks sat up above, in the office windows, and signalled orders to the traders by hand, and the traders wore bright caps and jackets so they could be told apart. It was called the curb market.
In June 1921, just as the trade on Kenmare Street was warming up, the legal street traders moved indoors—into a building put up for them on Trinity Place. Eight years later their market became the New York Curb Exchange. A little over thirty years later, the American Stock Exchange.
Two pavements. One city, one year. Both matched supply with demand. One went indoors, set up rules, membership and a clearing house, and lived for more than eighty years. The other was broken up after a shoot-out. Was it the goods? The people? No. What decided it all was the machinery that stands behind the market.
What Holds a Market Up
Think a market is just where a seller meets a buyer? Not only. Behind it stands a whole operation. And most of it nobody sees.
You need rules. Who’s allowed to trade? How do you announce the price a deal went through at? What happens if somebody cheats? In 1792 twenty-four New York brokers, so the story goes, gathered under a buttonwood tree on Wall Street and signed a short agreement: to trade among themselves and charge clients the same commission, a quarter of a per cent. Out of that scrap of paper grew the New York Stock Exchange.
You need clearing: a clearing house works out who owes whom how much and guarantees that the money and the securities really will change hands. You need a register, to record who owns each share. You need a depository, to hold those shares. You need communications, so everyone finds out prices quickly. In 1867 the stock ticker appeared in New York—a telegraph machine that printed quotations on a narrow paper tape. Two years later Edison made his own, a faster one. The tape didn’t go out of date until the sixties of the twentieth century.
And in 1968 the market nearly suffocated under paper. Over three years, trading on the New York Stock Exchange roughly tripled, and every trade was still settled with paper certificates carried around by couriers. The back offices couldn’t cope. Certificates got lost. People quit. For a while the exchange closed on Wednesdays so the offices could dig themselves out. The way out was found in 1973: a central depository was set up, and the shares stopped travelling. All the securities were registered to a single nominee holder, and who really owns them shows up in electronic records. Do you own American shares? On paper they’re most likely registered to that holder too, not to you. And that’s normal. Almost all big markets work that way.
A Clearing House for Fakes
We had our own clearing houses too. In 1909 the Secret Service was tracking the Morello gang, which printed counterfeit two- and five-dollar bills. And the detectives, Critchley writes, switched their attention to Domenico Milone’s wholesale store. It was called the “clearing house” for the fakes the gang printed in the village of Highland. Everyone knew his job: one engraved, another printed, a third distributed, and the store brought it all together.
How was it different from the legal kind? In one way. The legal kind guarantees the deal. The illegal kind guarantees the evidence. Whatever has been written down and gathered in one place will sooner or later end up in the hands of the investigators.
The Price of Admission
And there’s one more thing that holds up every market. You have to pay to get in.
Dash describes how trusts ran the New York markets at the start of the century. The poultry trust—twenty-odd wholesalers who had banded together in a cartel—took ten dollars from every commission agent for every railway wagon of poultry brought into the city. It dealt only with those who belonged to the union. Anyone who complained got six per cent added to all his purchases. Even if the goods were worthless. And the Manhattan laundry market was held by three big corporations, which agreed to charge no less than a dollar and a half a bundle.
A legal exchange charges for entry too: want a seat, a membership, a licence—pay up, and hand over the commission besides. The question is what you’re being sold for that money. The exchange sells rules, keeps an eye on the settlement and doesn’t let you get cheated. The trust promises to leave you alone. And that’s all.
When I told this to Don Vincenzo, he laughed till he cried at the dollar and a half a bundle. He too had once been invited to join an “association of laundry owners” where they agreed a minimum price. He went to one meeting, drank a coffee and never came back. “If the association sets the price,” he said, “then what does the client need me for? He’ll go to whoever’s nearest.” Three years later the association fell apart: everyone was quietly cutting prices. And the Don sold at his own price to those who came to him, because his laundry washed well. If it’s an agreement holding the price up, not the goods, you can’t call it a market. It’s a queue for whoever bends the easiest.