By David Hochfelder
— Today, more than half of American families own stock, up from about 5 percent at the turn of the 20th century. Thanks to the Internet and smartphones, investors today can place trades instantly from almost anywhere.
But widespread access to stock ownership — for better and for worse — arguably began with another technology, one as revolutionary in its day as the Internet is today.
In 1863, electrician Edward A. Calahan invented the stock ticker, a telegraph receiver capable of printing letters and numbers onto paper tape. At first, almost all ticker customers were brokers and bankers. By around 1880, however, the ticker had spawned a new kind of business, called bucket shops.
Bucket shops were the equivalent of off-track betting parlors where customers placed wagers on the price movements of stocks, offering a kind of vicarious participation in the market. Although bucket shops subscribed to the same ticker service that bankers and brokers did, no securities changed hands and the wagers didn't affect share prices on stock exchanges. Several hundred of these shops were operating around the country by the turn of the 20th century.
Before their rise, the public had typically viewed the stock market from the sidelines, as fascinated but disinterested spectators. Financial failure was something that high-profile speculators suffered, not ordinary people. The bucket shops changed that. After 1880, stories began appearing in newspapers about reckless men who had squandered tens of thousands of dollars, bankrupted themselves, ruined their reputations and destroyed their families.
Although some contemporaries blamed the amateur investors for their own failures, others blamed the big exchanges for fostering a get-rich-quick mentality. In 1903, federal appellate judges prevented the Chicago Board of Trade from cutting off the flow of its quotations to bucket shops. The vast majority of transactions on the Board of Trade were "in all essentials gambling transactions," they ruled. "The Board of Trade does not come with clean hands, nor for a lawful purpose, and for these reasons its prayer for aid must be denied."
Those who believed in the social and economic utility of speculation on the organized exchanges, however, regarded increasing public participation via bucket shops as the real problem.
In 1911, a Columbia University professor, Carl Parker, recommended the "elimination from the field of speculation of those who are unfitted by nature, financial circumstances, or training to engage in it." William C. Van Antwerp of the New York Stock Exchange claimed that the "great evil of speculation" lay with the participation "by uninformed people who cannot afford to lose." And the Council of Grain Exchanges in 1915 pronounced itself "opposed to the assumption of risks by those who are not financially or educationally qualified to speculate."
In reality, ordinary investors couldn't participate on the organized exchanges; no matter how savvy, they were barred by high margins, large lot sizes and brokers unwilling to take small trades. The Wall Street Journal estimated that in 1912 only 60,000 people placed trades on the New York Stock Exchange, and as late as 1916 only 80 out of the exchange's 600 brokers accepted trades of less than 100 shares. Compare this to one bucket-shop chain, Haight & Freese Co., which claimed to have more than 10,000 accounts in 1902 and which accepted "trades" as low as a few dollars.
In 1905, the Supreme Court issued a ruling that gave stock and commodity exchanges ownership of their ticker quotations. Armed with this decision, the exchanges cut off the bucket shops from using their price quotes. By 1915, the bucket shop was dead. Many of the shops' former patrons transferred their business to legitimate brokers who had come to realize that a vast, untapped customer base existed — the investor of modest means. Brokers increasingly welcomed the "odd lot" business that the stock ticker and the bucket shops had helped create, paving the way for today's investor democracy.
David Hochfelder is an assistant professor of history at the University at Albany, State University of New York, and the author of "The Telegraph in America, 1832-1920."