The New York Stock Exchange closed its doors at the genesis of WWI, when officials suggested that the threat of Europe’s liquidation of US securities warranted a trading halt. Most people would disregard the shutdown and chalk it up as the prudent response to the beginning of World War I, but no war, including the Civil War and the September 11th attack on the World Trade Center less than one-half mile from the NYSE, has unplugged the exchange for more than 10 days. Ultimately, this would result in the longest circuit-breaker in the 222-year history of American financial markets and caused the exchange to close from July 31, 1914 to December 12, 1914. President Wilson succeeded in keeping the exchange closed, however a substitute market emerged on New Street, a little roadway behind the NYSE.
From the start of the century to 1914 was the worst period for stock returns in the 20th century, preceding the Great Depression. The Dow started slipping even before the murmurs that led to war, but it puked almost 20% from January 2, 1913, through July 30, 1914. The big drop occurred in the last week of July.
Efforts to sidestep the trading ban in 1914 began a day after the NYSE’s closure, and a thriving substitute market emerged within a week. On January 7, 1915, the Wall Street Journal wrote, “The quotations that were made in New Street were no more legitimate than the quotations that were made in Belgium, where people with securities in their pockets, and fleeing from war and starvation, sold them for cash at thirty and forty percent discount to some itinerant peddler.”
The Board of the NYSE voted to postpone trading 15 minutes before the scheduled 10 a.m. opening bell on Friday, July 31, 1914. Later that same day, president of the Exchange, Henry Noble, established the Committee of Five to supervise all NYSE operations during the suspension. The final passing of the Committee of Five came in a vote by the Board on August 3. That same day, the New York Times headlined, “Emergency Stock Market: Pending the resumption of trading on the New York Stock Exchange . . . we are prepared to buy and sell all classes of securities.” It was signed: “New York Curb.”
Investors made a fuss as they expected a prolonged suspension after the government indicated that the exchange would remain closed for the foreseeable future. On August 1, the New York Times reported: “The closing of the New York Stock Exchange was approved at the White House and the Treasury Department.” The committee successfully coaxed the press into resisting the regular publication of New Street prices. But the most important step to counter the New Street market occurred on August 12, when the committee authorized trading through the NYSE Clearing House at prices “no less than the closing prices of Thursday, July 30, 1914.”
Records of the Committee of Five disclosed a cluster of news clippings from the Morning Telegraph, ordinarily a “theater and turf paper,” giving price quotes from the New Street market. Although the NYSE successfully muzzled the New York Times, the Wall Street Journal and the Commercial and Financial Chronicle, it could not silence the Morning Telegraph, which wasn’t dependent on Wall Street for regular news. The clashing newspaper’s differed over the quality of New Street’s liquidity services. The Wall Street Journal, dismissed New Street by comparing it with trading in Belgium.
On January 3, 1915, the New York Times briefly gauged the New Street market activities: “It furnished a market where stocks could be bought and sold by those who had especial need of liquidating their holdings or had money to invest . . . . At the height of its activity, the New Street market consisted of about thirty-five brokers who dealt for cash only. In the downward slant of prices in October, it was estimated that fully 40,000 shares a day were handled for a number of days.”
New Street quotes were always two-sided, meaning if there were only sellers at the Clearing House and no buyers, some of those bears could dump their shares at the New Street bid prices. This disposal solution was key for liquidity, as potential sellers would be unsure if the low bid price came from a decline price action or simply a reflection of the relatively wide bid-ask spreads on New Street. When both the bid and offer on New Street were below the July 30 closing price, the New Street market dominated the NYSE Clearing House for both potential buyers and potential sellers. Moreover, the low bid prices gained credibility from the go along with low offer prices.
Was the shutdown worth it? Yeah, probably. From the market fittingly resuming activity on April Fool’s Day in 1915, through the Treaty of Versailles on June 28, 1919, the official end of the war, the Dow skyrocketed 75%. As we’ve seen in previous financial cycles, stocks can go through hell and back, but more often than not, they prevail. WWI erased many things, but not the precious equity market.