In August 2019, when United States President Donald Trump imposed a new round of import tariffs on Chinese goods, Wall Street traders reacted accordingly. The three major benchmark indices ended the session lower despite heavy trading volume in excess of 9.89 billion transactions. Across the Atlantic, a similar sentiment was expressed by traders at various stock exchanges operated by Euronext, an Amsterdam-based company that started providing capital markets services long before Wall Street became the world’s largest financial center. The Euronext Amsterdam and its regional exchanges may only post a fraction of the trading volume that takes place on Wall Street, but its legacy dates back to 1602, when the establishment of the first publicly traded company in the world marked the beginning of the modern economy.
Going Public: The Dutch East India Company
Following the discovery of the Americas and their subsequent colonization by the Spanish Crown in the 16th century, European monarchies started sailing around the world in search of trading opportunities. The Vereenigde Oostindische Compagnie (VOC) was founded through a governmental decision to consolidate various outfits that competed with each other in the silk and spice trade. The VOC was dedicated to all facets of trading; from shipbuilding to exploration and from wholesaling to commercial diplomacy, this company was a prototype for today’s megacorporations.
By virtue of the articles of incorporation of the VOC, this business entity met all the criteria necessary for going public as a stock company in 1602. Prior to the initial public offering and listing in the Amsterdamse effectenbeurs, the first modern stock exchange, individuals and business entities that wanted to invest in the VOC activities could only do so on per-project basis. Let’s say a group of investors from Brussels heard about an upcoming voyage by VOC ship Duyfken from Rotterdam to Australia; while they could certainly invest in this particular venture, their capital would be subject to all the risks entailed by sailing into uncharted territory. Investors preferred being able to invest in the entire breadth of business conducted by the VOC, a preference that resulted in shares of the company being offered to the public in the form of stock certificates.
Going Public: The Dutch West India Company
The second IPO in history took place two decades after VOC went public. The Geoctroyeerde Westindische Compagnie (WIC) followed a business charter similar to the VOC, but it focused its trading efforts in Africa and the West Indies. The Dutch West India Company went public in 1623, and WIC stock certificates traded not only in Amsterdam but also Rotterdam. By the time WIC shares went public the Amsterdam stock exchange had become sophisticated enough to handle trading of corporate debt instruments such as bonds, but the real action was in stock transactions because of their dynamic trading rules.
Early Rules for Stock Trading
Wall Street traders are familiar with the rules promulgated by the United States Securities and Exchange Commission as well as self-regulating entities such as the Financial Industry Regulatory Authority, formerly known as the National Association of Securities Dealers. What they may not know is that rules of corporate and exchange governance were being observed and followed in Amsterdam more than four centuries ago.
Speculation was inherent to trading VOC and WIC shares, and this was something that exchange managers in Amsterdam learned just a few years after the historic VOC IPO. In an effort to make stock trading truly public, the exchange allowed VOC representatives to exercise equality when offering stock certificates; they did not want trading to be solely in the purview of affluent clans, and to this effect they reached out to immigrant communities and middle class families across the Kingdom of the Netherlands. As can be expected, this widespread reach brokering of VOC and WIC stock eventually resulted in underhanded episodes of market manipulation and wild speculation.
By 1610, Amsterdam exchange operators enacted a rule prohibiting traders from taking advantage of major price drops. “Pump-and-dump” schemes were also proliferating, sometimes in the outskirts of the East India House, which was located near the courtyard of the Amsterdam Stock Exchange itself. Isaac Le Maire, a former VOC director, is remembered as a company executive who truly cared about the interests of shareholders; before abruptly leaving the company, Mr. Le Maire fumed about careless money management impacting not only the bottom line of the company but also stock prices, thus being remembered as an advocate for corporate governance and shareholder relations.
Prior to WIC going public, the Amsterdam Stock Exchange was already paying out VOC dividends, and operators were also keeping a finger on the pulse of what was taking place at nearby cafes and pubs where traders met to discuss potential transactions, some of them highly speculative; for this reason, more rules were enacted so that fraudulent short selling and other unethical transactions could be prevented or at least mitigated. It should be noted that Tulip Mania would originate in The Netherlands and spread across Europe a couple of decades after the Amsterdam Stock Exchange enacted rules against speculation and underhanded trading; however, let’s keep in mind that tulips were traded in the commodities markets.
Financial Capitalism at Its Best
The Amsterdam Stock Exchange inspired other countries to establish similar finance centers. Although the Royal Exchange in London was bustling before the VOC IPO, it did not operate as efficiently; in fact, it was often regarded as a madhouse where unregulated securities other than stock certificates traded under suspicious methodology. The Bourse of Antwerp was established even before the Royal Exchange, but both financial marketplaces would eventually learn from the Amsterdam Stock Exchange, meaning that they focused on regulated stock trading.
Another reason the exchanges in Antwerp and London emulated their counterpart in Amsterdam was that the Dutch city had entered a Golden Age of wealth. Being proficient in stock trading and capital markets resulted in The Netherlands becoming what Wall Street is today; in other words, Amsterdam turned into a financier of the world before the 18th century. These days, from its headquarters office in Beursplein, Euronext oversees stock exchange operations in Amsterdam, Brussels, Dublin, Lisbon, Paris, and London.
The building home to world’s first stock exchange is called the Beurs van Berlage and can still be visited today. However, for those who would like to learn about both companies, the VOC and WIC, that were at the very heart of the creation of world’s first stock exchange a visit to the Maritime Museum is recommended.