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Spring 2002

ISSN 0890-913X

Volume 17, Number 2

Categories: Spring 2002 | Law

The Emergence of the London Stock Exchange as a Self-Policing Club

Edward Stringham, George Mason University

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TheEmergenceoftheLondonStockExchangeasaSelf-PolicingClubEdwardStringham*GeorgeMasonUniversityItiscommonlyheldthatgovernmentisneededtoenforcecontractsinfinancialmarkets.AccordingtoHobbesiantheory,withoutexternalenforcement,theincentivestocheatwouldprevailandwelfare-enhancingtradeswouldnottakeplace(Glaeser,2001;Buchanan,1975;Tullock,172,1974).Whileitiscertainlytruethatrulescanimprovecontractualperformance,amajoroptionthatisoftenignoredisthepossibilityofprivately-generatedrules.Uponexaminingthehistoricalrecordwecanseethat,byandlarge,rulesgoverningfinancialtradingdevelopedindependentlyfromthestate.ThefocusofthispaperistheevolutionoftheLondonStockExchange(Silber,1981;Carlton,1984;FischelandGrossman,1984;MaceyandKanda,1990;ChambersandCarter,1990;Mahoney,1997;Banner,1998;MaceyandO=Hara,1999).1Ratherthanhavingpublicorigins,theLondonStockExchangeemergedwheneighteenth-centurybrokerstransformedcoffeehousesintoprivateclubstoformasystemofself-regulation.*TheauthorwishestothankPeterBoettke,BryanCaplan,TylerCowen,PaulMahoney,AndrewSellgren,andseminarparticipantsatGeorgeMasonUniversityandtheAssociationofPrivateEnterpriseMeetingsforhelpfulcomments.Theusualdisclaimerapplies.Beyondmerelyprovidingbuyersandsellersalocationtomeet,oneofthemostimportantfunctionsofastockexchangeisfosteringanorderlyatmospherewheretradersfollowacommonsetofrules.Exchangemembersmustconstantlyseekwaystoattractbusinessandonewaytoimprovebusinessisbyprovidingassurancesagainstfraud(Banner,1998:132).Bycooperatingandformingaclubforthejointprovisionandconsumptionofruleenforcement,stockbrokersenhancethevalueoftheirenterprise(Buchanan,1965).Thisstandsagainsttheideathatstockexchangeswouldfailtoorganizeproperlywithoutdirectionfromthestate(Frye,2000).Therearemanyadvantagesofmarketregulationovergovernmentregulation.Firstandforemost,whentheprivatesector1ForbooklengthhistoriesoftheLondonStockExchange,seeWincott(1946),MorganandThomas(1969),Jenkins(1973,andMichie(1999).

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Metadata [hide]

Title	The Emergence of the London Stock Exchange as a Self-Policing Club
Authors/Creators:	Edward Stringham, George Mason University
Year:	2002
Volume:	17
Number:	2
Pages:	1 - 19
Publisher:	The Association of Private Enterprise Education
ISSN:	0890-913X
Document Type:	Articles
Keywords:	Law enforcement, Contracts, Financial market, Institutional evolution, Stock exchange, Private ownership, Freedom, Competition, Government policy

Citation:
Stringham, Edward / 2002. "The Emergence of the London Stock Exchange as a Self-Policing Club." The Journal of Private Enterprise, 17(2): 1-19.