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The Great Paperwork Crises of 1968 Thumbnail

The Great Paperwork Crises of 1968


They New York Stock Exchange (NYSE) closed every Wednesday from June 12, 1968, until December 31st of that year!



Increasing Trade Volume

In March of 1602 The Dutch East India Co. became the first company to conduct an IPO when it allowed the public to buy shares in its business. Like all publicly traded companies' legal documents, called stock certificates, were issued that certifies ownership and the number of shares owned by the holder. For the next 370 years when a stock trade was done the stock certificate would be physically transferred from the seller to the buyer.

The process of transferring physical shares worked well for the first few centuries of stock trading, but by the late 1960s, with large increases in trading volume on the New York Stock Exchange (NYSE), the process was starting to break down. With millions of shares trading daily and the growth of institutional investors, brokers were falling behind on moving stock certificates between buyers and sellers. Hundreds of thousands of transactions remained unsettled daily, certificates were being delivered to the wrong places, and many were being lost or outright stolen in the deluge of activity and confusion. This led to the NYSE closing on Wednesdays for the last half of 1968 so that clerks could get caught up on processing the trades.

If the stock market was going to continue to grow a solution was needed.

In 1973, after several years of research on possible solutions The Depository Trust Company (DTC) was created to allow stock trades to settle electronically. DTC immobilizes the physical stock certificates by holding them in a depository. By this we mean the stock certificate remains in one physical place, even when the owner changes. A ledger is kept by DTC that accounts for who owns what shares in the vault.

Today when a trade is done an electronic message is sent by both the buyer's broker and the seller's broker to DTC. If both the buyer's and seller's electronic message matches on trade details, DTC "clears" the trade and the ledger is updated to reflect the new owner. The cash side of the trade is settled at that time between the two parties.

It's All About Speed.

When this new electronic system was implemented the trade settlement cycle was T+5. Meaning that when you entered into a stock trade, the shares and cash were exchanged five business days after the trade was done. In 1993 this was shortened to T+3 days. Then in 2017 it was shortened again to T+2, allowing for reduced counterparty and payment risk. Buyers get their shares sooner, and sellers get their money quicker. Today Billions of shares are traded daily, none of which would be possible without computers and electronic communication.

Paperwork is the embalming fluid of bureaucracy, maintaining an appearance of life where none exists. - Robert H. Meltzer