“The Paperwork Crisis”

In the mid-1960s, a great conglomerate merger wave swept the American business landscape as companies built portfolios of unrelated businesses that let them bypass antitrust restrictions. These were the “go-go” years on Wall Street, which resulted in a sharp increase in trading volume on the New York Stock Exchange. The sheer mass of stock certificates overwhelmed back offices up and down Wall Street, resulting in a backlog of trades waiting to settle and clear.

For months, the NYSE remained closed on Wednesdays just to allow brokers time to catch up, but even this was not enough to stem the tide of failed trades. Thieves, meanwhile, exploited the chaos, with organized crime syndicates making off with more than $400 million in looted securities.

Brokers turned to mainframe computers to keep up, but these were expensive and demanded sophisticated management that few firms could provide. When trading volumes subsided during the bear market of 1969 and 1970, brokerage revenues dropped precipitously, leaving many brokers unable to cover their costs. By the end of 1970, nearly one-sixth of the nation’s brokerage firms were forced to merge, liquidate, or go public.

The longer-term impacts of the “Paperwork Crisis” were still more profound.

For one thing, it accelerated the automation of manual processes across Wall Street, which reduced transaction costs, increased trading volumes, and stimulated competition. Even the New York Stock Exchange had come under increasing pressure from secondary markets like the National Association of Securities Dealers, which in 1971 launched the NASDAQ, an automated quotation system for over-the-counter securities accessible to broker-dealers nationwide. On May 1, 1975, the NYSE finally yielded to this pressure and abolished fixed commissions on buying and selling stocks.

Automation also encouraged diversification. Firms that had once specialized in brokerage, underwriting, or commodities trading, for example, expanded into a wider variety of financial services, including individual retirement accounts and 401(k) retirement plans. Each expansion, in turn, required more technology, people, and capital, which led most of the surviving Wall Street partnerships to merge or go public—from Donaldson, Lufkin & Jenrette in 1970 to Alex. Brown & Sons in 1997 and Goldman Sachs in 1999.

 

For Further Reading

  • John Brooks, The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s. New York: Allworth Press, 1973.
  • Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance. New York: Aspen Publishers, 2003.
  • Janice M. Traflet, A Nation of Small Share-Holders. Baltimore: Johns Hopkins University Press, 2013.
  • Wyatt Wells, “Certificates and Computers: The Remaking of Wall Street, 1967 to 1971.” Business History Review, Summer 2000.
  • “When Paper Paralyzed Wall Street: Remembering the 1960s Paperwork Crisis,” August 19, 2015, https://www.finra.org/investors/when-paper-paralyzed-wall-street-remembering-1960s-paperwork-crisis

 

200 Years of Partnership

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