Lance Davis, California Institute of Technology
Larry Neal, University of Illinois

Although its structure will be constrained by environmental factors, when a formal security market is initially established, there still remain choices about the micro-structure of the operating rules that must be made before the market can begin to function. Such decisions include, but are not limited to: the characteristics of the securities that will be traded; the methods used to carry out and confirm trades; the kinds of agents that will be permitted to operate in the market; the amount of information that will be disseminated among agents, to regulators, and to potential clients; the commissions that agents will charge; the technology that will be employed by the traders; the physical location of the market and the hours that it will operate; and the rules that govern the relationships with other securities markets and other financial intermediaries. A systematic study of the markets that have evolved in environments marked by a wide range of exogenous conditions and that had adopted very different sets of institutional rules can help explicate the relationship between the micro-structure and the performance of the capital market; and it can provide some guidelines for the development of appropriate sets of rules for securities markets that are being, or soon will be, organized. By 1800 formal securities exchanges were in operation in London, New York, and Paris. Over time, each evolved a set of rules that governed the operations of that exchange in terms of costs, scope, volume, and the level of penetration. This paper begins to examine the differential impact of one aspect of the alternative sets of market rules adopted by the three exchanges over the century and half between 1800 and 1914. In this first effort, we focus on one aspect of their initial organization that is typically not considered by regulators and professional analysts today, but that we believe was of fundamental importance in shaping the micro-structures of the three exchanges Ð the initial definition of and the enforcement of property rights in the three markets. Those differences, we argue, pushed the long-run evolutionary paths of the three institutions in quite different directions with important consequences for efficiency, competitiveness, and long run viability as well as their ability to generate external economies of scope.