Though the Royal Exchange was set up in 1571 by Thomas Gresham as a stock exchange the beginnings of the London Stock Exchange did not start until well over a century later. Rather surprisingly the roots of the London Stock Exchange were not in a bank or another financial institution but in coffee-shops. During the 17th century stock-brokers were not allowed in the Royal Exchange, this was supposedly due to their 'rowdiness' and 'rudeness'. As a result they were forced to meet elsewhere, generally in nearby coffee shops. The main place that these stockbrokers met was in Jonathan's Coffee-House in Change (or Exchange) Alley.
At these meetings a stock broker called John Casting began to list the prices of some commodities, exchange rates and provisions. The list was called 'The Course of the Exchange and other things'. It was not published every day and was only put up a few days a week. Public auctions were held that were known as 'by the inch of candle' auctions as they would only last as long as a length of candle could burn for. New companies joined the activity and as stocks grew the group moved to Garraway's coffee house. This activity is arguably the first evidence of organised trading in marketable securities in London.
The reasoning behind the flourishing of stock exchanges in the coffee houses was partly due to the rules of the Royal Exchange. Though it housed brokers, merchandise and merchants and was the first regulated stock market, it had a number of problems. Parliament issued an act in 1697 that introduced heavy penalties and fines to brokers who were unlicensed. The number of brokers who could trade in the Royal Exchange was also limited to one hundred. These restrictions pushed brokers away from the Royal Exchange and out on to the streets and coffee shops of Change Alley.
This continued for a time with the popularity of coffee shops waning and growing over the years. The coffee shops were particularly popular after the Seven Years War. Eventually 150 brokers at Jonathan's Coffee House started a more formal version of the stock exchange in Sweeting's Alley in 1773. The brokers moved away from Jonathan's and built their own building that had both a dealing room and a coffee room - this building became known as 'The Stock Exchange' and had a set entrance fee. However, in order to deal with fraud annual membership fees were introduced in 1801 and the Exchange was turned into a regulated exchange. The London Stock Exchange was born. As of December 2011, the London Stock Exchange was the largest in Europe and the fourth-largest in the world.
The Stock Exchange was not always easily accessible to those with smaller funds. This was not introduced until the beginnings of investment trusts. Through using an investment trust smaller subscribers could pool their resources and invest in similar ways to wealthier subscribers. The idea was that shares should be available to everyone and that the risk should be spread. One of the earliest investment trusts was set up in 1868, it was called the Foreign and Colonial Government Trust (now known as F&C). Another investment trust that was started in the early days and is still running today is the Witan Investment Trust that is one of the largest trusts on the Stock Exchange. It was founded in 1909, initially to manage the funds and estate of the Lord Farringdon. The introduction of investment trusts allowed more people to enter the world of the stock market and brought the Stock Exchange much closer to what it is today.
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