Abstract: Broker Networks during the South Sea Bubble: The Strength of Weak Ties
We explore the endogenous development of a network of stockbroker-dealers active during the South Sea Bubble of 1720 in London. A group of expert specialists able to make binding commitments with each other in a continuing auction market is a defining characteristic of a modern stock exchange. We find that out of the nearly 7,000 transactions in Bank stock that year, the 15 leading dealers accounted for over 1,000 (1,117 purchases and 997 sales). And of the £5.9 million of shares exchanged, our group of dealers accounted for over £1 million (£1,173,184 purchased and £1,084,278 sold). While each of the active traders had a distinctive clientele corresponding to their respective status and occupation, they were able to keep a stable inventory of stock by dealing with each other. The least active traders tended either to build up or to draw down their holdings. The two leading dealers, by number and amount of transactions, dealt disproportionately with women clients. Almost all the trading by the group of dealers was done with London-based clients. We conclude that the diversity of the most active traders, and the diversity of their respective clienteles, created a weakly tied network within the large and diverse customer base for Bank of England stock. At a time of great uncertainty about price behavior, and the future of the Bank itself, such a network is precisely the kind that provides the most efficient diffusion and use of information, according to network theory. Perhaps the appearance of such a network of traders for the least volatile stock available during the South Sea Bubble helps explain the long-run recovery of the London capital market, in contrast to the experiences in Paris and Amsterdam that year.