The Buttonwood Agreement

FINANCIAL HISTORY

THE BUTTONWOOD AGREEMENT

Although stock trading had become popular in the late 1700’s, there was not one central location where stocks could be traded.  At the time, most stock transactions took place at the broker’s offices or at local coffee shops where regular auctions were scheduled. 

In 1792, several brokers decided to form a central auction at 22 Wall Street called the Stock Exchange Office.  Those wanting to sell stock could deposit their shares and an auctioneer would take a commission on the sale.  This system did not last long, since outside brokers would attend the auction only to learn of the latest prices and then offer the same stocks at a lower commission outside.  Even inside brokers would often trade away from the auction to insure their own profits. 

In an effort to correct this problem several of the more prominent brokers met on March 21, 1792 to work out an agreement to stop the abuses.  A few weeks later, twenty-one individual brokers and three firms supposedly met beneath the Buttonwood (Sycamore) tree located outside of 68 Wall Street to sign onto the agreement.  This became known as the Buttonwood Agreement and in short, it fixed the commission rate they would charge and they agreed to “give preference to each other in our negotiations.”  Since there still was not enough business to justify building an exchange, the organizers built a coffee house at the corner of Wall and Water Streets to conduct exchange business.

Even though the New York Stock Exchange was not formally organized for another 25 years this agreement, essentially creating a price fixing cartel, is regarded as the ultimate foundation. 

Kimber Heaton is a Certified Financial Planner (CFP) and the principle of HEATON FINANCIAL, a Registered Investment Advisor, and can be reached at info@heatonfinancial.com or 435-272-4362

Reference:  The Great Game by J. S. Gordon pps. 38-41