One of the most curious and often ignored factors in the development of the City of London was the importance of the ‘coffee house’ as a place where merchants and financiers would meet and discuss trade and business. With many merchants not having their own office and office space being at a premium, coffee houses were often used as easily identifiable and usable meeting places. It was also easier to conduct business in a coffee house rather than in a tavern with the excess amounts of alcohol tending to obscure judgement and opinion.
The practice also developed within the City of particular types of merchants or traders in goods or products from particular parts of the world meeting in certain coffee houses. The coffee houses then acquired a form of product or service identity of themselves. The proprietors or owners of the coffee house would also encourage this through, for example, the provision of relevant trade and other general newspapers or the development of communications links with other parts of Europe or the world. The coffee houses or, at least, their main participants often then subsequently formalised the venue with the creation of a market. Many of these were then subsequently developed into some of the leading commodity and financial markets of the world.
A number of the great London coffee houses can be regarded as London institutions in themselves although not generally given the same credit and attention as their successor markets. Many of the finest names, such as Garraways’s, St. Paul’s, Jonathan’s, the Jerusalem and the Baltic have been forgotten although the markets which they assist form continue as global leader’s in their respective fields.
LONDON STOCK EXCHANGE
The most famous single market in the City is the London Stock Exchange which remains one of the most distinguished and leading stock markets in the world. The LSE originated in the dealings conducted between merchants in the old coffee houses in the City of London. With entrepreneurs requiring increasingly large sums of money to invest in overseas trading expeditions and long-haul shipping voyages, the practice developed during the 18th century of buying and selling shares in such ventures in coffee houses. The first joint stock company was originally set up in London in 1553 as the Muscovy Company (see www.londonstockexchange.com). The East India Company was subsequently formed in 1600 and the Hudson’s Bay Company in 1668. Other exchanges were also opened across Europe. The oldest stock exchange is in Amsterdam which was opened in 1611. The Austrian Bourse was also opened in Vienna in 1771 trading on Wall Street also began in March 1792 although the New York Stock Exchange and Board was not set up until 1817.
Specialist intermediaries or brokers later emerged to act as introducers between the merchants and investors. A club was subsequently formed at Jonathan’s Coffee House in 1760 by a group of 150 brokers to buy and sell shares. They had earlier been removed from the Royal Exchange for bad behaviour. The name of the club was subsequently changed to the Stock Exchange in 1773. The original Deed of Settlement was entered into in 1802 and revised in 1875. This was then replaced by a new Memorandum and Articles of Associated in 1986 when the Exchange became a private limited company after the London ‘Big Bang’ on 27 October 1986.
With the ‘Big Bang’, ownership of firms was opened to non-Exchange members, minimum commissions were abolished and the earlier distinction between ‘brokers’ and ‘jobbers’ was abolished with all firms becoming dual capacity broker/dealers. The earlier open ‘outcry’ market was replaced by screen trading with the introduction SEAQ (the stock-exchange automatic quotations system) and SEAQ International for international equities. While SEAQ provides a quote driven dealing system which is generally conducted by telephone, SETS (the Stock Exchange Electronic Trading Service) was introduced in October 1997 to create an automated matching service for orders that were placed electronically by prospective buyers and sellers. This is considered to provide better choice, increase transparency, lower costs, larger volumes and improved competition.
LLOYD’S OF LONDON
Lloyds originated in the coffee house maintained by Edward Lloyd in Tower Street within the City of London. This was used as a meeting place for merchants and insurers to discuss financial coverage on national and international contracts or transactions. The coffee house was first referred to in the ‘London Gazette’ in February 1688. Merchants and ship-owners met to discuss shipping business and agreements that could be entered into to ensure or underwrite particular transactions. The ship-owner would pay a premium in return for which the loss of the ship or cargo would be recovered by one or more ‘underwriters’. The person providing the cover would write his name at the bottom or under the agreement or policy. This led to the use of the reference to ‘names’ or ‘underwriters’ at an early stage. If the risk was large, a syndicate would be formed with all of the contributing names signing under a lead underwriter. The section within the coffee house or trading room or hall is still known as the ‘Room’ even in the new Roger’s Building. Edward Lloyd did not provide insurance cover directly but only the premises. To develop the facilities, he built a network of correspondents in sea ports throughout Britain and provided information on shipping business. This became the ‘Lloyd’s News’ which acted as a regular shipping bulletin from 1696 onwards. Edward Lloyd also arranged for the auction of ships and ship equipment.
After the original coffee house fell into disrepute with many gamblers and speculators as well as legitimate underwriters taking part in its business, another coffee house known as ‘the New Lloyd’s’ was set up in 1769 by Thomas Fielding. Although a committee had been charged to find new premises, it was not until John Julius Angerstian arranged for two rooms to be let at the Royal Exchange that Lloyd’s had its own offices. The Royal Exchange was then destroyed by fire in January 1838 although it was subsequently reopened in November 1844. It moved into Leadenhall Street in 1928 to acquire more space and subsequently into Lime Street in 1958. The current building was subsequently opened in November 1986 at ‘No. 1 Lime Street’ on the site of its earlier Leadenhall premises.
Following the move to the New Lloyd’s Coffee House, 70 underwriters and brokers each subscribed £100 for the purpose of building or acquiring new premises. Lloyd’s became the property of its subscribers in 1771 although the Society of Lloyd’s was not incorporated until Section 3 of the Lloyd’s Act 1871 was adopted. Royal Charters had been granted to the Royal Exchange Assurance and London Assurance companies in 1720 although the individuals who operated through Lloyd’s were exempt from the monopoly created. Further Acts were adopted in 1888, 1911, 1925 and 1951. Following the ‘Fisher Committee’ investigation into whether further statutory amendment was required, the Lloyd’s Act 1982 was adopted. This was reconsidered by the Neill Committee which published its report in 1987 following abuses involving the ‘skimming’ of names’ funds through bogus reinsurances and abuses of the premia of trust funds. Seventy recommendations were made which were subsequently implemented by the Society.
The Baltic Exchange is one of the oldest and leading shipping exchanges in the world. This provides members with premises, facilities and rules of conduct to allow them to undertake shipping business, freight business and other related activities including the purchase and sale of ships and shipping equipment. The Baltic Exchange is in ‘St. Mary Axe’ in the City of London.
The Exchange began in London coffee houses during the 17th century. These were used by merchants and ships’ captains to arrange freight and shipping. The main coffee houses involved were the Jerusalem Coffee House and the Virginia and Maryland Coffee House. The Virginia and Maryland was subsequently renamed the ‘Virginia and Baltic’ which referred to the geographic areas where its business was derived. This was subsequently shortened to the ‘Baltic’ in 1810. ‘Baltic Club’ regulations were then produced in 1823 with a formal trading floor being constructed in 1903. This was destroyed with an IRA bomb in 1992 but reopened in St. Mary Axe in 1995.
The Baltic Exchange includes over 700 corporate members with 1,500 individual members from 45 different countries. Some members act as ‘chartering agents’ and represent merchants with cargoes to move. Others are ‘owners’ brokers’ who represent the ship owners. Merchants and ship owners may also be direct members. Freight futures are dealt with through the Baltic International Freight Futures Market (BIFFEX). This was opened in 1985 and is based on the ‘Baltic Freight Index’ (BFI) which is published daily by the Baltic Exchange. This shows the weighted average ‘freight rate level’ and weighted average ‘trip time charter hire level’ each day in the dry bulk cargo shipping markets. A number of other indices are also traded.
Gold would also have been traded in some of the early coffee houses although the price of gold was set by the Bank of England from the early 19th century onwards. The gold standard effectively operated from 1815 after the Napoleonic wars until 1914. During this period, Britain was obliged to pay gold in exchange for its international debts at fixed prices. This was replaced by the gold exchange standard between the 1900s and 1920s with individual currencies being linked to sterling. These earlier arrangements were subsequently replaced by the Bretton Woods system of managed exchange rates between 1944 and 1973. This provided for the value of the US dollar to be fixed with regard to gold (at $35 per ounce) and with all other currencies being fixed to the dollar. The Bretton Woods system of fixed exchange rate standards was abolished following the closure of the ‘gold window’ by President Richard Nixon in 1971. International currencies have generally then floated since 1973 with various alternative mechanisms being adopted in particular countries to attempt to stabilise movement.
The formal London gold market was not opened until 1919. This was subsequently closed between 1939 and 1954. The bulk of the gold produced in the world, in particular, by South Africa as well as Russia, Canada, Australia and the United States is now dealt with through the London market. Since opening on 12 September 1919 at the offices of N. M. Rothschild & Sons in New Court, the gold market operates with the five market members meeting twice a day (at 10.30 a.m. and 3 p.m.) to ‘fix’ the gold price. The daily ‘fixing’ is the price at which the five market members are able to agree that they can satisfy outstanding buying and selling orders for gold. Meetings are chaired by a member of Rothschild’s staff with members being in telephone communication with their offices. (Union Jack flags are lowered on the desks to confirm that agreement has been achieved on the ‘fixing’.)
In addition to the formal financial exchanges, London trading has also operated through a large number of other smaller commodity exchanges, salesrooms and auction houses. Again, early trades would have been conducted through coffee houses that then specialised in particular products or geographical areas. The main markets then subsequently develop include the London Metal Exchange (LME) at 56 Leadenhall Street, the London Commodity Exchange (LCE) and the International Petroleum Exchange (IPE).
The LME opens between 11.45 and 12.30 p.m. and again between 3.20 and 5.20 p.m. dealing in eight major metals (copper, zinc, lead, aluminium, aluminium alloy, nickel, silver and tin) which are allotted to two separate trading sessions of five minutes each. Separate ‘kerb’ dealings may also be conducted 20 minutes after each session. A quotations committee monitors the ‘official’ prices for spot and forward delivery which are used by producer countries to price raw materials. Membership consists of ‘fourteen rein dealing’ members. Physical delivery is made at registered warehouses through the presentation of LME warrants. LME registered warehouses are located in Europe, Singapore, Japan and the US in addition to the UK. The LCE trades ‘soft’ commodities including cocoa, robusta, coffee, raw and white sugar as well as agricultural commodities and the shipping freight rate index (BIFFEX). The LCE is also responsible for futures and traded options markets in these commodities.
The IPE provides a range of energy future and options in oil and gas contracts. It is the second largest in the world and the largest in Europe. The IPE supports benchmark prices in two-thirds of the world’s crude oil and the bulk of middle distillate traded in Europe (see www.ipe.uk.com). The IPE deals in three main energy contracts with Brent Crude futures and options, Gas Oil futures and options and Natural Gas futures. Trades are done through members or through member broking services. Trades are cleared through the London Clearing House (LCH).
The two main clearing houses in London are the London Clearing House (LCH) and CREST. The LCH was originally set up as the London Produce Clearing House Ltd in 1888 to clear coffee and future trades. This was re-named the International Commodities Clearing House Ltd in 1973 and then the London Clearing House Ltd in 1991. LCH currently clears trades for LIFFE, IPE and LME as well as the electronic securities market (Tradepoint).
Electronic clearing and settlement can also be effected through CREST which was set up following the establishment of a Task Force on Securities Settlement by the Bank of England in 1993. This provides a system for electronic settlement of registered securities. CREST is operated through CREST Co which is a recognised clearing house for the purposes of the Financial Services and Markets Act (see www.crestco.co.uk). CREST has also been responsible for the settlement of Government gilts and money market instruments since 1999. These were formerly dealt with through the Central Gilts Office (CGO) and the Central Money Markets Office (CMO) within the Bank of England.