Share Trading and the London Stock Exchange 1914-1945: The Dawn of Regulation

Abstract

In the London of August 1914, there was no statutory regulation of share trading. By the beginning of 1946, only traders registered in accordance with the Prevention of Fraud (Investments) Act 1939 were permitted to engage in share trading between members of the public. This study examines the stages by which share trading in the United Kingdom came to be a statutorily regulated activity and by which the London Stock Exchange moved from being antagonistic towards public regulation in 1914 to lobbying in 1944 for the new scheme to be implemented.
A number of challenges were posed by changes in the character of the demand for and supply of securities which were evident before 1914 but hastened by the 1914-1918 war. There is no evidence that the Exchange, its members or outside observers understood how these changes would affect the overall character of the market or its sensitivity to risk. Almost all regulatory interventions between 1914 and 1945 responded to crises which exposed the failure of existing arrangements to cope with the consequences of market changes. Whilst these interventions show that self-regulatory arrangements could be effective, they also demonstrate the limitations of reliance on self-regulation alone. Although the Exchange’s members supported severe action after the crashes of 1929, the criminal justice system again proved inadequate to deal with abusive share trading generally. The 1939 legislation responded to the criminal justice system’s failure and, for the Exchange, was made palatable by protecting its formal independence.
Each successive regulatory intervention in part responded to compromises in previous interventions occasioned by the need to secure acceptance by market operators.