I

Financial markets aggregate savings and allocate them to productive opportunities, a crucial role which underpins their political legitimacy. According to mainstream financial theory, the production and dissemination of fair prices allow markets to perform these functions, and they relate to market transparency. A more recent literature shows that a complementarity between transparent and opaque markets may contribute to the development of the securities market because it strengthens different dimensions of market effectiveness and meets traders’ heterogeneous preferences. However, a concentration of traded volumes on opaque markets may have an impact on stability and price formation and make regulators react by imposing regulations that hamper market development.

Market organization determines transparency and has strong, redistributive effects across market operators (Pirrong Reference PIRRONG1999, Reference PIRRONG2000), who therefore compete to capture them. Market organization is thus an endogenous variable that calls for a political economy approach (Biais and Green Reference BIAIS and GREEN2019). Before electronic trading, rules defining market access played a crucial role in determining transparency. A high number of traders on the floor would affect the transparency of order-driven trading systems negatively. Ceteris paribus the concrete organization of the price discovery system impacts on transparency: open-outcry trading within an enclosure makes a market more transparent than low-voice trading through bilateral contacts.

This article focuses on the conflicts over market access rules between the two main categories of market operators in Milan and Genoa, the leading Italian stock exchanges, from the Unification of Italy until World War I. It shows that these conflicts disrupted the quality of information produced by the two markets for a long time. Whereas official brokers aimed to defend their monopoly on brokerage and capture rents by restricting market access, banks wanted to widen access so as to avoid paying these rents, make the market opaque and capitalize on their informational advantage.

When direct telegraph links between the stock exchanges and large national banks improved the informational integration of the markets at the turn of the twentieth century, operators of the Milan Exchange solved the conflict and developed a transparent pricing system, whereas the Genoa Exchange remained opaque, rendering the two markets complementary to each other and fostering the development of the securities market overall. However, when the violent 1907 crisis erupted in Genoa, legislators intervened to harmonize the organization of the Italian exchanges.

Section II of this article focuses on the theoretical framework related to market access and transparency as well as to operators’ incentives and preferences. Section III analyzes the evolution of market regulations up to the Commercial Code of 1882, the legal framework until 1913, and the conflicts these regulations caused. Section IV discusses formal and informal regulations of the Milan and Genoa exchanges at the turn of the century that led to divergent levels of transparency between the two markets. Section V discusses the 1907 crisis and the regulations implemented in its aftermath that led to the imposition of a homogeneous national regulation. Section VI concludes.

II

Before electronic trading, rules defining market access played a crucial role in determining market transparency. Pre-trade transparency represents the ability of market participants to observe the quantities and prices offered by others to conduct the most favorable transactions. The collection and publication of the prices of such transactions ensure post-trade transparency. A high number of traders on the floor would negatively affect pre-transparency of order-driven trading systems. Hushed transactions in bilateral contacts on an overcrowded floor prevent operators from properly observing an asset's supply and demand because they increase search costs, while a large number of traders in an enclosure during open-outcry affects transparency because of traders’ cognitive limitations. Baker (Reference BAKER1984) demonstrates that the greater the number of traders in a pit, the greater the dispersion of prices because traders cannot follow buy and sell offers from all other traders. Ceteris paribus the organization of the price discovery system impacts on transparency: open-outcry trading within an enclosure makes a market more transparent than low-voice trading through bilateral contacts. Rules on market access may also affect post-trade transparency negatively if overcrowding prevents the exchange from collecting and publishing transaction prices.

Exchanges may limit market access to mitigate counterparty risk. Without an immediate exchange of securities for cash, there is a risk of a counterparty defaulting and triggering a chain reaction. In case of large shocks, this risk may pose systemic dangers. Therefore exchanges select members to ensure they hold minimal reserves for absorbing losses and they also foster monitoring. However, selection may create capacity constraints. A limited number of operators can be unable to handle soaring traded volumes smoothly and such capacity constraints increase trading costs. Moreover, access restrictions may lead to operators developing strategic behavior. A limited number of operators colludes more easily and wields market power through handling large volumes for many clients and/or for their own. They may therefore earn rents, pushing up trading cost. As a result, entry restrictions may create scope for complementary markets (White Reference WHITE2013).

An important stream of literature posits that trading should concentrate in one transparent market as a natural consequence of competition eliminating the others. The benefits of a single transparent market stem from the positive externalities of liquidity speeding up orders matching, from the production of fair prices through a consolidation of the price discovery process reducing information asymmetries, and from economies of scale cutting trading costs (Madhavan Reference MADHAVAN2000). However, it is difficult to conceive how this theoretical model translates into a concrete market organization achieving at the same time transparency, liquidity and fast order matching, at least before electronic trading. Within any organization there will be trade-offs among its different parameters which imply trade-offs among different dimensions of market effectiveness (Schwartz Reference SCHWARTZ1995, p. 6).

Recent literature emphasizes the advantages of the complementarities between transparent and opaque markets if investors are heterogeneous enough in terms of information, risk appetite and time horizon. Such a complementarity would attract investors who would otherwise not enter because the single market fails to serve their needs, thereby increasing overall liquidity and foster financial development (Gomber et al. Reference GOMBER, SAGADE, THEISSEN, WEBER and WESTHEIDE2017). However, complementary markets may lead to multiple equilibria. Some of those may be stable, if not welfare maximizing because the dominant category of traders earn rents, but they may be upset by a shock (Bias and Green Reference BIAIS and GREEN2019). Large trading volumes on opaque markets may indeed affect stability and price fairness (Securities and Exchanges Commission 2013). Regulators could thus react to stabilize the market by imposing regulations that hamper development (Harris Reference HARRIS1993).

Standard microstructure models assume two types of traders: large informed ones, typically financial institutions, and small uninformed ones (Kyle Reference KYLE1985). Large financial institutions are considered informed because of the economies of scale and scope in collecting information on issuers. This holds in particular for large banks with shares in industrial firms, the supply of corporate finance and directorships providing crucial sources of private information.

If informed traders send orders to a transparent market, other participants may take advantage of this disclosed information for free and thus lower informed investors’ profits. Consequently, informed traders may prefer relying on brokers and trade on opaque markets. Conversely, uninformed investors may prefer transparent markets to obtain better information. These heterogeneous preferences could led to endogenous market segmentation. However, this segmentation is limited by mutual dependency. Informed traders need other participants to absorb large orders, while uninformed traders need informed traders’ price signals. Large institutions gain additional advantages through direct market access. Information inferred from observing the trading process may complement fundamental information on issuers. Large institutions can thus extract additional information from monitoring the order flow, even on opaque markets, due to the many interactions in which they engage. Moreover, they can exert market power more easily and at lower cost (Biais et al. Reference BIAIS, GLOSTEN and SPATT2005).

Investors with a short time horizon may prefer opaque markets where large investors absorb their orders quickly even if at less favorable prices, while investors with a longer horizon may prefer waiting for their orders to be executed at more favorable prices on a transparent market. Large institutions may have sufficient information to assess the risk of their counterparties, while risk-averse traders may opt for markets implementing counterparty risk management.

During the period under study, the Milan and Genoa stock exchanges both hosted various categories of operators. The two most important professional groups were banks and stockbrokers. Alongside these there existed securities trading firms, free middlemen, remisiers, commercial and industrial firms, and private investors who, though without any legal status, could trade on the exchange.

With regard to market access, official brokers were subject to a different regulatory regime from the others. They had a monopoly on brokerage in listed securities and were obliged to publish the prices of their transactions on official lists. Consequently, they had direct market access, but access to the profession was regulated. Only people meeting specific national and local official criteria could become members. Official brokers aimed to increase the revenues from their monopoly by raising entry barriers to their profession and limit other operators’ market access in the face of competition from free brokers and from direct transactions between operators. Moreover, handling higher volumes would have enabled official brokers to extract information from the order flow, also on opaque markets. Brokers could thus adapt to opaque markets through trading on their own account, a current practice if an illegal one at the beginning of the period under study. Banks and bankers acted as informed investors would, using knowledge gathered from combining credit with merchant banking, directorships and securities trading.

As local regulators, the Chambers of Commerce (CoC) were in charge of enforcing national rules, of making and enforcing local rules, and of verifying the candidates’ qualifications for an official position as stockbroker. Originally official brokers were barred from membership of the CoC because of their legal status, but the 1882 Code changed that. Henceforth the brokers’ commercial status made them eligible in principle, but until the turn of the century the CoCs kept them out and were backed by contradictory jurisprudence on this point (Bassano Reference BASSANO1898, pp. 71–2). This gave bankers free rein to influence local regulators.

III

Up to Italian Unification the Milan and Genoa exchanges followed quite different historical trajectories. Its seaward orientation made the Genoese Republic's economy focus on international trade and finance, while the mountainous hinterland limited agriculture, inspiring a tradition of economic liberalism. Although Genoa was annexed to the Kingdom of Sardinia in 1815, the town retained commercial practices inspired by liberalism due to its considerable autonomy (Doria Reference DORIA1973; Felloni Reference FELLONI2006, Reference FELLONI2016; Giacchero Reference GIACCHERO1980; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009).

In Genoa the 1843 Commercial Code with its rules on market access and on official brokerage was never applied. As late as 1854 a member of parliament pointed out that, despite the need for official recognition of the exchange and its rules, the most complete freedom still existed with these respects.Footnote ¹ Only 10 of the 12 authorized official brokers were actually in business, the costs of these positions outweighing potential revenues because of the competition from unofficial brokers.

The CoC refrained from entering into negotiations with the government for recognition of its exchange until the early 1850s when the latter did not adopt the principles of abolishing the brokers’ fixed number and opening the profession to anyone meeting the legal criteria. Even so, the CoC managed to have the exchange rules amended so as to take into account local circumstances and customs, preserving its autonomy by appointing new stockbrokers just before the 1854 law on official brokerage came into force. As a consequence, the number of official exchange brokers shot up from 10 to 140, but the rules reserving market access to official brokers and merchants recognized by the CoC were never enforced. The requirements to enter official brokerage set out in the 1854 law were similar to the ones in the earlier legislation. The only difference was the body in charge of the Reference BIAIS, GLOSTEN and SPATTb9process: first the government, then the CoC.

The Milan Exchange's historical trajectory went back to the Austrian Empire's policies to foster stable economic and social development based on farming. On this foundation Enlightenment thinkers in Lombardy constructed a philosophy underlining the virtues of the market and competition while accepting the need for external regulatory intervention to moderate the excesses of individual self-interest. This orientation influenced Milanese finance in a way that Alessandro Polsi, commenting on the banking euphoria of the early 1870s, defined as the Lombard way to banking (Baia Curioni Reference BAIA CURIONI1995; Polsi Reference POLSI1993).

Founded in 1808 under Napoleonic rule, the Milan Exchange was governed by regulations with a French matrix that remained virtually unchanged until 1865. Applied to the local context these created a stable group of official brokers. Entry into the profession was in practice by co-optation, which ensured a degree of social control discouraging opportunistic behavior. Co-optation was also conducive to long careers, as a rule ended only by old age or death. With this social mechanism brokers succeeded in enforcing the founding decrees’ intention to reserve access to the exchange to recognized traders and official brokers.

The Kingdom of Italy's first Commercial Code of 1865 expressed the government's conception of brokers as guarantors of market transparency. To avoid conflicts of interest with clients the Code confirmed official brokers as pure intermediaries, and their obligation to declare their transactions to the Sindacato, the brokers’ governing peer-elected body, which drew up official lists from their submissions. The Code also confirmed the brokers’ monopoly and reserved market access to official brokers and merchants recognized by the local CoC.Footnote ² However, the Code left it to the CoCs, as local supervisors, to enforce the national rules, draft and enforce the local exchange's rules, and verify whether candidates for the position of official broker met the qualifications now uniformly set for the entire country (Baia Curioni Reference BAIA CURIONI1995; Da Pozzo and Felloni Reference DA POZZO and FELLONI1964; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009).

At that time, transactions were conducted bilaterally in hushed voice on both exchanges. The new Code did not affect practices on the Genoa Exchange; access to the stockbroker profession continued to be easy and access to the market free. By contrast, the Code led to a fundamental conflict between Milan bankers and brokers. In 1867 the CoC issued new regulations largely inspired by bankers hoping that competition would drive down brokerage fees. The profession of broker was considered free since bankers considered stockbrokers to be a privileged subgroup within the category of brokers, all of whom could have access to the exchange. The official stockbrokers countered that, by confirming their monopoly, the Code gave them an exclusive right of access to the exchange. The conflict led the Syndicate, the only body at that time in charge of market monitoring, to resign, hampering the smooth working of the exchange for three years. The Milanese financial press highlighted the ‘deplorable situation’ as well as ‘the disorder and anarchy’ of the market.Footnote ³ In the end the CoC accepted the official brokers’ requests and issued new regulations in 1870 (Cafaro Reference CAFARO and Antonini1993; Baia Curioni Reference BAIA CURIONI1995).

During the early 1870s Italian financial markets boomed, the euphoria centering on Genoa, the leading exchange by far (Da Pozzo and Felloni Reference DA POZZO and FELLONI1964, p. 76). Bankers, particularly from Genoa, promoted the creation and listing of joint-stock companies, especially banks. The boom was widely accompanied by fraud, such as price manipulation and inserting false prices on official lists. Official brokers traded for their own account, notably on forward transactions, both illegal at the time (Tronci Reference TRONCI1891; Da Pozzo and Fellon Reference DA POZZO and FELLONI1964; Conti Reference CONTI and Pecorari2006). When in 1873 the boom busted, Genoa, where traded volumes and fraud had concentrated, was hit hardest. Between 1873 and 1874, only one Milanese official broker out of 60 went bankrupt, and brokers’ numbers remained stable thereafter (Baia Curioni Reference BAIA CURIONI1995, p. 103). In Genoa, 40 out of 210 brokers left the profession in the wake of the crisis, and brokers’ numbers continued to decline thereafter. Brokers were ‘people not well known in town and looking less for a stable profession than for quick profits’ (Da Pozzo and Felloni Reference DA POZZO and FELLONI1964, p. 80). It turned out that the Genoa CoC had been soft on verifying candidates’ requirements. As late as 1876 only 11 out of 132 official brokers satisfied the requirements set by the 1865 Code.

Though the price discovery system in Genoa and Milan was similar in being conducted bilaterally in hushed voice, the former market must have been more opaque than the latter because it hosted three times the number of stockbrokers plus a large crowd of other operators. According to a Milanese journalist describing the Genoa stock exchange during the boom, ‘The large room of the stock exchange was not enough to contain the persons who came to buy and sell shares in industrial banks… Persons completely unfamiliar with trade, i.e. big and small capitalists, professors, lawyers, clerks, crowded in and mixed with merchants, bankers, stockbrokers.’Footnote ⁴ Moreover, the competition between official and unofficial brokers had pushed down monopoly revenue, forcing the former to start trading for their own account. They kept these clandestine transactions secret, thereby helping to undermine the informational quality of published prices. During the 1872 boom the nearly 200 official brokers declared only 5,267 contracts to the Genoa Syndicate, less than 20 per day. It comes as no surprise that, in 1873, a government commission deplored the information quality of official lists generally, but considered the issue particularly serious in Genoa (Da Pozzo and Felloni Reference DA POZZO and FELLONI1964; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009). The situation there contrasted sharply with Milan. That same year the supervising ministry – the Ministry of Agriculture, Industry, and Trade (MAIC) – congratulated the local CoC with its exchange as ‘one of the best organized of the Kingdom’.Footnote ⁵

The 1873 crisis spurred the government into trying to improve the functioning of the exchanges and it did so by relying more on official brokers. A law enacted in 1874 legalized forward transactions and introduced a tax on all financial transactions which the official brokers had to collect. It granted official brokers a monopoly on forward operations both on and off the exchange to make them transparent and registered, and to ensure that official brokers received additional revenues to compensate for the loss of trading on their own account, which the tax collection mechanism was meant to render impossible (Bassano Reference BASSANO1898, pp. 265 ff.; Da Pozzo and Felloni Reference DA POZZO and FELLONI1964, pp. 26–7).

The financial milieux protested, but their arguments differed. The Milan CoC considered only the tax rate excessive, whereas the Genoa CoC spoke vehemently against the tax and against the monopoly, arguing that it was contrary to ‘the tradition of the financial center’ (Da Pozzo and Felloni Reference DA POZZO and FELLONI1964, p. 36). The law failed to achieve its purposes. Official brokers in Milan declared only 365 contracts during the first half of 1875, while their Genoese colleagues suspended publication of the official list for the first 15 days of 1875 and then refused to report contracts at all for the next two years. The law's net result was more and more serious damage to the quality of official lists.Footnote ⁶

Passed in 1876, a new law limited the official brokers’ monopoly on forward transactions to on-exchange and reduced the tax rate significantly. However, protests continued as the tax administration put the CoCs under pressure to enforce the law. During 1877 and 1878 an average of only one contract per official broker per year was declared In Genoa, so ‘The official list, rather than guiding the operators, misled them’ (Da Pozzo and Felloni Reference DA POZZO and FELLONI1964, p. 42). The Milan CoC announced that it might move to inspect brokers’ accounting books to verify declarations. The threat was effective to some extent, increasing brokers’ submissions.Footnote ⁷

The government and press countered by arguing that the official brokers had abandoned their public interest mission. Consequently, the 1882 Code changed tack and shifted the focus from the regulation of official brokers to that of transactions (Baia Curioni Reference BAIA CURIONI1995). The new Code liberalized further brokers’ profession and access to markets, but liberalization remained incomplete. A regulation annexed to the Code (Regolamento d'esecuzione) qualified brokers accepting some obligations and offering some guarantees as ‘public intermediaries (intermediari pubblici)’ and granted them privileges in return.

The Code was a compromise between competing interests. To avoid transactions migrating to fully private circuits, the Code granted the public intermediaries a monopoly on on-exchange brokerage while requiring them to report transactions to the Syndicate for publication in the official list. Yet it failed to safeguard the monopoly, drastically reduced requirements for becoming a public intermediary, and gave CoCs the option to tighten requirements. Public intermediaries were also allowed to become merchants. In addition to brokerage, their activities could henceforth include operations for their own account and participation in commercial and financial businesses, an opportunity that made some associate themselves with small securities trading firms.

The 1882 Code also delegated substantial power to CoCs by considerably limiting the scope of national regulations. The Code introduced a new body in charge of daily management of the exchange, the Deputazione di Borsa, whose members were appointed by the CoCs. Unlike in Milan, the Genoa CoC was used to appoint the members of its council as members of the Deputazione. The Syndicate was in charge of collecting declarations of contracts by public intermediaries, transmitting them to the fiscal administration, and establishing the official list (Baia Curioni Reference BAIA CURIONI1995; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009). According to the legislator's intentions, the commercial status of official brokers was meant to facilitate the brokers’ election to the CoC and their appointment as members of the Deputazione. Hiding behind contradictory jurisprudence, the CoC kept public intermediaries off its councils until the beginning of the twentieth century (Bassano Reference BASSANO1898, pp. 71–2).

IV

The 1882 Code liberalized access to the markets. It did not change practices at the Genoa exchange, where the CoC adopted the Code's minimum requirements for the access to stockbrokers’ profession, thereby keeping it wide open. In Milan the 1882 Code triggered ‘class dualism (dualismo di classe)’, a virulent conflict between public intermediaries and bankers. The local CoC removed restrictions reserving access to public intermediaries and merchants. Free brokers entered the exchange and competed with public intermediaries, and other (individual) investors also entered the floor. The crowd made the market more opaque, rendering it more difficult to enforce the monopoly. As competition and encroachment lowered revenues, public intermediaries demanded the restoration of barriers to entry.

The conflict threw the market into disarray for about twelve years. During this period, the Syndicate resigned when the Deputazione was appointed and vice versa. At times tempers rose to such a degree that neither body was in charge (Baia Curioni Reference BAIA CURIONI1995; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009). When the Syndicate was not in charge, the list was established by the president of the Deputazione, or the deputy general secretary of the CoC, but the exchange became so disorganized that, at the end of the 1880s, ‘the list could not present guarantees of truthfulness’.Footnote ⁸

Between 1888 and 1894, the ‘Great Crisis (Grande Crisi)’ undermined the Italian economy. As the primary Italian banking and financial center Genoa suffered heavy losses (Giacchero Reference GIACCHERO1980, ch. 6). Burdened by participations in industrial companies, the Crédit Mobilier banks were hit especially hard. Despite bankers’ maneuvers on the more unregulated exchanges, Genoa and Rome, to offload their holdings, a series of bankruptcies occurred (Zalin Reference ZALIN and Pecorari2006). Their role was taken over by new German-inspired universal banks, the Banca Commerciale Italiana (BCI) and the Credito Italiano (CI), which formed during the first half of the 1890s and took headquarters in Milan (Hertner Reference HERTNER1984).

The MAIC tried to improve transparency in the markets at the core of the scandals, Genoa and Rome. In 1892 and 1894, the MAIC sent a ‘peremptory invitation’ to the Genoa CoC to introduce open-outcry negotiations in an enclosure on its exchange. While the Rome CoC complied, the Genoa CoC refused, even though the MAIC had sent written articles to be inserted into its regulations, and ordered them to be adopted promptly.Footnote ⁹

Disappointed by the bankers’ attitude, the government sought to restore order on the exchanges by relying on the stockbrokers and formed a commission, chaired by the MAIC Boselli, to draft new regulations. The Genoa stockbrokers’ Syndicate, having fought the CoC for years to obtain market access restrictions, complained about ‘the ever-increasing practice of free brokerage’ and that ‘they had to reduce their brokerage fees to a bare minimum in order to sustain competition’ from free intermediaries. It took advantage of the situation and sent complete draft regulations to the commission and the press. The draft proposed increased government control, market access restrictions, more stringent qualifications for becoming an official broker topped by the Syndicate's approval for accession.

The Syndicate presented the proposal to the Deputazione and found that the latter was ‘against any innovation to existing regulations and to granting stockbrokers convenient privileges in return for the special burdens to which they are subject’.Footnote ¹⁰ However, the commission adopted most of the Genoese Syndicate's proposals in its draft regulations. Asked to review the draft, the Genoa CoC rejected it outright as threatening the freedom to do business and, by making the validity of the CoC's deliberations subject to government approval, a blow to its autonomy and independence as an elected body. As Natale Romairone, president of the Deputazione between 1882 and 1912 as well as administrator and shareholder of the Cassa Generale, an important merchant bank, explained: ‘The principle of the greatest possible freedom both in stock exchange transactions and brokerage is always preferable to the principle of monopolies.’Footnote ¹¹ Because of that freedom, the Genoa CoC failed in its legal duty to submit prices and turnover data about Italian public debt transactions needed to establish the weighted average price of public bonds published daily in the kingdom's official gazette. Until 1912, the Genoa CoC sent only approximate prices without turnover data.Footnote ¹²

By contrast, the Milan CoC welcomed the draft bill as in line with its longstanding wishes. During the crisis, the CoC, relying on public intermediaries to improve the functioning of the exchange, had authorized the Syndicate to assume powers of the still-defunct Deputazione and exclude private brokers. Though the Syndicate operated under the authority and supervision of the CoC, the bankers reacted vehemently.Footnote ¹³ The government's fall halted the parliamentary process of the bill. However, the government also worked to have the exchanges change the layout of their lists so as to make comparisons easier. Starting in June 1896, Milan's and Genoa's lists converged, but disparities in labels and categories of reported information remained, with Milan's list always reporting more (types of) information than that of Genoa.

The Great Crisis and consequent heavy losses in Ligurian finance, the advent of German-type universal banks, and creation of telegraphic links between Italian exchanges prepared the conditions for ending the conflict between bankers and brokers at the Milan Exchange.Footnote ¹⁴ The bankruptcy of a public intermediary in 1895, a rare event in Milan, was the triggering event. Under pressure from the CoC, the two groups agreed on a novel market organization, the creation of an enclosure for open-outcry negotiations, reserved for public brokers and bankers selected by criteria for capital and reputation. The organization guaranteed public brokers a substantial enforcement of their monopoly and granted to banking operators direct access to the market's core.Footnote ¹⁵

Despite the creation in 1898 of a ‘reserved area’ of about half the 750-sqm exchange floor, market access remained open in Genoa. The CoC created this area not to select operators, but to compensate for a loss of harbor dues income by increasing its revenues from the exchange with a small entrance fee (Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009). The president of the Deputazione emphasized that the zone would not foster monopolies or privileges.Footnote ¹⁶ The Genoese market's lack of organization made the quality of the official lists questionable. At least from the second half of 1896, the local branch of BCI, the largest Italian bank, published a private list of Genoa Exchange prices because it probably considered the official list defective. The French bank Crédit Lyonnais, at the time the largest bank in the world with a sizable research department (Flandreau Reference FLANDREAU, Desjardins, Lescure, Nougaret, Plessis and Straus2003), bought the BCI private lists but did not buy official lists regularly.

By contrast, in Milan, further restrictions on access to the enclosure preserved market transparency. Following public brokers’ requests, the CoC stopped admission of new bankers to the enclosure and further tightened requirements for becoming an official broker, with a commission composed of stockbrokers and bankers entrusted with examining candidates.Footnote ¹⁷ The universal banks endorsed the reform.Footnote ¹⁸ Due to its organization, the Milan Exchange developed. Market growth led the CoC to invest in a new exchange building with a 700-sqm floor, which opened in 1901.

From the final years of the nineteenth century, universal banks and banking houses again began promoting and financing large-scale joint-stock companies. Strong competition among large banks, fanned by the foundation of the Società Bancaria Italiana (SBI) in 1898, contributed to a rapid development of industrial finance. To reduce their participation and cash in on their loans, the banks floated companies on the stock exchange and developed a secondary market to make their holdings liquid. They acted on the secondary markets directly as traders for their own account, and on behalf of their clients, and indirectly by financing other operators though repo transactions and advances.

From the mid 1890s, when telegraphs and the universal banks improved the informational integration, the complementarities between a transparent market in Milan and an opaque one in Genoa facilitated the Italian financial development. The transparent Milan Exchange, with its effective counterparty risk management based on operators’ selection, was a stable market producing fair prices, where the proportion of spot trading was much higher than in Genoa. Genoa attracted informed investors and opportunistic operators thanks to its opacity and immediacy for their large trades. However, the concentration of volumes on the opaque market threatened it (Baia Curioni Reference BAIA CURIONI1995; De Luca Reference DE LUCA2002; Riva Reference RIVA2007, Reference RIVA2012). Supported by bank credit, Genoa traded most of the Italian (forward) volumes, but frequent and often large failures destabilized the market (Riva Reference RIVA2012).

V

The Milan Exchange's new organization failed to prevent it also suffering from an ‘excess of speculation’ during this boom.Footnote ¹⁹ Public brokers admitted elsewhere by other, more accommodating CoCs exploited a legal gap to gain access, and the Milan CoC proved unable to refuse admission to unsuitable candidates for the profession. In November 1905, the CoC adopted regulations to stabilize and limit access to the market, introducing circuit breakers, reforming the open-outcry system by codifying practices disregarded by newcomers, and substantially raising the professional qualifications required for becoming a public broker. Once enacted the speculative fever disappeared.Footnote ²⁰

A the same time, fear of a new Great Crisis pushed the government and the Bank of Italy (BI) to send signals in favor of stability. The government entrusted Emilio Maraini, a member of parliament very close to the BI, BCI and CI, with the task of drawing up proposals for exchange reform (Baia Curioni Reference BAIA CURIONI1995, pp. 235-6). Maraini drafted a bill largely inspired by the work of the Congress of Italian Syndicates held in 1904. The bill's main points were open-outcry transactions around a pit reserved for official stockbrokers as pure brokers and no other counterparties; very strict professional qualifications for becoming a public broker; and reform of the Deputazione with the appointment of a delegate from the Treasury, one from the BI and one from listed companies.

The reactions of the CoCs to the Syndicates’ proposals and to Maraini's bill mirror their attitude to their respective markets. The Milan CoC agreed with the professional qualification requirements, similar to the ones it had recently adopted, but expressed serious doubts about other points. It argued against reforming the Deputazione because CoCs already possessed the means to regulate their markets if they so wished, as had happened in Milan where the Deputazione and Syndicate collaborated closely. The CoC also warned that reserving the access to the open-outcry enclosure to official brokers only would reopen the conflicts that the Milanese microstructure had pacified.Footnote ²¹

The Genoa CoC rejected changes in regulations that would ‘disrupt stock exchange operations conducted according to traditional customs and in harmony with the precepts of freedom that the CoC has always observed’. Moreover, tightening the requirements for entry into public brokerage would have effectively fix the number of stockbrokers, whereas access to the profession should be free and no privileged position should be given to public stockbrokers. The approval of the Maraini bill was delayed by the lack of support from even the more stable market such as Milan. Despite pressures from the government, the press, and other CoCs through the Union Camere, the Genoa CoC did not change its market organization nor the requirements to enter public brokerage; even the minimum requirements of the 1882 Code were not enforced and the number of public intermediaries skyrocketed from 1904.Footnote ²²

In 1906, 156 traders were admitted to the Milanese enclosure, which occupied a large portion of its 700-sqm floor, but no fewer than 1,180 operators crowded Genoa's reserved area, which occupied half of its 750-sqm exchange (Riva Reference RIVA2007). Yet according to press reports, the Genoa market was dominated by only four unnamed large operators competing fiercely with each other (Bonelli Reference BONELLI1971, p. 23). Those four were the main Italian banks. When during the international monetary tightening of 1906 BCI and CI reduced their market positions progressively, Ligurian bankers took control of the SBI and founded a new bank, the Banco della Liguria (Baia Curioni Reference BAIA CURIONI1995; Bonelli Reference BONELLI1971; Confalonieri Reference CONFALONIERI1979; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009, Reference RIVA2012).

At the time, the Genoa CoC was pleased with the extraordinary influx of operators who come to Genoa from other parts of Italy, but a few years later, the CoC admitted that the reserved area hosted ‘all kinds of persons and not all of the most respectable honesty, a world of idlers and traders excluded from the other exchanges of the Kingdom because of bankruptcy’, and that ‘crowding in this reserved area became such that the smooth running of transactions was disrupted’.Footnote ²³

The 1907 crisis centered on Genoa, where market coups and price manipulations had proliferated. Several insolvencies blocked the stock exchange settlement of May 1907, Counterparty risk became systemic. Many operators possessed little or no reserves as a result of the defective selection process and high leverage. Because it was impossible to evaluate the counterparties’ solvability, trading was suspended for ten days while local regulators attempted to unfreeze the market. After difficult negotiations the CI took over all positions of the insolvents. Exchange trading resumed, but prices collapsed, and the fall in prices led to the insolvency of SBI, the third largest Italian bank controlled by Genoese bankers who also operated on the exchange as such. The failure of SBI led to panic withdrawals of deposits at CI and BCI. Having organized a syndicate to bail out SBI, the BI was forced to take on most of the burden (Bonelli Reference BONELLI1971; Riva Reference RIVA2012).

The government, press, and members of parliament, particularly from Lombardy, considered Genoese regulators to be responsible for the mess. The government reacted immediately by decreeing, the day after trading had resumed in Genoa, that open outcry was to be reserved for public brokers. The decree targeted Genoa, but failed to achieve its goal there while causing collateral damage in Milan. Instead of imposing the creation of an open-outcry enclosure, the decree regulated access to it. The Genoa CoC therefore disregarded it, claiming its exchange had no enclosure, whereas the Milan CoC had to comply and exclude banking operators from its pit.

Milanese regulators denounced the inappropriateness of a decree issued in a hurry ‘to resolve inconveniences that, in Milan, had not occurred’. The decree had ‘disorganized the Exchange, which until now had functioned in an exemplary manner’, whereas ‘at the Genoa Exchange, for which it was issued, it remained unexecuted since open outcry does not exist’.Footnote ²⁴ Milanese bankers reacted by founding a market of their own, Il Mercato Libero dei Valori, whose list was published in Il Sole, an economics newspaper closed to the CoC. After negotiations within the CoC, which involved the government, the parties reached a new agreement; the CoC argued that the decree had not retroactively affected the rights of bankers who already had access to the enclosure. The protest subsequently ended and Il Mercato Libero closed.Footnote ²⁵

The 1907 crisis pushed the government to intervene through legislation. In 1908, the MAIC ministry presented a new bill to parliament. The accompanying memorandum explained that CoCs and Deputazioni failed to supervise the markets properly, the Syndicates did not follow the rules when publishing lists, public brokers were too numerous and disregarded their duties, and abuses and speculation occurred too frequently.

The bill changed the principles of the 1882 Code radically by imposing uniform regulation on all exchanges and abolishing local rules and customs. The government centralized regulatory and supervisory powers and assumed authority to issue directives to be adopted at local levels; any decision by the CoC needed prior government approval in order to be effective. The bill imposed a detailed market organization on the exchanges based upon open-outcry trading within an enclosure, similar to the one in Milan, restricted access to that enclosure to official brokers, and granted those brokers a monopoly on transactions. Official brokers were to limit themselves to pure brokerage and could enter the profession only upon meeting qualifications modeled after the 1905 Milanese regulations. Government instability and renewed financial buffeting delayed parliamentary approval of the bill (Baia Curioni Reference BAIA CURIONI1995; Riva Reference RIVA, Conti, Feiertag and Scatamacchia2009).

According to the Milan CoC, one-size-fits-all legislative interventions could compromise some local situations even if it improved others. It argued that ‘each exchange, for a spirit that one would be tempted to define as regional, but that in reality has its roots in historical reasons all peculiar to the conditions of Italy prior to its unification, wants to be organized and regulated in a manner consistent with the interests and habits of the centers in which it is located, and a complete harmonization is very difficult, not to say impossible, in practice’. The Milan CoC notably worried about excluding bankers from the enclosure, but its lobbying resulted only in the insertion of a transitory provision in the bill granting bankers access to the enclosures for five years.Footnote ²⁶

Knowing that approval of the bill would be fatal to its exchange, the Genoa CoC strove to preserve a margin of autonomy. Between 1909 and 1912 the CoC gradually translated the bill's main provisions into local regulation in the hope that the government would then remove them from the bill. According to the president of the Deputazione,

It is well known that the government is targeting particularly the Genoa Exchange since it considers it responsible for the financial crisis … However, by these initiatives, the Deputazione wishes to disarm the government … If the CoC approves the reforms proposed by the Deputazione, it would prevent certain provisions contained in the bill approved by the Chamber of Deputies from being maintained in the final text. Certainly, if the law were passed as it is, our stock market community receives a fatal blow. Well, the Deputazione wants to mitigate the scope of certain particularly dangerous proposals.Footnote ²⁷

In 1909, the Genoa CoC also tightened the qualifications for entering the brokerage profession and the criteria for access to the reserved area, limiting entry to public brokers, merchants officially recognized by the CoC after a review of their standing, and representatives of all Italian public joint-stock companies. However, only in 1912, when the CoC inaugurated a new stock exchange building, with a 1000-sqm floor, the largest in Italy, it introduced an enclosure for open-outcry trading accessible only to public brokers and bankers meeting the same criteria as the brokers. Joint-stock public companies, and thus banks, were excluded. Universal banks were subject to accusations of redirecting their activities to Milan and robbing Genoa of its status as Italy's leading securities market.Footnote ²⁸

Parliament finally approved the bill in 1913 with few changes from the original 1908 draft. The government subsequently decreed that the exchanges were to hold trading sessions at the same hours, considered critical to centralizing financial activity and exercise effective supervision (Riva Reference RIVA2007). By excluding bankers from open-outcry enclosures and abolishing the complementarity between Genoa and Milan, the 1913 law deeply affected the evolution of Italian securities markets (Baia Curioni Reference BAIA CURIONI1995; Riva Reference RIVA2012). It removed operational conditions beneficial to the markets’ overall development to achieve stability. However, given the Italian historical trajectory, it would have been difficult to achieve development and stability at the same time.

VI

The production and dissemination of fair prices allow markets to fulfill their functions, and they constitute the core of their political legitimacy, with transparency a pre-condition. An important stream of literature posits that trading should concentrate in one transparent market. More recent literature emphasizes the advantages of complementarity between transparent and opaque markets, if investors are heterogeneous enough in terms of information, risk aversion and patience. Complementarity may attract investors otherwise left outside because their preferences are not met by the single market. However, large trading volumes on opaque markets may affect stability and price fairness. Regulators could thus react to stabilize the market but impose regulations that hamper development.

Market organization determines transparency and has strong redistributive effects among operators, giving rise to conflicts over its capture. Before electronic trading, rules that defined market access played a crucial role in determining market transparency. The conflicts on market access disrupted the quality of information produced by the Milan and Genoa exchanges for a long time. Official brokers aimed to limit market access to defend their monopoly on brokerage and capture rents. Banks aimed for wide access to avoid the payment of these rents and make the market opaque, on which they could leverage their informational advantage.

Throughout the period under study, the Milanese brokers were able to impose restrictions on market access, whereas in Genoa free access prevailed. From the mid 1890s, when direct telegraphs between exchanges and the development of national banks improved market integration, the Milan Exchange implemented a transparent market based on open outcry trading within an enclosure and tight restrictions on access to it. Complementarities between Genoa and Milan contributed to development of the Italian market. However, Genoa was the main market, and its opacity led to the 1907 crisis that motivated regulatory interventions. The 1913 law imposed organizational homogeneity on Italian stock exchanges and it reserved open-outcry enclosures for official stockbrokers. It limited market development to achieve stability and facilitated centralization of financial activity in Milan.