Wall Street: A Guide to the Heart of the US Financial Industry
Wall Street is the term used colloquially around the world to refer in general terms to the US financial industry. This is because, traditionally, much of the industry was physically located on or around Wall Street.
Table of Contents
Wall Street’s Early History
The southernmost tip of the island of Manhattan, in what is now New York, was colonised by the Dutch in the 17th century. To protect their settlement from native Americans and the British, the Dutch built a defensive wall running east to west along what is now Wall Street.
As the street had a well-known location and conveniently ran between the docks on the East River and the Hudson River it became an important location for commerce. The many sorts of goods traded included shares and bonds.
One of several places where the traders of these financial instruments met was under a buttonwood tree outside 68 Wall Street. In May 1792, 24 traders met there to sign an agreement outlining the rules and fees governing these transactions. This became known as The Buttonwood Agreement and is considered to mark the founding of the New York Stock Exchange (NYSE).
Exchanges
In pre-digital times, the most efficient way to trade financial instruments was to be in close physical proximity to other people interested in trading the same instruments. These meeting places gradually evolved into different “exchanges”, each specialising in the trading of different physical commodities or financial securities.
Financial exchanges still present in the Wall Street area include the world’s two largest stock exchanges by market capitalisation; NYSE and NASDAQ – as well as the New York Mercantile Exchange (trading commodity futures), The New York Futures Exchange (futures and options) and the New York Board of Trade (commodity derivatives).
The location of these exchanges is one of the main reasons why banks, brokers and other financial players located their offices in the Wall Street area.
If there is one image that comes to mind when one hears the name Wall Street, it is the famous Doric columns at the front of the New York Stock Exchange. But, curiously, the front of the New York Stock Exchange building is not actually on Wall Street but on Broad Street.
Trading and Investing on Wall Street
Any time anyone trades a US financial asset, like a stock or a bond, it is very likely that at least part of the transaction will be handled by an organisation based in New York’s financial district, or Wall Street.
But how can you trade or invest more directly in the US financial industry? Can you actually own a piece of the Wall Street machine and profit from its success? Or can you short a firm’s stock and benefit from any misstep?
In the next few sections, we will look at some ideas. None of the firms mentioned are recommendations by Admirals, they are simply cited as examples of the stocks and CFDs you could trade.
Financial Supermarkets
One obvious way of investing on Wall Street’s main industry is to buy the shares of “financial supermarkets”, a small number of large firms active in many parts of banking and the financial markets. Six of the largest names in this category are:
- Goldman Sachs Group Inc
- JP Morgan Chase & Co
- Morgan Stanley Inc
- Bank of America
- Citigroup
- Wells Fargo & Co
Buccaneers
If you prefer trading and investing in more buccaneering areas, you might want to consider:
- Apollo Global Management
- Ares Management
- The Blackstone Group
- Carlyle
- KKR
These firms are described as “alternative investment managers”. Whilst they have all expanded to provide investment funds in multiple categories, all of them started life as niche players in one particular corner of the financial industry, such as “distressed credit”.
For example, KKR, or Kohlberg Kravis Roberts, to give it its full name, pioneered the modern Private Equity industry. Although the firm completed its first buy out deal in 1976, KKR was made famous by the book (and later film) Barbarians at the Gate, which documented its 1989 hostile takeover of RJR-Nabisco. This was the biggest leveraged buy out at the time - and for 17 years later.
Traditional Fund Managers
Fund managers pool money from individual investors before investing. By doing this they generate economies of scale and make it easier for individual investors to diversify their investment portfolios.
The largest fund manager in the world, with $7.43Tr of assets under management at the end of 2019, is BlackRock Inc.
The othertop 10 fund managers in the world are either not publicly listed (e.g. Vanguard and Fidelity), part of another financial institution (e.g. State Street and Goldman Sachs), or non-US (e.g. Allianz and Amundi).
Incredibly, BlackRock was only founded in 1988, making it much younger than all of its peers. The company has a short but interesting history, sharing roots with Blackstone, which helped with the initial financing, and at one point owned 50% of the company.
Stockbrokers
To buy or sell shares on a stock exchange like NYSE, you need to be registered with (or a member of) the exchange. You also need to comply with rules and regulations which sometimes originate from the exchange and sometimes from the relevant regulators.
As a result of all this, when individuals and investment specialists want to buy or sell shares, they will almost always go through a stockbroker.
Three large US stockbrokers whose shares you can trade through Admirals are:
- Charles Schwab Corp.
- Interactive Brokers Group
- T Rowe Price Group
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Insurance Companies
The insurance industry is often overlooked by those analysing the financial industry. However, their job includes:
- Collecting payments from clients in the form of insurance premiums; and
- Making sure they have enough capital to pay any valid insurance claims made by their clients.
In between these two activities insurance companies often invest the premiums they receive – and they are some of the largest and most important investors in the world.
Listed US insurance companies whose shares (or CFDs) you can trade on Admirals includes:
- American International Group, or AIG
- Hanover Insurance Group
- Metlife
In A Class of Its Own
In a class of its own but with insurance at its core is the legendary investment company Berkshire Hathaway – headed by Warren Buffet and Charlie Munger.
Although technically a conglomerate, Berkshire Hathaway conducts insurance business through around 70 subsidiaries including General Re, GEICO and NRG. Like other insurers, it uses the funds from the insurance premiums to invest.
Berkshire Hathaway has grown into a large and diversified investor with$817bn of assets under management in a broad portfolio of public and private companies, in financial (American Express, Bank of America, Wells Fargo) and non-financial (Coca-Cola, American Airlines, Apple, IBM) companies handpicked by two of the greatest investors of all time.
Despite this pedigree and the fact that its shares are listed on the New York Stock Exchange, it is notable that Berkshire Hathaway is headquartered far from Wall Street, in Omaha Nebraska.
A Twist On Insurance
For a different way to trade the insurance industry, you might want to look at insurance brokers, firms that help corporate customers with the selection of the best insurance for their needs. Two such firms listed on NYSE are:
- Brown & Brown Inc., and
- Marsh & McLennan Cos
Marsh & McLennan is one of the world’s largest players in the insurance broking industry and has also diversified into other service industries, like specialist consulting.
Financial Infrastructure
If you are interested in owning (or shorting) a share of Wall Street’s infrastructure, you could consider any one of these four groups:
- Intercontinental Exchange (ICE), which owns 12 exchanges, including NYSE, the world’s largest stock exchange measured by the market cap of its listed companies. ICE also owns 6 central clearing houses around the world.
- NASDAQ Inc, owner of the second largest stock exchange in the world and smaller subsidiaries in Nordic Europe.
- CBOE Global Markets, which owns and operates four options exchanges, seven equities exchanges, one futures exchange and one foreign exchange marketplace – as well and the CBOE Volatility Index.
- CME Group Inc, the world’s largest group of financial derivative exchanges; owning Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange and others. The group owns other technology and information-based products and 27% of S&P Dow Jones Indices, owner and provider of the S&P 500 and the DJIA.
Steady Revenues
To invest in the financial industry but avoid some of the cyclical risks associated with it, you might consider:
- Bank of New York Mellon Corp
- Northern Trust Corp
- State Street Corp
Technically banks, these three organisations make the majority of their revenues from providing “custodian” and related services to other banks and large investors. This line of business provides relatively predictable revenues, whilst still benefiting from the overall growth of the financial industry.
Information & Research
Wall Street is a huge consumer of information and research. Three global suppliers with roots in Wall Street and listings on the New York Stock Exchange are:
- Factset Research Systems
- S&P Global Inc.
- Moody’s Corp.
S&P, for example, was founded by Henry Varnum Poor in 1860 and specialised in supplying information on railway stocks – the popular investment of their time.
As well as research and information, the company owns the largest credit rating agency in the world and the majority of S&P Dow Jones Indices, producer of the S&P 500 and Dow Jones Industrial Average, among other indices.
In November 2020, the company announced the acquisition of another financial intelligence supplier, IHS Markit for $44bn.
Final Thoughts
As you can see, Wall Street has a wide variety of players, many of them giants of the global financial industry.
The fortunes of these companies tend to rise and fall with the health of the financial markets.
Although most started life as small partnerships, all the firms named in this article are public, which means you can buy or sell their shares and CFDs right here with Admirals.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
