Shipping containers and financial instruments
What do they have in common?
Shipping containers are among the most significant//important inventions in maritime shipping. They are large steel containers, ranging in length from 20 to 40 feet (about 6 to 12 metres), designed to optimize space. Their use has revolutionized logistics and facilitated international trade growth//fuelled growth in international trade. The idea came from Malcolm McLean, an American businessman who, in 1956, had 58 containers loaded onto an old tanker converted into the first container ship in history.
Standardizing containers was a revolutionary idea: with standard sizes and characteristics, containers can be easily transported on freight trains, trucks and ships; they can be loaded and unloaded without necessarily unloading//emptying//removing their contents; they can also be stored in ports and warehouses stacked like building blocks. All this translates into significant savings in costs and shipping times.
The standardization of goods and services, including financial ones
The idea of standardizing goods and services is not new, and it has long been a concern in the financial sector too. Some examples of standard financial contracts, especially those relating to the exchange of goods, go back even further, and predate McLean's invention by 350 years; they are closely linked to the emergence of financial markets.
The first example of organized trading occurred in Bruges, Belgium: some investors used to meet in the Van der Bourse family inn to exchange credit securities, foreign currencies and goods. However, one of the first active and organized markets for trading standardized financial securities as we understand them today - i.e. involving small savers - developed in Amsterdam in 1602, thanks to the Dutch East India Company, one of the first private multinational companies in history.
The first securities to be traded were the shares issued by this company, which financed itself through the first initial public offering in history. The first large company with a broad shareholder base was created: many standardized contracts for small units, i.e. shares, gave shareholders the right to receive part of the future profits of the company, to which the Dutch government had granted the monopoly on the trade routes with the Asian colonies. The possibility of trading securities freely was crucial: as they had no maturity date, the only way to recover the capital invested was to sell them to other investors. Let's consider the opposite case: who would give a company their money in exchange for shares that are difficult to sell? Probably only those who want to make a very long-term investment.
The function of the stock exchange was, and still is, to broaden the range of investors by giving even those with a short time horizon the possibility to liquidate their position easily, i.e. to sell at any time, thus freeing themselves from investment constraints.
Standardizing property rights in a company provides important benefits:
- uniform terms and conditions allow standard contracts to be used for all negotiations: the cost of drawing up the obligations and rights of the parties is reduced;
- faster negotiations: buyers and sellers do not need to evaluate the rights and obligations of each specific contract because they already know the terms;
- greater liquidity leads to lower risk for investors and lower costs for issuers (lower risk premiums offered when signing contracts);
- increased competition in the market, because the same types of contracts offered by different companies can be compared more easily;
- increased transparency, since it is the market as a whole that evaluates the same characteristics, thus reducing 'information asymmetries', i.e. the differences in knowledge between the investor (the weaker party) and the issuer;
- greater innovation in the financial sector, as market participants can develop new standard products and services, such as exchange-traded derivatives.
As with containers, standardizing the financial markets has been enormously successful. Although Amsterdam's importance as a major financial centre has been surpassed by other cities, such as London, Chicago and New York, the number and value of instruments traded on stock exchanges have never stopped growing.
The idea has stood the test of time and has even given rise to important new and more complex financial instruments, such as futures and options traded on [stock] exchanges.
Standardization makes trading easier and increases market efficiency, but it is not always straightforward: just as managing global trade flows through containers requires enormous logistical efforts, creating and exchanging standardized financial contracts requires huge investments in technological infrastructure and human capital. However, working with many small, standardized 'bricks' has led to unprecedented trade development and growth, both in the world of commerce and in the global financial system.