Financial centers: from their historical roots to modern technology hubs
Market places have existed since humans have started to exchange goods: gathering in one place was the best way to promote transactions. Farmers came from the countryside to the cities to sell their productions: fruits, vegetables, grains, chickens, ….
The concentration of people in a central place was needed to exchange goods and information. Money and finance were no exceptions: in the early days of the stock markets, people had to come to a central place to meet and exchange news. It was very convenient for all to feel the mood of the other market participants. When everybody is optimistic, one can dare to acquire shares. Whenever the common opinion turns sour, it is time to take one's profit and sell.
Very rapidly, technological innovations brought advantages to the early adopters. The telephone allowed brokers to communicate much quicker with their investors. In the building of the stock exchange, those whose telephone boots were closer to the trading floor had an edge on their competitors. It was also advisable to have young jobbers who could run faster to communicate hot news and transmit orders.
Today, the speed of execution of orders has become crucial. With the co-location, the stock exchanges allow the brokers to put their servers in the same room as the computers that run the markets: even the length of the connecting cables is measured to ensure a level-playing field between all participants! In the race to capture a technological edge by gaining a few nanoseconds, some market participants set up their telecommunication systems to liaise in a straight line between financial centers such as New York / Chicago or London / Frankfurt.
However, financial centers include much more than trading platforms and market infrastructure: they include the banks, the insurance companies, the fund managers, … as well as the various services around finance such as law firms, accountants and advisers. For most of them, there is a strong incentive to be close to each other and close to the regulators and market authorities. Despite the ease and speed of the communication systems, the proximity is quite relevant, and market participants need a local presence if they want to capture a sizable part of the financial activities of a country or region.
Conversely, companies and organizations looking for funding or other financial services know that the financial centers will provide them with the needed assistance.
This explains the emergence of a limited number of financial centers that have been able to attract the bulk of the business. In a typical "network" effect, the more competence a financial center acquires, the most successful it becomes!