The Baltic, Britain’s Sociable Exchange

In the world’s oldest market economies, securities and commodities exchanges have been in operation for centuries. Of those founded in Britain and America, quite a few have their origins in coffee-houses. In an era when Puritan sensibilities made alehouses and taverns unseemly places to do business, coffee-houses provided a place for social diversion. However, this sociability was no doubt important in establishing trust among exchange participants when regulations were either nonexistent or primitive and institutional strength was far weaker.

Many of these coffee-house exchanges are well known to this day, but one in particular is quite obscure to those outside the industry it serves, London’s Baltic Exchange. In its history, the Baltic went even further in encouraging sociability among its participants, limiting membership and hosting clubs in rowing, sailing, tennis, and more. True, in some respects, the Baltic looked more like a social club than an exchange but its trust-building characteristics have certainly not gotten in the way of its survival, the exchange is still in business to this day, over 250 years after it was founded.

Trading Over Coffee

The history of the Baltic Exchange dates to 1744 when merchants and sea captains began meeting at the Virginia and Baltick Coffee House on Threadneedle Street in London. That coffee-house, previously known as the Virginia and Maryland Coffee House, was renamed to reflect the favored routes of the merchants who fraternized there. At the time, the countries of the Baltic Sea were a source of raw materials like furs and tallow which were imported and traded in London. Coffee-houses like the Virginia and Baltick were important to this commerce in the 17th and 18th centuries. They were places to share information and conduct trade. Many other exchanges, from the New York Stock Exchange to the Lloyd’s insurance market have their origins in coffee-houses as well.

At the Virginia and Baltick, ship owners looked for freight with which to fill their vessels and merchants arranged for the transport of their cargoes. It made sense therefore that certain cafés were meeting places for merchants operating in certain areas. In London, there was also a Jerusalem Coffee House, for example, that was frequented by merchants operating in the Levant. However, only the more successful institutions ever grew out of their humble accommodations. For the Baltic, the first of several moves occurred in 1810 but even this relocation was simply to a larger coffee-house.

Initially, the Baltic Exchange was mostly focused on the shipping and trade of dry goods like grain. As such, business on the exchange boomed in the mid-19th century after the repeal of the corn laws, which had previously subjected grain imported to Britain to heavy tariffs. It was not until the early 20th century that the exchange began to focus more purely on ship chartering. This was the product of low grain prices following the agricultural glut of the 1920s and the exchange’s earlier combination with the London Shipping Exchange in 1900. It was during that period that the Baltic became what it is today, a freight shipping market focused chiefly on the trading of shipping contracts.

Membership

The specialized nature of the Baltic Exchange was sure to keep membership from growing too large. Nonetheless, the exchange sought to regulate its membership carefully and in 1823, limited its size to three hundred persons and companies. Each of these paid four guineas (or 84 shillings) and entry required six recommendations from existing members. Once a member though, such person or entity became a partial owner of the exchange, collecting whatever funds remained at the end of the year in dividends. It was never a massive business though and the exchange had a rather cozy atmosphere, resembling a social club as much as a trading floor. It regularly hosted dinners and even had organized shooting, rowing, and musical clubs.

Even these social events had an institutional purpose. They helped foster trust among members, critical since the exchange prided itself on being a place where verbal commitments had the force of written contracts. The commercial, social, and reputational benefits of membership meant that as the ship-brokering business grew, the Baltic Exchange remained at its center. Indeed, the exchange was physically in close proximity to the offices of large shipping firms and the managers of these companies regularly congregated at the Baltic for lunch or other occasions.

Eventually, the three-hundred-member limit was abandoned. There were some 2,800 members paying twenty guineas in annual dues by the 1920s. However, that era marked the peak of the exchange’s membership. The number fell to 1,200 during the Second World War. In 2015, just before ownership of the exchange changed hands, the company paid dividends of £1 million to under four hundred members, an average of just £2,500 each. Regardless, the purpose of exchange went far beyond directly enriching its member-owners.

“The members, many of them in silk hats, form little groups on the floor … If a member is wanted, his name is called from a high-pulpit-like structure. Around the room are posted bulletins, telegrams, etc., giving exhaustive and up-to-date information as to the movement of steamers and other shipping information.” – The Nautical Gazette, describing the Baltic Exchange in 1921

Functions

Among the functions of any exchange is to centralize the trading in some asset or commodity. In this respect, the Baltic Exchange was no different; one of the ways it made the market for ship chartering more efficient was by bringing ship brokers, owners, and merchants under one roof. However, the exchange also established its own ethical guidelines and rules for handling disputes. The exchange required the arbitration of disputes among exchange members; if no consensus could be reached, an umpire would be appointed to settle the issue. This was a means of mitigating the cost of litigation and making the exchange a more seamless place to do business. In time, it also made the Baltic Exchange the industry’s self-regulatory body, a role many other exchanges aspire to but rarely hold.

However, it isn’t the governance roles of the exchange that are most well-known to outsiders. Rather, the Baltic publishes a well-known index of shipping rates that is used to track economic health on a daily basis. The Baltic Freight Index was first tabulated in 1985 and became a benchmark for the ship chartering market. To this day, the index is calculated as a weighted average of rates for dry-bulk vessels operating on thirteen different routes. The index was created to make shipping rates more transparent and, in the process, make the business more efficient. Instead of haggling rates from scratch every time a deal was to be done, merchants can refer to the index or one of its components to reach a fair price.

The Baltic Freight Index was renamed the Baltic Dry Index in 1999 and since then the exchange has continued to be a publisher of industry news and statistics. Indeed, the Baltic Dry Index itself has been put to great use in forecasting economic growth, or the lack of it. It used to be called the world’s most reliable economic indicator, measuring the day-by-day changes in shipping rates without the ‘noise’ plaguing equity markets, for example. Because building cargo ships takes many years, the short-term movements are driven by changes in trade volumes, a proxy for global demand unaffected by investor speculation.

Since its combination with the London Shipping Exchange, the Baltic has evolved, though arguably less than other exchanges have over the past century. It maintains a relatively slim membership of six hundred or so, just under two-thirds of which shared ownership of the exchange until it was sold to the Singapore Exchange in 2016 for £77 million. Some of the more significant changes are the new markets the Baltic helped create. The exchange got into aircraft chartering back in 1929, giving it a role in that segment of the freight trade. More recently, in 2011, it launched a market in forward freight agreements, essentially futures contracts on shipping rates. Today, the Baltic is the world’s largest ship chartering market with annual turnover of over a £1 billion. There is still ample time for recreation though as the exchange continues to maintain clubs in cricket, tennis, and sailing for its members.

Bombing

Not all of the Baltic’s history is about steady progress and good times though. Less than thirty years ago, the company was forced to abruptly find new accommodations after its building on St Mary Axe was bombed. On April 10, 1992, a bomb made of a ton of fertilizer was placed in a van parked just outside the exchange by the Provisional Irish Republican Army. When it went off late that evening, it killed three people, an exchange employee and two pedestrians. The bombing prompted yet another relocation for the exchange which had already changed sites three times in the past two centuries of its history. A century earlier, it had called the site of the old South Sea Company, of bubble fame, its home.

Nonetheless, despite the bombing, which took place on a Friday evening, the exchange had reopened for business the following Monday at the other great London exchange with maritime origins, Lloyds. Unfortunately, the old Baltic Exchange building did not survive the bombing, though it has been since replaced by another architectural gem, the Gherkin, designed by the architects Foster and Partners.

Lesson

Until its sale in 2016, the Baltic was one of the world’s oldest independent exchanges in existence. The assets traded there, principally empty space on cargo ships, gave it a niche market to serve. The Baltic was also a notably social institution as suggested by its small membership and atmosphere. These facts are no doubt related. However, the Baltic also reveals a more general fact about exchanges, that though they are thought of as impersonal, if not entirely anonymous, environs for financial dealings today, this is not true for all of them. Indeed, many had their origins in very collegial and social institutions, in an era when your local coffee-house may have hosted trading in more than just coffee.

More from the Tontine Coffee-House

Also read about other exchanges founded in coffee-houses, including the New York Stock Exchange and Lloyd’s of London.