Morgan Stanley, Wells Fargo, UBS and Merrill Lynch all compete fiercely on technology today, but the roots of the term “wirehouse,” which is often used to describe them, reach back to a system from almost 200 years ago.

The 19th-century technology that laid the foundation of wirehouses was a precursor to the information exchange of the modern era. In the mid-1800s, members of the New York Stock Exchange and other major stock exchanges started linking their branches in different cities to their headquarters via private telegraph wires, according to Eric Hilt, professor of economics at Wellesley College. These financial institutions relied on the “wires” to send orders and confirmations between the branches and markets, he said.

"Financial firms were among the first to adopt these new, rapid-communication technologies because, as maybe Ben Franklin was the first to say, 'Time is money,'" added Richard Sylla, professor emeritus of economics at New York University’s Stern School of Business.

Like the railroads with which they were often associated, the expansion of telegraph links across the country helped define 19th-century America and fuel its economic growth. The first commercial telegraph line — which ran between New York and Washington, D.C.— came just two years after Samuel Morse sent the first ever such message on an experimental line, according to the Economic History Association. That message, sent from Washington, D.C. to Baltimore on May 24, 1844, produced a paper tape with the words, “What hath God wrought?” — a biblical verse suggested by the young daughter of one of Morse’s friends, according to the Library of Congress.

As telegraph wires reached more and more parts of the country, the impact on financial firms was huge.

“With telegraph and then paper tape wire feeds, branches of companies with agents on trading floors could more fully participate from a distance,” says Colin Read, author of the seven-book series, "Great Minds in Finance” and professor of economics and finance at the State University of New York Plattsburgh. “These brokers that networked branches via wire feeds to list prices and facilitate trades gave us the wirehouse name today.”

Still, private telegraph lines were very expensive, and would only have been adopted once there was sufficient business originating in branch offices to justify the cost, Hilt noted, adding that it was probably not until the 1870s that brokerage houses developed their networks.

Hilt believes that “wirehouse” originally referred to brokerages with branch networks and at least some retail component to their businesses, as opposed to the wholesale investment banks or securities dealers that focused on commercial clients. “I think over time, as retail brokerage operations became more important to the whole industry, the term 'wirehouse' applied to most investment banks or broker-dealers,” he told FA-IQ.

Telegraph Boom

The latter years of the 19th century saw a telegraph boom. Between 1866 and 1900 Western Union dominated the U.S. telegraph industry, according to the Economic History Association, with the number of messages sent over its lines jumping from 5.8 million in 1867 to 63.2 million in 1900, it says.

It is difficult to pinpoint an exact date when the term "wirehouse" first emerged, according to experts. While SUNY Plattsburgh's Read thinks that it may have quickly followed the advent of the telegraph, NYU's Sylla thinks that it may have appeared much later. "Although I am not totally certain, I think the term 'wirehouse' did not come into use until the 1920s when more and more broker-dealers with branches served more and more ordinary investors as the markets became more democratized," he said. "The wirehouses contrasted with independent broker-dealers that had to execute their trades through another firm, typically one in New York that had a seat or seats on the stock exchanges."

 Wall Street Crash

Sylla explained that by the 1930s, when Merrill Lynch was founded, "wirehouse" came to connote a full-service broker dealer that provided clients with research, advice, investment banking services, and order execution. Charles Merrill, he noted, had a predecessor broker firm in the 1920s, but presciently closed it before the 1929 crash, and then refounded it in the 1930s.

The telegraph industry took a major hit during the Great Depression, according to the Economic History Association. As the century progressed, the telegraph found itself increasingly losing ground to telephone technology. The landscape of financial institutions also dramatically changed, undergoing significant consolidation over the decades.

The telegraph’s role in the development of the U.S. financial industry, however, is now inextricably linked to modern firms bristling with sophisticated financial technology that are still described as wirehouses.

Do you have a news tip you’d like to share with FA-IQ? Email us at editorial@financialadvisoriq.com.