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STOCK EXCHANGE REFORM

I

IN discussing the Stock Exchange in its economic relation to the State, it is desirable to regard it from two points of view : first, as an institution for the convenience of the public in the purchase and sale of stocks and shares; and, secondly, as the theatre of gambling operations in time bargains, the settlement of which consists in the payment and receipt of differences, or, in other words, bets for the rise or fall. It is unnecessary to refer to the foundation of the Stock Exchange, beyond saying that it was the natural development of the system previously existing under which the buyer was brought into contact with the seller by means of the broker, who made himself in a way responsible for the proper carrying out of the bargain. As business grew in volume, brokers became more numerous, associated themselves together, met on common ground, and laid down rules by which they agreed to abide. Consols, Foreign Government Stocks, Canals and Water Companies were the principal stocks dealt in. There were no railways, and the Limited Liability Act had not been passed. The choice of investments was, therefore, very small in comparison with the Stock Exchange Official List of to-day ; but it continued to expand, and was presently greatly enlarged by the inclusion of railway stocks and joint-stock companies of limited liability. The Stock Exchange prospered ; the mem— bers were eminently respectable, mostly wealthy, and content with the good living to be made by charging fair rates of commission for work done. The function of the broker was an important one, and, indeed, indispensable to the proper conduct of the business of the country. It appears to me that the only essentials for a real transaction in Stock Exchange securities is the article to be dealt in and a buyer and seller. The broker exists to bring these three into contact and effect the transfer; beyond that he is superfluous. In a nutshell, therefore, I have dealt with the raison d'étre of the Stock Exchange as an institution of public utility ; I will now briefly indicate some of its failings, and how I suggest they might be remedied. To do this I must add one more to the list of dramatis personae, and that is the jobber. Now the jobber is not so easily explained as the broker. He is a kind of connecting link between speculative and investment business, a middle-man whose existence is mighty convenient to broker and client, yet who could often be dispensed with to the advantage of both. So long as business was confined to what I venture to call strictly legitimate channels—such as the sale of a certain amount of stock on the one hand, and the investment of a certain sum of money on the other hand— there was nothing that a broker by taking pains could not do without the assistance of a jobber ; but if we go a step further, and imagine a holder of stock desirous of selling on the spur of the moment before the broker has had time to find a genuine buyer, or an investor desirous of taking advantage of the immediate condition of the market before the broker has had time to find a genuine seller, then the utility of the jobber is very pronounced ; and if we progress a little further and imagine a person desirous of selling what he has not got, in the hope of buying it back cheaper before the day of settlement and thus netting a profit, or another person desirous of buying what he has no intention of paying for, hoping to sell at a profit and put the difference in his pocket, then the jobber is not the mere interloper snatching a profit between buyer and seller, but becomes of as much importance as the keeper of a gaming table, paying and receiving according to the chances of the game. He should be always in pocket so long as he eschews speculation on his own account and contents himself with the profit derived from the turn of the market. Now, concerning the first part of my proposition, which may be said to be the investment side of the question, it has been contended that the unnecessary intrusion of the jobber between the buyer and the seller of stock is detrimental to the interests of both parties to the contract, and there would appear to be good grounds for such an allegation, at all events in relation to stocks in which there is not what is called a “free market,” that is to say, where dealings are more or less a matter for negotiation—such, for instance, as railway debenture stock, or similar investments of the gilt-edged class. The broker, on receiving an order to buy or sell, goes to a jobber, who makes a price at which he will do either. There is generally a wide difference between these, perhaps 2 per cent, sometimes even more. In such a case, in a deal of £1 ooo stock, the seller would receive £20 less than the buyer paid, whereas had there been no jobber in the way the seller would receive precisely what the buyer paid, less commission, at the outside I os. per cent. on the money value. Naturally this course of proceeding would be a little more troublesome to the brokers, but that is what they exist for, and they would only be fulfilling the function for which they were created. It may be urged against this view of the jobber as a detrimental that without such help as he gives by standing in place of the real buyer or seller pro tem., the business could not be done, and that by holding stock till a buyer comes along he takes the risk of a possible decline in the market and is justified in making wide prices. These are specious arguments, and find their contradiction in the circumstance that the public and their brokers can frequently do better business outside the Stock Exchange, besides which the jobbers who deal in particular stocks frequently have a joint book and in that way control their own markets, as there is no one in the House to bid against them, and at critical times they can unite and close their books against further purchases except at “knock-out” prices. If what I have said is not very convincing as to the decay of the Stock Exchange in its primary object of utility to the public, it at least leaves it open to argument as to whether such usefulness as it has may not be considerably added to by internal reform in the machinery of its business. By the granting of settlements and quotations, the Committee of the Stock Exchange place the hall-mark of its approval upon securities which sometimes very ill deserve it, and the public are misled by their reliance upon a safeguard which at its best is illusory, and at its worst is a vehicle for the perpetration of fraud. How often have not investors found to their cost that debentures supposed to be a first charge either have no powers of foreclosure or are subject to prior liens, and companies in which there have been active dealings are absolutely devoid of the property represented by the shares. No doubt it is for the purchaser to beware, but the Stock Exchange are in a measure to blame for allowing him to walk into a pit blindfolded, and carelessness or indifference as to the interests of one's customers is not the way to build up an enduring business. Looking at the matter from an outside standpoint, I should say the Committee of the Stock Exchange hardly realise their great responsibility in the matter of granting settlements. To turn to a pleasanter contemplation, the inviolability of

bargains and the practical certainty that the purchaser will get his stock and the seller will get his money are beyond all praise, and in discussion whether the Stock Exchange should be ended or mended, they outweigh many adverse considerations. I shall have again to refer to this in a different strain when treating of the speculative or gambling side of the question, but as a convenient machine for the exchange of securities I am prepared to concede that the Stock Exchange should endure, but that reforms are desirable.

II

It is when we come to consider the Stock Exchange as a theatre of legally authorised gambling transactions that we are brought face to face with its most glaring deficiencies, whether in relation to its internal economy as regards the interests of its members, or concerning its obligations to the public. The enormous volume of these dealings as compared with purely investment business makes it of the first importance that they should be conducted on a sound and well-regulated system under rules, the wisdom of which is indisputable. The love of gambling is inherent in the human race, and no amount of preaching or legislation will extirpate it. The Racecourse and the Stock Exchange are its largest recognised fields of activity, but with the former we have no concern in this article. By a legal fiction it has been held that a purchase of stock which entitles the buyer to demand delivery is not properly a gambling transaction, and I am willing to waive the point and call it a speculation, but this speculation for the rise and fall is what I mean by speaking of these dealings as legally authorised gambling. In speculative business the function of the stock-jobber receives its very highest development. If it is questionable if he might not sometimes be dispensed with in business of the investment class, it is unquestionable that but for his help the wheels of the speculative machine must run with greatly diminished velocity—or stop entirely. I will instance this by describing the modus operandi of a speculative deal in the mining market. A broker receives an order from his client to buy say I ooo shares for the rise. The centre of the market is formed by a knot of jobbers wedged together as closely as in a football scrimmage, and vociferating their eagerness to buy or sell at constantly changing prices. Long before the broker can reach this spot, even if he has the intention of doing so, he is accosted by one of the ever-watchful representatives of a jobber in the inner ring, who supplies him with the nominal quotation and then forces his way to the centre to find out if there has been any change in price. On his return the broker deals, and the bargain is reported to the jobber, who undoes the business at a profit if he can, by making a closer price to another jobber than that at which he has dealt. In this way shares change hands oftentimes at a difference of orth of a £, sometimes even less, and occasionally the business or some part of it is undone without any profit at all. By the aid of the jobber the speculator is thus enabled to deal at a closer price than would be possible without him. I am speaking of an active and free market, the very opposite of which is the “one man market,” and it is difficult to see how the individual who constitutes the latter can be otherwise than a very dangerous person to the speculator, as I will proceed to explain. A company desirous of pushing the sale of its shares in the Stock Exchange, gives to some leather-lunged jobber the right to “call" for delivery of them at a certain price. From that moment the jobber devotes himself to creating a demand for the shares at a higher price than his “call,” and with that object employs means which are discreditable to the Stock Exchange and fatal to its reputation for the honourable dealings of its members. I will illustrate this by a case in point. A company is formed and issued without prospectus, the shares being placed on the market at a premium in the manner stated, by giving a “call ” option to one of the leading jobbers. Concurrently with this, Press notices appear and a sheaf of eulogistic literature is published. The jobber “tips" his friends and the brokers to buy, predicting that the price will go higher. Sure enough it does ; the tape shows advancing quotations, which are duly repeated with appropriate comments in the financial papers. The trap is baited only too well, and the public flock in like sheep and the jobber unloads upon them. As the settlement approaches, many of those who have bought would rather take their profit than carry over, but the “one man" has closed his book temporarily against purchasers, and the client has to run the shares. He carries them over, perhaps for a few accounts, paying his differences each time as prices steadily decline with the cessation of buying. The “one man " of the market then prepares to turn his worthless scrip into hard cash by declining to carry over, which obliges the client to pay for the shares, and they accordingly pass into his possession. The jobber has the gold and the client has the paper. After that nothing is heard of the company, which lapses naturally into the category of “silent mines"; the shares are unsaleable, but the luckless investor at a not very

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