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The Stock Exchange
BOOKS ON BUSINESS
_Crown 8vo. 2s. 6d. net._
A series dealing with all the most important aspects of commercial activity.
"Short, pithy, simple, and well informed, and written by men of acknowledged authority, these books are equally interesting, whether the reader knows something or nothing of the subject."
_Manchester Guardian._
PORTS AND DOCKS. By DOUGLAS OWEN, Barrister-at-Law, Secretary to the Alliance Marine and General Assurance Company.
RAILWAYS. By E. R. MCDERMOTT, Joint Editor of the _Railway News_, City Editor of the _Daily News_.
THE STOCK EXCHANGE. By CHAS. DUGUID, City Editor of the _Daily Mail_, Author of the "Story of the Stock Exchange," etc. etc.
MONOPOLIES, TRUSTS, AND KARTELLS. By F. W. HIRST.
TRADE UNIONS. By G. DRAGE.
THE BUSINESS OF INSURANCE. By A. J. WILSON, Editor of the _Investors' Review_, City Editor of the _Daily Chronicle_.
THE ELECTRICAL INDUSTRY. By A. G. WHYTE, B.SC., Editor of _Electrical Investments_.
LAW IN BUSINESS. By H. A. WILSON.
THE MONEY MARKET. By F. STRAKER, Fellow of and Lecturer to the Institute of Bankers and Lecturer to the Educational Department of the London Chamber of Commerce.
THE SHIPBUILDING INDUSTRY. By DAVID POLLOCK, M.I.N.A., Author of "Modern Shipbuilding and the Men Engaged in It," etc. etc.
THE BUSINESS SIDE OF AGRICULTURE. By A. G. L. ROGERS, M.A., Editor of the last Volume of the "History of Agriculture and Prices in England."
THE BUSINESS OF ADVERTISING. By C. G. MORAN.
THE COTTON INDUSTRY AND TRADE. By S. J. CHAPMAN.
CIVIL ENGINEERING. By T. C. FIDLER.
THE IRON TRADE OF GREAT BRITAIN. By J. S. JEANS.
THE BREWING INDUSTRY. By JULIAN L. BAKER, F.I.C., F.C.S.
THE AUTOMOBILE INDUSTRY. By GEOFFREY DE HOLDEN-STONE.
MINING AND MINING INVESTMENTS. By A. MOIL.
THE STOCK EXCHANGE
BY CHARLES DUGUID
CITY EDITOR OF "THE DAILY MAIL" AUTHOR OF "THE STORY OF THE STOCK EXCHANGE" "HOW TO READ THE MONEY ARTICLE" ETC. ETC.
THIRD EDITION
METHUEN & CO. LTD. 36 ESSEX STREET, W.C. LONDON
_First Published.... February 1904_ _Second Edition..... November 1906_ _Third Edition .... November 1913_
PREFACE
In accordance with the scope of the series of Books on Business, of which this little work forms an item, its main object is to explain to the unversed in simple terms the somewhat complicated machinery of the Stock Exchange. Some criticism is ventured upon here and there, and a practical hint may be gleaned now and again from its pages; but the real aim of the book is merely to explain, not to comment. If the book conveys some idea of the important part the Stock Exchange plays in the economy of the nation, and of how it plays that part; if it furnishes a solution of the various mysteries which the routine of the Stock Exchange presents to many minds, the objects of the little work will have been attained.
Owing to the continued demand for the book, and to the changes which have occurred during the decade which has elapsed since it was written, it is now reprinted in revised form.
C. D.
PARK LODGE, NEW BARNET, HERTS, _July, 1913_.
CONTENTS
I. WHAT THE STOCK EXCHANGE IS 1
II. THE MARKET-PLACE 6
III. THE MEMBERS AND THEIR CLERKS 18
IV. THE COMMITTEE 26
V. BROKERS AND JOBBERS 32
VI. HOW BUSINESS IS TRANSACTED 45
VII. THE SETTLEMENT 56
VIII. THE ZOOLOGY OF THE HOUSE 65
IX. OPTION DEALING 72
X. THE WARES OF THE MARKET 84
XI. FAILURES 101
XII. PRICE LISTS AND RECORDS 109
XIII. THE ROYAL COMMISSION'S VIEW 125
XIV. A SKETCH HISTORY 138
XV. A BROKER'S DAY 150
XVI. FROM A SOCIAL POINT OF VIEW 161
INDEX 169
CHAPTER I WHAT THE STOCK EXCHANGE IS
The Stock Exchange has been described as the mart of the world; as the nerve-centre of the politics and finances of nations; as the barometer of their prosperity and adversity; and so on. It has also been described as the bottomless pit of London, and as worse than all the hells. Perhaps, however, the Stock Exchange can best be defined and described as a market. Just as Smithfield is the market for meat and Covent Garden the market for flowers, fruit, and vegetables, so is the Stock Exchange the market for stocks and shares.
These stocks and shares, as everyone knows, are, roughly speaking, sleeping partnerships. The holder of railway stock is a part-proprietor of the railway, and is entitled to his proportion of its profits; the holder of shares in a mining company is similarly part-proprietor of the mine. Even although the holders of the stocks of a nation, such as Consols, or of the debenture stocks of a company, are creditors and not proprietors, they depend, for the income which those stocks yield them, upon revenue and profits, just as does a partner in a business.
It will at once be seen that although the Stock Exchange may be defined as a mere market, the wares that are displayed and dealt in are of such importance as to entitle it to the more ambitious definitions with which it has been exalted. It is worthy of being defined as the mart of the world, because these wares represent property in every part of the world, and because the orders which are executed in this mere market emanate from all over the world. The business of the Stock Exchange is more varied and cosmopolitan than that of any other mart, except, perhaps, the Money Market. The business of the Stock Exchange may be described as the business of businesses. The institution may be defined as the nerve-centre of the politics and finances of nations, because in this mere market all that makes history is focussed and finds instantaneous expression. It is worthy of being defined as the barometer of their prosperity and adversity, for a glance at the tone of this mere market, whose wares are more mercurial than these of any other mart, suffices to indicate their condition. It may almost be said that the price of Consols is the welfare of the world expressed in one figure.
Perhaps the Stock Exchange is unworthy enough to be defined as the bottomless pit, and to be described as worse than all the hells, if we look at the mere market from the point of view of those who abuse the facilities which it offers for free dealing--but only from that point of view. Without the Stock Exchange our commercial and industrial life could never have attained its modern refinements. Indirectly this institution provides the sinews of industry and commerce, or, at all events, that one great sinew, capital. The inventor with an idea to develop, the trader with a business to expand, the pioneer with a country to explore, the Government with a scheme to finance, all betake themselves eventually to the Stock Exchange.
It is the organisation of capital for speculation and investment, even as the banks are the organisation of capital for loans. Its members are in close touch with all the capitalist investors and speculators in the country, and can lay any scheme for which the financial sinews are required before them. Moreover, in providing a free market for the securities upon which the money is subscribed, the Stock Exchange tempts subscriptions, and indeed renders them possible where otherwise they might not be. Most people would hesitate to part with their money in exchange for even the best securities, did they not feel assured that, if necessity arose, they could readily obtain its return by selling the security in the free market which the Stock Exchange affords. But for the Stock Exchange, even the Government would find a difficulty in borrowing; whilst great schemes, national, commercial, and industrial, would languish in the lack of a ready flow of capital. Railways could not traverse the land nor ships the sea; enterprise would be discouraged, and the original and progressive ideas of clever men would decay undeveloped. Thus the Stock Exchange is linked closely with the prosperity of the world in general and of the nation in particular, and it has grown with the development of that prosperity.
Some very fair idea of how it has grown is obviously conveyed by a statement of the nominal value of the wares in which it deals. It is impossible to form an estimate of the whole of the enormous amount, as there are dealings in so many securities which are not recognised in the Official List of the market. But the nominal value of the securities thus quoted at the end of 1912 reached the enormous total of £10,990,249,126; this comparing with £8,787,316,406 in 1902, an increase of £2,202,932,720, or no less than 25 per cent. In other words, the amount of securities officially quoted in the Stock Exchange is one-quarter larger than it was a decade ago.
CHAPTER II THE MARKET-PLACE
The market-place, where the dealing in this mass of securities is carried on, is by no means of imposing appearance from the exterior point of view. Of all the Stock Exchanges, Bourses, and Bolsas throughout the country and the world, the London Stock Exchange makes, perhaps, the least exterior show. The tourist often seeks it in vain, and thousands of Londoners pass it every day without knowing that behind the suites of offices, with their Portland-stone walls relieved by granite, is hidden the mighty market-place. Yet, for its purposes, the Stock Exchange, or the House, as the members and even the Rules affectionately term it, could not be better situated. It is in the very heart of the City. Its west door, the Capel Court entrance, which is the most important by tradition though not by usage, faces the eastern end of the Bank of England, and the building occupies the greater part of the triangle which has Bartholomew Lane for its base, Throgmorton Street for its north side, and Threadneedle Street and Old Broad Street for its south side, the apex of the triangle being formed by the junction of Throgmorton Street and Old Broad Street.
As to the interior, it is without form, though anything but void in business hours. There is no trace of the triangle to the insider, the boundary lines being broken where the surrounding offices abut, or where they have been swept away as opportunity offered for the extension of the Stock Exchange proper. Although the site, including the surrounding offices, occupies some 40,000 square feet, the Stock Exchange itself is only about half that in floor area. The whole design of the interior architecture, Italian in style, is marked by a good deal of solidity. The walls are for the most part covered with marble, the peculiar veining of which suggested the title, Gorgonzola Hall, by which the Stock Exchange is sometimes known. Massive pillars, also marble, abound. The floor is of teak, oak, which was formerly used, having been found of insufficient durability to stand the wear and tear of the members' feet. The feature of the interior architecture, however, is the dome, 70 feet in diameter and 100 feet high, covering the central octagonal area. Beneath the Stock Exchange proper, and extending to almost the same area, is the Settling or Checking Room, the walls of which are lined with oak panelling and glazed tiles.
To the interior of the Stock Exchange the public is not admitted, the authorities and the members themselves, aided, of course, by the janitors stationed at the doors, keeping most careful guard. Many are the stories, generally exaggerated, as to what befalls the stranger who has the temerity and skill to pass within the sacred portals. Occasionally, however, distinguished visitors are shown round, and the list includes the late King Edward VII. Only once have the Managers given permission for drawings to be made of the interior for publication, and on one occasion photographs of the interior were taken and sold for charity.
One of the most common remarks of the clerk who sees it for the first time is, "How small a place!" The impossibility of taking in the whole of the building at a glance is responsible for the false impression so often formed by the disappointed young man newly introduced to a scene of which he has heard so much. But to take one's stand at the Bar of the House, which is just inside the door at Capel Court, is to obtain a much better view than that usually offered by the waiters on effecting the introduction of a new-comer. One is then in the Consol Market, in some respects the most important of all, and looks right down the whole length of the House from west to east. The vista is fine, if not, indeed, impressive. The massive pillars, so often criticised by the members for the loss of space they involve at their huge bases, stand out with a certain solid grandeur, but the dome of what is still called the New House, the most beautiful feature of the Stock Exchange, is lost by reason of the lower roof just in front of us. On the left hand or north side of the Bar is the Parlour, and on the right stands the Kitchen, names handed down through decades for the two little sets of desks on each side of the Bar. Moving forward through the Consol Market, and slightly to the left or north-east, one passes through the Colonial Stock and Bond Market, and stands upon the threshold of the Grand Trunk section. It will be understood that there are no lines or barriers to form boundaries of the various markets. When one talks of a Stock Exchange market, he has in his mind a mere space in the Stock Exchange near some pillar or window; or, much more likely, he has in his mind the group of men who occupy it, dealing, or prepared to deal, in certain securities. Generally speaking, custom alone forms the barrier between the various departments, and the consequence is that when one particular market attracts many members by reason of its animation, the dealers in the busy part frequently overflow the fancy boundaries and press hard upon the neighbouring space. Thus it often happened that the American Railroad Market, touching the Home Railway section on one side and the Grand Trunk section on another, overlapped the boundaries of each, and eventually, because of the inconvenience, the home of American Railroads had to be enlarged.
Pursuing the oblique left-handed direction of our walk through the House--proceeding, that is, to the north-east--we pass three markets--Home Railways on the right, Trunks on the left, and next to Trunks, further on, American Railroads. We struggle by Banks and come into the cosmopolitan waters of the Foreign Market, where may be heard half a dozen different languages all being spoken at the same time. The Foreign Market is in shape like a sleeve, and the cuff end of it leads out to the main door of the Stock Exchange in Throgmorton Street, so that we have traversed, roughly speaking, the north-west quarter of the Stock Exchange. Round that door the South African Market or Kaffir Circus seethes and squirms. First comes the Rand Mines and East Rand division, then the gold shares to the left and the De Beers market to the right, leading into the middle of the Gold Fields and Chartered group, beyond which again stand the dealers in Rhodesians, each group, of course, covering a wide variety of kindred shares. But, getting back to the main entrance and deviating with the structure of the House a little to the right, we leave the Deep Level section sitting round a pillar and press on through the British Columbian lot. This market runs along the north-eastern side of the House, and is bounded on the outside by the spacious telephone and lavatory accommodation. The British Columbian Market abuts on the eastern end of the Stock Exchange--the apex of the rough triangle which is its form.
We have thus traversed the Stock Exchange from end to end through its northern half, and turning, we proceed to traverse the southern half. First comes the West Australian Market, which is bounded on the outside by the Cloak Room. This market has a fine space to itself, and rejoices in the possession of the board upon which the tape of the Exchange Telegraph Company is displayed. On the western confine of the West Australian Market is the Jungle, the West African Market. In busy days the West African dealers sadly crowd the Foreign Railway Market, standing next, and the Jungle occasionally gets mixed up with the Electric Lighting section. We are gradually working round to our original standpoint, and leaving the little Mexican Railway and Uruguay Markets on the right, we press through the Miscellaneous or Industrial Market, on towards that devoted to Indian Railway securities, which in its turn debouches upon the Kitchen, where we started.
Of course, there are many markets one hardly notices in a hurried tour round the House, but we have glanced at the principal. We have also noticed here and there the boards upon which quotations are marked and record is made of the prices at which business is done. We have also noticed the Waiters' Stands, about twenty in number, placed in various parts of the House, pulpit-like, or rather rostrum-like, erections, each with its small sounding-board above, so that the important announcements which emanate from these stands may be well heard in the House. But we shall learn more of the uses of these internal features of the Stock Exchange, marking-boards, waiters' stands, and so on in subsequent chapters.
Upon this market-place something approaching three quarters of a million sterling has been spent. It does not belong to the members as such; it is the property of the proprietors, who, roughly speaking, must be members of the Stock Exchange. When at the beginning of the nineteenth century it was decided by the members of the Stock Exchange of that day to erect a new building, some of the more enterprising of them subscribed £20,000, and they laid the foundation-stone of the present edifice, which has been vastly extended since and is still growing. The share capital is now £260,000 and the debenture capital £500,000. All new members are now required to hold one or more shares, and only members are allowed to hold the shares except in the case of these few proprietors who acquired them before the end of the year 1875, when a new deed of settlement came into force. These proprietors, their executors and legatees, may hold the shares although they are not members, but in other cases where the shares fall into the hands of those who are not members, or where they are in the hands of one who ceases to be a member, they must be transferred to a member within twelve months. Anyone, whether a member or not, may hold the debentures, which are secured by a floating charge on the whole property, although they carry no mortgage rights.
The proprietors of the Stock Exchange draw a great part of their revenue, of course, from the entrance fees and subscriptions of the members, who pay a rent, as it were, for their stands in the market-place; and a considerable portion of the revenue comes from the rent of the brokers' offices which form part of the building. The interests of the proprietors are controlled by directors, who are called Trustees and Managers. Before they can be appointed they must have been proprietors for the preceding five years, and must hold at least ten shares at the time of their nomination. Their task, as may easily be imagined, is no light one. They are nine in number, as they have been ever since the present constitution came into force at the beginning of last century. It is theirs to provide a fitting market-place for the important transactions carried on by the members and their clerks, who number about 7,500 in all. To provide accommodation for such a population, with all the requirements of ventilation, heating, and lighting, as well as facilities for work at high pressure, which modern business demands, would tax the organising capabilities of any body of men. The principal officers of the Stock Exchange responsible to the Managers are their Secretary, the Architect and Surveyor, and the General Superintendent. It is not surprising that grumbling criticism is sometimes heard; the matter for surprise is that there is not more of it, especially considering the rapidity of the growth of the number of members, and the difficulties in the way of extending the size of the market-place. These difficulties are constantly being overcome; offices are absorbed into the main area, corridors are swept away, the utmost ingenuity is exercised in the creation of space.
The enlargements and alterations and the provision of facilities for expeditious dealing and of conveniences for the comfort of the members naturally mean a large amount of expenditure; but, in spite of this, the Managers have always succeeded in making the market-place pay its proprietors, and pay them handsomely. On the four hundred shares of £50 each, which formed the original capital of the Stock Exchange when it was opened in 1802, there were no dividends for the first three years, but then a series of annual £10 dividends set in, with the result that within seven or eight years from the outset the whole of the capital had been returned in dividends. Until the end of 1853 the shares remained £50 paid, and by that time no less than £571 had been paid on each share in dividends. As there was a £25 call in 1853, the shares became £75 paid, and in 1854 a dividend of £13 was distributed. In the following year there was no dividend--the fabric of the Stock Exchange had been entirely rebuilt--but a call of £25, making the shares £100 paid. On these £100 the dividends amounted in the years 1856 to 1867 inclusive to £192. Then in 1869 there was again no dividend, but a call of £25, and in the next seven years, from 1869 to 1875 inclusive, the dividends amounted to £490 10_s._, and the calls to £155. Thus, at the end of 1875, when a reorganisation of capital took place, the shares had become £280 paid, and on each of these had been distributed £1,266 10_s._ All this is to show that the Stock Exchange was a huge financial success from its inception--that the market-place has paid its proprietors. By a further reorganisation of capital the shares had become £12 paid in 1882, and in that year the dividend was £3 18_s._ It went on increasing steadily for many years after that: £5 being paid for 1888, £6 for 1893, £7 10_s._ for 1896, £8 for 1899, £9 for 1900, £10 for 1904, and £12 for 1905. This £12 a share has so far been the maximum rate of dividend. In May, 1911, a call of £1 a share was made, making the shares £13 paid, and the most recent dividend was £10 10_s._ a share. The liability on the shares is unlimited, but no more than £2 can be called up in any one year. The market price of each £13 share has for some time been round about £160, whilst the 3 per cent. debentures are quoted at about 83.
CHAPTER III THE MEMBERS AND THEIR CLERKS
So much for the proprietary of the Stock Exchange. Let us turn to the members, those who actually deal in the market. Their number is now about 5,000, and they are assisted by some 2,500 clerks, who also have the privilege of entering the Stock Exchange. In spite of appearances, no member of the Stock Exchange is a foreigner. Unless born a Briton, he must have resided in this country for at least seven years, and must have been naturalised for at least two years. For some years a rule was in force that before a candidate could be elected a member, he must serve at least two years' apprenticeship as a clerk in the House. This was one means by which it was attempted to limit the number of members at a time when the Managers were at their wits' end to find accommodation. The existing members, of course, welcomed the restriction, as it meant a limitation of competition; and, on the other hand, this limitation can hardly be said to have been a hardship for the public, for the number of members was by no means small, and certainly no one who desired to enter into a Stock Exchange transaction could ever fear that he would fail to find a broker. Moreover, the restriction was very desirable, inasmuch as it kept out of the Stock Exchange those adventurers who, possessing some money, or next to none, sought membership to provide facilities for gambling, just as they might seek membership of a baccarat club. Further, the business of a member of the Stock Exchange is one full of intricacy, of technicality, and of responsibility; and to enter upon it without some preliminary training, such as the couple of years' apprenticeship as a clerk affords, is to court disaster both for the adventurer and for those who may be involved in his transactions.
The apprenticeship qualification has now, however, been abolished as a necessary preliminary to membership, although four years' clerkship (with a minimum of three years in the House itself) enables a certain limited number of clerks each year to obtain membership on special terms, the number so admissible being fixed each year by the Committee. All other candidates have to comply with another formality designed to restrict the number of members, each of them having to obtain the nomination of a member retiring in his favour or of the legal representatives of a deceased member. Moreover, each clerk admitted a member on the special terms has now to buy one Stock Exchange share, and every other candidate has to buy three shares.
It goes without saying that in the admission of members account is taken of any previous business career that they may have had. No one is eligible for admission who has been more than once bankrupt or insolvent, and if he has once been proved insolvent, or has entered into any composition with his creditors, he must before admission have paid them in full and have obtained a complete discharge.
Then every applicant for membership, before his application can be considered, must be recommended by three guarantors, reduced to two in the case of candidates who have served as clerks in the House or Settling Room for four years, of which at least three must have been in the House. These guarantors must have themselves been members for not less than four years, and must engage to stand surety for their nominee in the amount of five hundred pounds each for a period of four years. They must have personal knowledge of the applicant whom they recommend, and of his past and present circumstances; and should he fail within the four years, they each hand the five hundred pounds over for the benefit of his creditors. No member is allowed to be surety for more than two new members, and, of course, any indemnification of the guarantors by the applicant for membership is out of the question. The guarantors have to state that they are not indemnified and that they do not expect to be. Should a guarantor receive indemnification subsequently, and the new member fail, the guarantor is compelled to hand over to the creditors the sum so received, as well as the amount of the surety. Every means is taken in this and other ways to make sure of the guarantors being independent of the new applicant.
Not only has the candidate for membership to find these sureties for the protection of his creditors, and as a guarantee of his status, but he has, of course, to pay an entrance fee and an annual subscription, all of which money is collected by the Managers for the benefit of the proprietors. The amount of these entrance fees and subscriptions is varied from time to time by the Managers; needless to say, the variation has always been in the nature of an increase. At present the entrance fee for a member is five hundred guineas, and the annual subscription is forty guineas.
As a matter of fact, every member is a new applicant for membership every year, although, of course, he finds sureties and pays an entrance fee only at the commencement of his Stock Exchange career. A little before the 25th of March, on which day the Stock Exchange year commences, he has to send in an application form for membership, on much the same lines as that which has to be signed by applicants for first admission. In the form of application with which he is provided, the new applicant has to declare that he seeks membership in accordance with the terms of the rules and regulations, and that he will be subject to them in all respects; he has to give his private and office address, and the names of his bankers, and he has to declare that he is not engaged in any business, except that connected with the Stock Exchange, and that he is in no way connected with any other institution in which dealings in stocks and shares are carried on. At times there has been protest against the stipulation that a member of the Stock Exchange shall not be connected with any other institution of the kind. There have been several movements for the formation of exchanges for mining share business, and even for the establishment of rival stock exchanges, and a year ago one of the great London newspapers established a system of direct dealing between its readers for nominal fees.