In the form of application for either admission or readmission, there must be stated the names of those whom the member proposes to employ as clerks, of which he is allowed a limited number. Of course, the clerks to whom reference is made are not mere office clerks in the ordinary acceptance of the term. Of these a member may naturally employ as many as he likes. But the Stock Exchange recognises a special grade of clerk, who is granted admission to the House, and provides a rather important element in its constitution. Each individual member may have five of these clerks, who are divided into three classes. He is permitted to have one who is called an authorised clerk, because he is authorised to transact business for his employer just in the same way as the employer himself would transact it. The authorised clerk pays an entrance fee of fifty guineas, and an annual subscription of thirty guineas. The member is permitted further to have two more, who are called unauthorised clerks, because they have no authority to deal, although they have the run of the House to convey messages and perform other similar services. These pay an entrance fee of ten guineas, and an annual subscription of the same amount. He is also permitted to have two Settling Room clerks, who, unlike the authorised and unauthorised clerks, have not the full run of the House, but only of the Settling Room, which they use in performing the routine work of checking bargains and carrying through the arrangements in connection with the settlement of transactions. They pay an annual subscription of eight guineas. It is permissible, therefore, for each individual member to have five clerks, and a firm consisting of more than one member is permitted to have nine--two authorised, three unauthorised, and four Settling Room clerks.
The limitation of clerks is another modern innovation in Stock Exchange history. Before March, 1902, the limitation was not nearly so strict, and the grade of clerk who is confined to the Settling Room, and had not the run of the whole House, was unknown. The innovation furnishes more evidence of the space difficulty with which the authorities of the Stock Exchange have to contend, and ocular evidence of the same difficulty is to be had by strangers in the vicinity of the Stock Exchange in the large number of young men wearing the blue badge, which denotes an unauthorised clerkship of the Stock Exchange, and the red badge, which denotes the Settling Room clerkship. The badge is imposed as a means of identification in connection with many complaints that arose as to clerks loitering about the already congested markets. They are badged and forbidden to loiter.
It is as one of these clerks that a candidate for membership can qualify for admission on the special terms we have indicated. If the applicant has served as a clerk for four years, with a minimum service in the House of three years, his entrance fee is 250 guineas instead of 500 guineas, his application requires the backing of only two guarantors instead of three, whilst the amount of each guarantee is only £300 instead of £500. As the total number of clerks employed is some 2,500, and as there are twice as many members, it is obvious that whilst some members and firms desire more assistance within the House, many do not exercise the privilege of employing any clerks at all.
CHAPTER IV THE COMMITTEE
Just as the interests of the proprietors of the Stock Exchange are in the hands of a body of Trustees and Managers, so are the interests of the members under the control of a Committee, which is called the Committee for General Purposes. The Managers provide and maintain the market-place, and thus make profit on the proprietors' capital; the Committee presides over the dealings in the market, and, of course, makes no profit in any way. It consists of thirty members, elected by ballot annually. Sometimes the election is exciting, when, for instance, the policy of the Committee on any point is questioned, but more usually it is a very formal affair. But exciting or formal, a few of the ballot-papers handed in by the members are, strange to say, always spoilt. The member of the Stock Exchange is prone to give vent to his feeling of admiration or indignation for the benefit of the scrutineers even at the expense of losing his votes altogether.
To be eligible for the office of Committeeman, one must have been a member for at least five years. The office is and always has been honorary, but now and again it is suggested that the Committee should consist, at least partly, of paid experts. Its duties are arduous, and it frequently has to settle points of the most delicate nature, whereas it is frequently complained that it does not consist of the best or most experienced members of the Stock Exchange, who do not see in the honour and dignity of the position sufficient inducement for the sacrifice of the time its duties involve. However, generally speaking, the members are held in high esteem, and seldom, indeed, does it occur that there is even an expression of disloyalty to the dictates of the Committee even on the part of those who most desire its reform.
It is questionable whether throughout the whole world any body of men so constituted is endowed with more important functions or with more arbitrary power. The Committee can make practically any additions to or alterations in the code of rules, which was originally based on the deed of settlement of the Stock Exchange. Those rules have become more drastic than the law of the land. Practices which would be perfectly legal, although not very reputable, constitute a contravention of the rules of the Stock Exchange which would bring dire consequences upon any member who indulged in them. Members have been expelled the House by the Committee under the rules for an offence of which the law of the land would not take cognisance. The rules of the Stock Exchange, as administered by the Committee, are a code of honour rather than a code of law.
In the course of administering this code of honour the duties of the Committee become exceedingly varied. It holds an ordinary meeting every Monday, but special meetings may be called at an hour's notice, only seven members out of the thirty being required to form a quorum in the ordinary way. Its fiat may go forth censuring, suspending, or expelling a member--expulsion, of course, meaning the loss of his profession, practically the end of his career, and probably ruin. Or its fiat may go forth in mild protest against smoking in the House a few minutes before the regulation time, or, as the temptations of the 5th of November approach, appealing to members to desist from firework displays in the House. With the Committee, of course, rest the admission and re-election of members. It decides whether the House shall be closed on any day except the usual holidays--there is always the excuse of structural alterations, and, as everyone knows, building operations can be carried on much more readily on a fine summer Saturday than during the dark frosts of winter. It decides all disputes between members; arbitration amongst the members themselves is encouraged, but they frequently refer to the Committee as a last resort. From its decision there is no appeal. To have recourse to the law courts without the permission of the Committee--which is, of course, granted in special cases--probably means the loss of membership by the member, who at the very outset undertakes to submit absolutely to the Committee and its rules. The Committee may summon any member before it and demand information; its power is inquisitorial. It fixes the days of settlement of the various transactions which take place in the market, and it decides what stocks or shares shall or shall not be quoted in the Official Price List, which emanates daily from the Stock Exchange under the Committee's superintendence. The principal officers of the Stock Exchange responsible to the Committee are its Secretary, the Secretary of the Share and Loan Department, the Official Assignee, the Deputy Official Assignee, the Manager of the Settlement Department, and the Manager of the Buying-In and Selling-Out Department. The nature of their duties will become clear as we proceed.
Thus it will be seen the Stock Exchange is governed under a system of dual control--that of the Managers representing the proprietors on the one hand, and that of the Committee representing the members on the other. It is the system of a proprietary club. In its efforts for the good order and government of the House, the Committee has no funds that it can expend. It may make representation to the Managers, but it can do no more; although there is every sign that the Managers are always reasonably willing to accede to these representations. At the time of the imposition upon unauthorised clerks of those badges of which mention has been made, there was much delay in issuing them, and the story went round that whilst the Committee had declared their necessity, the Managers refused to advance the money to provide them. That was probably merely a playful little suggestion, but it serves as an illustration of the drawbacks of dual control. This dual control is, however, gradually becoming abolished under the operation of the rule which compels every new member to hold one or more shares in the Stock Exchange.
CHAPTER V BROKERS AND JOBBERS
In the preceding chapters the Stock Exchange has been considered as an institution complete in itself, rather than as an important element in the world's business. We have obtained some idea of its constitution as it affects its proprietors and members rather than as it affects the outside public. The market-place and its frequenters are there, but we have not yet seen them at work, as we shall now proceed to do.
The members of the Stock Exchange are divided into two sections: the jobbers who are ever ready to buy from or sell to the public the wares in which they deal, and the brokers ever ready to act as agents for the public in their transactions with these jobbers. These brokers and jobbers--there are twice as many jobbers as brokers--are equal in all respects as members of the Stock Exchange; they pay the same fees and subscriptions, and they are governed by the same code of rules, although, of course, some of these rules are specially applicable to the one class and some to the other. At the outset a member of the Stock Exchange has to declare whether he proposes to act as a broker or a jobber. He may not act as both, or what would practically amount to the same thing, no partnership may exist between a broker and a jobber.
The system, the advantages of which are often called in question, is peculiar to the London Stock Exchange. It does not exist in New York, or in Paris, or in the other principal business centres of the world. It is obvious, however, that it acts as something of a check in the interest of the public unversed in the methods of the market. Were an outside buyer or seller to deal direct with a market professional, he would be entirely at his mercy, whereas by employing another market professional to deal for him he brings into play the principle of diamond cut diamond. It is quite easy to bid on one's own behalf in an auction room, but it is usually found more profitable to pay a commission to someone who knows the ropes; and the intricacies of auction buying are not to be compared with those of transactions in stocks and shares. That, of course, is not the only advantage of employing a broker as agent to deal with a jobber who is a merchant. The wares of the Stock Exchange are numerous and varied; more than four thousand separate securities are quoted in the Official Price List of the market, and the number of stocks and shares dealt in which are not quoted in this list is legion. One might wander about the Stock Exchange all day, and frequent hundreds of brokers' offices which surround it, without being able to find a seller of the certain stock one wants to buy, or a buyer of the certain stock one wants to sell. In the existence of the jobbers there is organisation. They stand in their own markets waiting either to buy or sell the few special securities in which they are always prepared to deal. In cases where there is intimate connection between a company and a jobber whom it employs to retail its securities, that jobber is called "the shop" in such securities. Jobbers are often called dealers; the broker, of course, deals in a sense, and so does the outside investor or speculator, but the term dealer is frequently used, to the confusion of the uninitiated, in the limited sense of being synonymous with the term jobber.
By making a speciality of a limited number of securities, the jobber is able to keep his finger on the pulse of the market, and to gauge accurately at any moment its supply and demand. He must do this in his own interest, for he must ever be ready to buy and sell at the demand of the broker whom the public sends to him. This is compulsory under the law of competition, for, of course although the jobber confines his attention to comparatively few stocks, he has no monopoly; there are other jobbers in the same market anxious to secure the orders which the brokers bring in. The jobber obtains his supply generally by purchase in the market, always endeavouring to charge a slightly higher price for it than that at which he has bought it or thinks he can buy it.
Thus he is to all intents and purposes a merchant, while the broker is an agent and an agent only, the agent of the outside public. The outsider buys from or sells to the jobber through the medium of the broker. The broker, except in special cases, may not do business direct with his client, although the rule is sometimes honoured in the breach; it is the custom of many a broker to inform the client of the name of the jobber from whom he has bought the stock, and it is within the right of the client even to examine the jobber's book to see that the transaction has been properly carried through. There are, however, special circumstances in which it is to the interest of both broker and client that they should deal with each other direct. For instance, if a broker, as not infrequently happens in the case of an active security, simultaneously receives an order to sell certain stock for one client and to buy it for another, it would obviously mean delay and expense, to the detriment of both clients, if the broker had to go into the market to sell the stock and to go into the market again to buy it. It is better for all concerned that the business should be carried out as a cross-transaction, even if in the process the broker receives a commission from both clients, as he would if he went into the market. He is allowed to arrange the cross-transaction, with the important provisions that he must distinctly inform the clients of the circumstances of the case and that he must not take commission from both parties.
The distinction between jobber and broker was for years a source of discussion often acrimonious in the Stock Exchange, and the long-suffering Committee was frequently called upon to decide delicate points arising out of the matter. The jobbers charged the brokers with acting as jobbers, and thus competing with them in their business. You have bought your mining shares, they said, not from us, but from a big mining house outside the Stock Exchange. The brokers countercharged the jobbers with acting as brokers, and thus competing with them in their business. You receive orders direct, they said, from certain provincial brokers who are not members of the Stock Exchange, whose business ought to come to us. But the grounds for these recriminations have now been removed by rules more clearly defining and separating the functions of jobber and broker respectively. The jobber is strictly forbidden to receive orders direct from the public or provincial brokers, and the broker must not receive a commission from more than one party on one transaction, and he must not execute an order with any non-member unless he can thereby deal to greater advantage than with a member.
The existence of the brokers as part of the system prevailing in the Stock Exchange is justified, not only by the fact that they are experienced in making the best terms with the jobbers, and by the fact that they are able to go direct to the market and the man who will at once buy or sell any one of the thousands of securities ranging from Consols down to Klondyke mining shares, but also by the fact that they perform many services of a somewhat intricate and technical nature connected with the buying and the selling. Transfers of inscribed stock have to be explained, and the client has to be identified at the bank, share certificates have to be obtained and delivered, arrangements have to be made for carrying over shares when a client does not desire to pay for them at the time of settlement, other detailed duties of the kind have to be performed, and, above all, the broker is frequently called upon to give expert advice as to investments and speculations, and to keep the client informed as to when to buy or sell. It may take days of watchfulness and inquiry to execute a single order when the client fixes a limit, that is, when he gives an order to purchase not above a certain price, or to sell not below a certain price.
For all this the broker receives a commission which must not be less than a scale laid down by the Committee. In the case of British and India Government securities, the scale is 2_s._ 6_d._ per cent. on the nominal value of stock bought or sold; for Bank of England and Bank of Ireland stock it is 5_s._ per cent. on the actual money paid or received; for British and other Corporation stocks and Colonial Government securities and for American and foreign railroad bonds, 5_s._ per cent. on the nominal value; for foreign Government bonds the rate is 2_s._ 6_d._ on the nominal value; for railway ordinary and deferred ordinary stocks the rate varies from 1/16 per cent. on the nominal value when the price is under £25 to 1 per cent. on the nominal value when the price is over £200; for other registered stocks the rate is 1/2 per cent. on the money. In the case of shares, the commission varies from 1-1/2_d._ to 2_s._ 6_d._ per share, according to the nominal value of each share, when the value is less than £25; for shares of the nominal value of £25 each or over, the rate is 10_s._ per cent. on the actual money. In the case of transactions over £1,000 the broker may charge half these rates. All these, of course, are minimum rates. There is nothing to prevent the broker charging more, if he can get it, but in practice the minimum has become the recognised scale.
Strictly speaking, the broker lives on these commissions, though, of course, his intimate knowledge of the market affords him special facilities for speculating and investing on his own account. He must not, however, it may be repeated, deal with his own clients; directly he buys or sells for himself he becomes a principal, and is not in that connection a broker at all. Moreover, he must not arrange with the jobber to whom he takes the business for part of the profit which the jobber makes. In the eye of the Stock Exchange, such collusion between broker and jobber would be regarded as dishonesty of the grossest nature, and would probably result in the instant expulsion of both the parties concerned. As a matter of fact, however, the broker frequently divides the commissions with an outside runner or with a member of his staff who introduces the business, although he is strictly forbidden to enter into partnership with one who is not a member of the Stock Exchange.
An adventitious source of income which the broker enjoys arises from the formation of new companies and the flotation of loans, especially large loans issued by the Government and municipal bodies. The broker is called upon to circulate the prospectuses amongst his clients; he stamps his name upon each application form, and the issuing house pays him a commission upon all allotments made to his clients. He may even underwrite loans or share issues--that is, undertake to subscribe for a certain amount, should the public refuse to come in. This he does in return for a commission, or some other consideration, which is paid whether he is called upon to take up his proportion of the issue or not. It is to the interest of the loan issuers and the company promoters to make sure, in this way, that their capital shall be all taken up. Some promoters boast in their prospectuses that the issue they are making has not been underwritten, implying, of course, that the issue is so attractive that they are sure the public will take it up. But in these cases the truth sometimes is that the issue is not underwritten simply because nobody can be induced to underwrite it.
Although the broker may, by the circulation of prospectuses, give a gentle hint to his clients that there is business afoot; although, indeed, he may, and in many cases does, send them circulars, and price lists, and newspapers every night; it is only amongst his own clients that he is allowed to advertise in this or any other way. He usually keeps this rule most rigidly, in the spirit as well as in the letter, and he is aided in so doing by the watchfulness of the Committee. For this reason, some members of the Stock Exchange--for the rule against advertising applies to the jobber as well as to the broker, although the jobber has naturally less temptation to advertise--show much repugnance even to their names appearing in the newspapers in any connection whatever, though it may be quite apart from business, and some are even chary of announcing a mere change of partnership, or a removal of offices, lest it might be construed as an advertisement.
Meantime, brokers who are not members of the Stock Exchange--outside brokers, they are called--flood the newspapers with advertisements of a description so flaring as to rival or surpass those of the patent medicine vendors; and partly to counteract the competition thus arising, the Committee of the Stock Exchange has a standing advertisement in all the principal papers announcing that members of the Stock Exchange are not allowed to advertise, that those who do advertise are not members of the Stock Exchange, and that lists of those members who are brokers--it is no use furnishing the public with the names of the jobbers--may be obtained from the Secretary on application. A list may also be seen at one of the entrances of the Bank of England--a relic, perhaps, of the time, when the Rotunda of the Bank of England was practically a Stock Exchange. There are a few firms of outside brokers of the highest standing, possessing businesses superior in magnitude and status to those of the great majority of Stock Exchange firms. Such firms as these in former years brought a considerable volume of business to the Stock Exchange itself, obtaining orders from their clients by more enterprising methods than the members themselves were permitted to employ under their rules, and passing the business on to brokers who were members. In its stringent rules regarding brokers' commissions, however, the Stock Exchange Committee has now practically abolished this practice by specifically penalising outside brokers.
All outside brokers, of course, are unchecked by the healthful restraining control of the Stock Exchange Committee; they are responsible to none but themselves. Their ranks unfortunately contain a large number of rogues and vagabonds. As they deal direct with their clients instead of for them, their clients' losses are their own gains; often they do not deal at all, but only bet with their clients on the rise or fall of prices. When they lose they refuse to pay, and on being taken into Court plead the Gambling Acts to relieve them of their liability. Cases are constantly occurring in which they show less honesty even than this; they simply make off with any money with which people may have entrusted them. As a rule, the advertising outside broker is to be avoided.
CHAPTER VI HOW BUSINESS IS TRANSACTED
When the broker, armed with his client's order, goes to the market in which it can be executed, and confronts the jobber with whom he usually deals because he finds he does his business best, he asks the jobber to make him a price in the stock concerned. He does not say he wants to buy it, for that would tempt the jobber to make the price high; he does not say he wants to sell it, for that would tempt him to make it low. The jobber would not, of course, give an out-of-the-way quotation, for the broker knows the market price almost as well as he does, but he might be tempted to vary the price by a fraction. As it is, the jobber names two prices, one at which he will sell and one at which he will buy. Suppose it were the Deferred Stock of the Midland Railway Company, the jobber might quote 69-70, meaning that he would buy the stock at 69 or sell it at 70. The broker would probably think that this price was too wide and might say so, implying that the jobber ought to be prepared to buy at a higher price and sell at a lower one. There are jobbers standing near who would like the business and who would make a narrower price. At last, without much haggling, for there is little of that in the Stock Exchange, the quotation 69-3/8-69-5/8 may be obtained. The broker need not have to ask for the price at all, the jobbers may be shouting that they are willing to buy or sell at a certain price, or that they are willing to deal either way. At all events, the broker being content with the quotation 69-3/8-69-5/8, and being commissioned to buy, informs the jobber that he buys so much stock from him at 69-5/8.
It is possible that the jobber would rather have bought, but once having made the price, he must, of course, carry out the transaction. When the broker confronts him, he may say he is only a buyer or only a seller of Midland Deferred, but of course, in refusing to deal either way he risks losing the order. Or he may make a price so wide, especially in a stock in which there is not a free market, as to protect himself amply. For instance, while the jobber was quoting 69-3/8-69 for Midland Deferred in the Home Railway Market, another jobber in the Foreign Market may have been quoting 74-78 for Servian Bonds. He would not buy them from the broker's client at a higher price than 74, and he would not sell them at a lower price than 78. Such a quotation provides an ample margin for what is called the jobber's turn, that is, the profit he expects to make by buying and selling the same stock, as a merchant. Wide quotations, which prevail in stocks that are not often dealt in, and even in stocks that are in times of panic, merely mean that the price the client has to pay is high, whilst the price he will receive for the same stock is low. The more enterprising the jobber, the narrower the prices he will make. Of course, in making a price the jobber does not undertake to deal in any abnormal amount of stock. There are limits which are understood where the broker does not state the amount in which his client desires to deal. In the case of our Midland Deferred Stock, a thousand pounds' worth is understood when no amount is mentioned.
However, when the broker signifies that he has bought the stock, nothing in the way of a voucher passes between him and the jobber. The transaction may be completed with a nod, the bargain is jotted down by each party in their respective dealing books, and one of them may, indeed ought, to mark the price at which the business has been done on a board provided for the purpose, so that it may appear in the next edition of the Official List issued to the public. It is very seldom, however, comparatively speaking, that the price is thus recorded. Indeed, it is said that many members only record it when they feel they have made a bad bargain, and want to convince the outside client that the stock has actually been dealt in at that price. Probably, however, the omission to mark business done merely arises from a desire to save time and trouble, and it might occur less frequently if arrangements were made to obviate the necessity of walking a considerable distance to one of the boards provided. The bargain is not checked until the next morning, when, in the room below the Stock Exchange, the clerks of the jobbers and brokers meet for the purpose.