An objection to the system is at once evident. If the directors were under the influence of the holders of the founders' shares, as they usually are, they would not be content to earn a steady profit of £7,000 for the advantage of the large number of ordinary shareholders, but would strain to divide a large profit in one year, even at the expense of making an actual loss in the next. For this and other reasons founders' shares are objectionable, especially in the case of those finance companies which earn their profits by speculation. These founders' shares are not to be confused with legitimate management shares entitled to a fair rate of dividend, and issued to the officials of a company to provide them with an incentive to work well in its interests.
There are also vendors' shares--shares allotted to a vendor in payment, or part payment, for the property which he sells to the company. If he is willing to take shares instead of cash for the property, it is a good sign, for he shows that he believes in it and desires to continue interested in it; that he does not wish merely to pocket the cash and walk off. When these shares come upon the market for sale, however, it is an obvious sign that the man who probably knows most about the property is clearing out. The rules of the Stock Exchange recognise this aspect of affairs by laying it down that no special settlement may be granted in vendors' shares until six months after the settlement of the shares issued to the public.
Sometimes amongst the wares of the market there are actually found stocks and shares which do not exist. A big Government loan is known to be impending, and although no prospectus has been issued and the market knows nothing about the terms, dealers, confident that these terms will be reasonable, and sure that there will be a big public demand for the stock, offer to sell it or to buy it at a fraction over the issue price, although they do not know what that issue price will be. Transactions of this kind sometimes occur not only in the case of a big Government loan but in the case of the flotation of an important company. After the prospectus appears, and the applications for allotment of the stock have been sent in, the dealings become quite general, although no one is yet in possession of the stock which he sells, nor do even the applicants know whether they will get the whole of the amount for which they applied, a part of it, or none at all. Some are tempted by the premium to sell the full amount for which they have applied, in the hope that they may get all of it, or, at all events, that they will get some and be able to buy the balance in the market. Others more cautious can often arrange to sell at a lower premium whatever amount of stock they may be allotted. These, of course, are on surer ground, and so are those who deal in the allotment letters themselves when they actually come out.
The practice of dealing in shares before allotment has from time to time for very many years past been the subject of much criticism, and the Stock Exchange Committee has frequently been called upon to put a stop to it. It has even now and again made attempts so to do, but these attempts have proved futile, and the penalisation has often fallen upon the less guilty of the two parties to the bargain, to the advantage of the one who has turned round and said, "If I complete the transaction, it will mean loss to me, and I shall not do so, and you cannot compel me to do so, because you have broken the rules of your Committee in dealing before allotment at all." Thus after several attempts the Committee seems to have given up all effort to restrain dealings before allotment, except by adopting a negative attitude, to the discouragement but not the penalisation of such dealings. Dealings take place not only in stocks and shares before allotment and in the letters of allotment, but also in what is called scrip, which is a provisional certificate issued some time after the letter of allotment and endorsed with a receipt for the payment of each instalment on the stock. It is a kind of temporary stock certificate issued in advance of the real one, which is forthcoming when the stock is fully paid up.
CHAPTER XI FAILURES
When a member of the Stock Exchange cannot fulfil his engagements, even if his position is brought about through no fault of his own, but by the default, say, of an important client, he may command much sympathy from his fellow-members, but this sympathy must not take practical form. Sometimes he does receive aid, but if so it is attended with considerable risk both to himself and to those who aid him, for the rules of the institution are most strict on the subject. The idea is, of course, that no member who is insolvent shall be encouraged to struggle against fate, for such a struggle usually means a plunge into wild speculation, making the last state of the Lame Duck worse than the first. When a member of the Stock Exchange finds that a fellow-member, who is his debtor, cannot meet his engagements, it is his duty, far from giving him time or any other consideration, to report the fact to a member of the Committee, and with the utmost celerity inquiry is made into the truth of the statement, and the insolvent member is immediately declared a defaulter. The news of insolvency is, as a matter of fact, very frequently communicated to the Committee by the unfortunate member himself, so that it does not fall upon his creditors to perform the unpleasant task.
The process of declaring a defaulter is called "hammering," because the Stock Exchange waiter, to whom a written announcement is handed, strikes the desk of his rostrum three times with his hammer to call the attention of those present to the dread announcement which he then reads out. As a matter of fact, two waiters perform the ceremony simultaneously in different parts of the House.
The member who is thus declared a defaulter loses his membership, and for all practical purposes he becomes in the eye of the Stock Exchange a bankrupt, his Stock Exchange estate being taken over by the two functionaries called the Official Assignees. He is by no means a bankrupt, however, in the ordinary sense of the term. His creditors in the Stock Exchange never make him a bankrupt legally, preferring, of course, their own arrangements for dividing the estate. Any outside creditor might obviously make him a bankrupt in accordance with the law of the land, but as a member of the Stock Exchange is not allowed to carry on any other business, his liabilities outside the House are usually insignificant compared with those within it. On the other hand, it is possible, although very unusual, for a member to be made bankrupt by outsiders, quite apart from his Stock Exchange engagements, in which case he ceases to be a member.
When a member is declared a defaulter, all bargains which he has open with other members are immediately reversed at the price ruling at the time of the declaration of the default, which is called the "hammer-price."
Suppose the defaulter has sold £100 stock to A at 95, and the hammer-price is 93, A must sell the stock back for £93, and rank as a creditor to the estate for the difference of £2. Suppose the defaulter has also bought £100 stock from B at £95, and the hammer-price is 93, B must buy the stock back for £93, and hand over the difference of £2 to the estate. In this way all outstanding bargains are cleared out of the way, and the Official Assignees, in their administration of the estate, have merely to pay as big a dividend as they can on the differences out of the debtor's assets.
Supposing the defaulter to be a jobber, and an outsider has sold £100 stock to him, through a broker of course, at 95. As it has fallen to 93 the jobber owes the outsider a difference of £2, and that outsider should in theory rank as a creditor for the amount. He would not, of course, lose any part of his stock, which he does not deliver, but his attempt to sell the stock has been rendered ineffective; and even if he was operating as a Bear, he has to rank as a mere creditor for the profit he would have pocketed had the jobber with whom he was dealing not failed. The outsider trusted his broker rather than the jobber of whom he knew nothing, and may feel it a hardship that his order has not been executed, or that he does not receive straight away the profit which he has made. To his mind the credit of the Stock Exchange and all connected with it have sunk to a low level. For such reasons as these, especially if the client is a good one, the broker, in practice, usually deems it expedient to bear the loss himself, and to hand over the profit. Outsiders are not often allowed to suffer by reason of failures of members of the Stock Exchange.
In the case where it is a broker and not a jobber who fails, the clients stand to be affected still less by the failure. The bargains open are between the clients on the one hand and the jobbers on the other, the broker being a mere agent or intermediary. The bargains are completed in the ordinary way without the further intervention of the broker, or another broker is selected to complete them. Cases have arisen in which the client has actually tried to turn the failure of his broker to his own advantage by declaring, when prices have moved against him, that the bargain is off altogether, or by claiming that the transaction should be closed at the hammer-price, when that price happens to be in his favour. Litigation has arisen over these points and does now arise; in fact, the state of the law as regards the relationship existing between outside clients and the Stock Exchange when its members fail cannot be said to be very clearly defined. One decision has abrogated another, and it can scarcely be said that any of the many intricate questions that arise have been settled definitely enough to carry conviction to the minds of dissatisfied and litigious clients.
The questions which arise between members of the Stock Exchange themselves are far more easily settled, thanks to the autocratic power of the Committee, to which members are amenable. A member does not care to offend the Committee, even if he feels that the treatment he receives at the hands of its officials constitutes an unjust hardship. The defaulter, who has to place himself unreservedly in the hands of the Official Assignees, giving up his books and so on, may feel less amenable, especially as he has ceased to be a member of the Stock Exchange, and has little to gain by obedient acquiescence, but considerations of the possibility of readmission generally assert themselves. These considerations are naturally important, because they mean the resumption of his profession. Any refusal to deliver up books, or any placing of difficulties in the way of the Official Assignees, means the postponement of readmission, if it does not render it impossible.
A defaulter may be readmitted upon application, if the small sub-committee appointed from the Committee to consider the case finds that he is entitled to readmission. As a result of an examination of his books showing the kind of accounts he had open, and as a result of an inquiry into his conduct preceding and subsequent to his failure, they report as to whether the failure has arisen through his own speculations or through the failure of his principals, whether he has been guilty of any bad faith or breach of the rules, whether the amount involved in his engagements was in reasonable proportion to his means and resources. Even where the conduct of a defaulter has been marked by indiscretion and by the absence of reasonable caution, the defaulter may be readmitted, but the decision of the Committee as to the readmission must remain posted in the Stock Exchange for thirty days, and the notice may indicate whether he is of the class of defaulters who have been brought down by misfortunes beyond their control, or of the class whose failure is brought about by rash speculation. In any case, no defaulter can be readmitted unless he has paid his creditors at least 6_s._ 8_d._ in the pound from his own resources apart from any moneys that may be receivable from his sureties. Moreover, the Committee expects that he shall make up any deficiency at the earliest possible moment until he has paid 20_s._ in the pound. For this reason the Committee periodically inquires into his position, and if a readmitted member were to become very prosperous and yet refuse to pay up his creditors in full, when the time for his annual re-election came round he might find himself left outside the fold.
CHAPTER XII PRICE LISTS AND RECORDS
Foremost amongst the publications which emanate from the Stock Exchange, and there are a good many, is, of course, "The Stock Exchange Daily Official List." Its main purpose is to supply the outside world with an official record of the prices of securities. It is compiled under the authority of the Committee and the superintendence of the Secretary of the Share and Loan Department, and published by the Trustees and Managers. The Committee is thus the editor of the List, and is responsible for the accuracy of the prices and other particulars which it collects and sets forth. The List is an imposing publication of sixteen closely printed pages, and contains the names of over four thousand securities. It is issued at about 5 o'clock each evening (about 2 o'clock on Saturdays) and gives the prices at 3.30 (1 o'clock on Saturdays). The annual subscription for the List is £4, exclusive of postage, and single copies cost sixpence each. Long before the time of publication, every day there may be seen outside the offices a motley queue of commissionaires, clerks, and office-boys waiting for the copies as they are delivered from the press.
The securities quoted in the List may be described as favoured securities, for it is the ambition of every company to obtain an official quotation for its stocks and shares. Every week there is published by the Committee a list of those securities for which quotation is sought, and another list of those in the case of which the application has been granted. The Committee is never tired of asseverating that when it grants quotation in the Official List to any security it does not thereby imply that that security is of superior status to other stocks and shares which are not so quoted; but the fact remains that official quotation does, undoubtedly, endow a security with a certain prestige. There is always some kind of market in securities quoted, and it is more easy to borrow upon them at the banks; whereas it is impossible to buy or sell many securities not quoted without long negotiation, and some of them may not be recognised by anybody except the promoters who have issued them.
Before a security can obtain quotation in the Official List, it has to possess certain characteristics, and its sponsors have to conform to certain formalities. The idea of quotation is not to enable those interested in the loan or company to sell the securities; quotation is for the benefit of the public; indeed, before quotation is granted, at least two-thirds of the securities issued must have been allotted to the public as distinct from vendors and others. The formalities to be observed resemble in many respects those imposed in the case of the granting of a special settlement. The loan or company has to be of sufficient magnitude and importance. Such documents as the prospectus, which must have been publicly advertised, the articles of association, which are the rules of the company, the allotment book, showing the extent to which the securities have been publicly issued, the banker's pass-book, certified copies of contracts and concessions, have all to be deposited. It has to be stated that the certificates or bonds are ready for delivery, and that the purchase of the properties has been completed. These are roughly the requirements, and a broker has to be appointed in connection with the loan or company authorised and ready to give full information in answer to the inquiries of the Committee.
It will be noted that in considering applications for quotation in its Official List the Committee attaches importance to the production of a publicly issued prospectus. This is natural, for the prospectus is, as it were, the written guarantee of those offering the securities for sale to those who subscribe money for them. In spite of the requirement, however, the number of new companies floated without the issue of a prospectus is far greater now than it was before the Companies Act of 1900 was passed. Under the old law, the regulations as to the information which a prospectus should impart were far less stringent than they are at present, and company promoters, who then had no objection to issuing prospectuses, seem anxious to avoid their issue now. The directors of a certain class of company find it inconvenient to bind themselves down in writing to statements sufficiently attractive to induce subscriptions, and yet sufficiently true to stand investigation should questions subsequently arise. Thus even at the risk of sacrificing the possibility of quotation in the Official List, they prefer to issue no prospectus at all. Some of them in its place publish a statement which is described as being not a prospectus, and as being issued for public information only, not to invite subscriptions. Such a statement, of course, may contain all that is in favour of the company of whose shares it is sought to dispose, and yet need not contain particulars as to contracts and the like, which the law requires in a prospectus, and with which it is essential the subscriber should be acquainted.
When such a statement is issued, care is taken by the promoters that the shares are easily obtainable in the market, although the statement dare not invite subscriptions for them, for by so doing it would convert itself into a prospectus. Simultaneously with the publication of the statement, a process known as "making a market" goes on in the Stock Exchange. The promoter, who holds all the shares, arranges with a jobber to sell them. He probably gives the jobber a call on the shares at a certain price, and anything which the jobber can obtain for them over that is his profit. Then the promoter instructs some brokers to buy the shares and others to sell them, and in this way he produces a semblance of activity. It can easily be arranged that the price shall rise rapidly enough to attract attention. The buying may cost the promoter a good deal, but if a public demand is thus created, it is merely a case of the sprat to catch the whale. The public demand is not created, of course, through the honest brokers, who have no difficulty in seeing through the game, but with the aid of financial and other newspapers of a certain class. The character of these papers is notorious, but there seem to be always some among the public ready to be misled, and in this way the process of making a market sometimes succeeds even in these days of awakened intelligence in Stock Exchange affairs. It would succeed less if it were not the fact that some straightforward and successful companies exist to-day which have never issued a prospectus, and which in some form or other have made a market in their shares. It is conceivable, of course, that a market may be made naturally without the underhand expenditure of the promoter. But the manner in which the public has been fleeced over and over again by the process of market-making has led to much of the unpopularity with which the Stock Exchange has to contend. It is a glaring blot on an institution otherwise excellently managed, and it is not too much to hope that the Committee will at some time or other give the subject its attention.
That the Committee is aware of the importance of the issue of a prospectus, which places the shares of a company without the process of market-making, is shown by its requiring the production of the document before the securities can be quoted in the Official List. When they are so quoted, the list gives not only the latest price of the stocks or shares, but provides an adequate description of the security, states the total amount of the authorised issue, the amount which has actually been issued, the rate of the last interest or dividend payment, and the date when those payments are due. It also gives the nominal amount or the amount paid up on the stock or share, and by comparing this with the market price it can at once be seen whether the security stands at a premium, or at a discount, or at par. Ten-pound shares quoted at 13-1/2-14-1/2 are at 4 premium, 14 being the middle price between the selling price and the buying price, both given. One-pound shares quoted at 13/16-15/16 are at 1/8 discount; when the market quotation is exactly equal to the denomination of the share, the price is at par.
Immediately against the quotation there often appear the letters _x d_, an abbreviation for ex dividend, which means that the price of the security does not include the dividend which the company has just paid or is about to pay upon it. The name of one who sells the security after the dividend is declared may be on the books of the company, and he will receive the dividend warrant; but if at the time of sale the stock was not quoted ex dividend, he has to hand over the amount of the dividend to the buyer of the stock. The buyer's broker will demand it. Thus when a stock is quoted ex dividend the price immediately falls, other things being the same, by the amount of dividend payable. The dividend in the case just mentioned is sent to the seller of the stock, because from the point of view of the company he is its holder--the transaction occurred after the books of the company had been closed in order to prepare the dividend. The stock is not, of course, quoted ex dividend before the books of the company have been closed, nor before the dividend is actually declared, but the guiding principle is to quote it ex dividend as soon after these events as possible. In the case of the Funds, however, where the closing of the books is on a fixed date, the settlement is made to synchronise with the closing of the books, and the quotation becomes ex dividend practically simultaneously.
Other marks somewhat similar to ex dividend may appear against the quotation in the Official List, such as ex rights, ex new, or ex all. "Rights" may probably refer to the privilege which a holder of the shares has of subscribing to shares in another company, a privilege which enhances the value of the shares he holds. "New" may probably refer to the privilege which a holder has of subscribing for new shares in his own company. Sometimes the holder is entitled to both these privileges, and perhaps others, besides the dividend; all these privileges being referred to for abbreviation's sake as "all." A seller of the shares after they are marked "ex" these privileges retains the privileges, and consequently gets a lower price for the shares.
There is provided in the Official List against the name and quotation of every security ample space for the record of the prices at which business has actually been done during the day. This space is usually blank. If the business done were accurately represented by the markings in the List, the Stock Exchange would be an idle place indeed. Reference has been made in a previous chapter to the reason for the blank appearance of the "business done" column, and it is often urged that in this matter there should be some reform. Many, indeed, go farther and suggest that not only should the prices be recorded in the case of all business transacted, but that means should be devised for placing on record the total volume of that business, as is done in the New York Stock Exchange. There day by day the public is informed as to the number of shares that have been bought and sold; here no such record is kept.
Criticism has often been levelled against the Official List, too, on the ground that its prices are so wide as to be valueless. When a stock is quoted at, say, 106-109, no one who knows his Official List will suppose for a moment that the stock can be bought by the jobber as low as 106 and sold as high as 109. The broker going to the jobber in the market would obtain a much narrower quotation. Even if the student of the Official List might conclude that as the stock is theoretically quoted 106-109, the practical price is round about 107-1/2, that is, midway between the two, it would be something. But as a matter of fact, whilst the stock is quoted 106-109, business may actually be done at 106-1/4 at one time and below 107 all day.
Other critics would have the List greatly expanded, so that official prices might be obtainable for a number of securities more in accordance with the number of those in which dealing actually takes place. These critics say that if the inclusion of all kinds of securities would be inexpedient, as altering the character of the List, then a supplementary list should be issued. Yet other critics say that the prices should be made up to a later hour. The latest profess to be 3.30 o'clock prices, whilst as a matter of fact, they are in the great majority of cases collected half an hour previously; and whilst the official closing time of the Stock Exchange is half-past three o'clock, the House remains open until four o'clock, and dealings go on inside the House until that hour.
Even after the Stock Exchange is closed, of course, business is transacted in what is called the Street Markets. Generally speaking, business in only the most speculative securities is transacted in the street after hours. Dealers in South African mining shares block Throgmorton Street itself for a couple of hours, more or less, according to the activity of business; and dealers in American railroad shares occupy Shorter's Court, a diminutive square just off Throgmorton Street, with which it is connected by a covered way, an entrance to the Stock Exchange being situated in the square. The Street Market in Americans is legitimate in a special sense, because business in New York has been going on for less than an hour when our market is closing, and, of course, the trend of prices in New York has a considerable effect upon quotations here. But the Stock Exchange recognises no street dealings of any kind, and has never done anything to encourage business after hours, in spite of various suggestions that have been made, especially at the time when several members found themselves in the police court, charged with causing an obstruction in Throgmorton Street.
Partly because prices are made up officially only to 3.30 o'clock, but more because brokers desire to furnish their clients with the prices of stocks and shares in which they are specially interested, many brokers compile price lists of their own for despatch to their clients. For practical purposes these smaller lists are more serviceable than the great Official List, as the quotations are not only later, but, being less wide, give more idea of the prices actually prevailing. Another way in which prices are conveyed from the Stock Exchange to the outside world, and a way much more expeditious than by either the Official List or the brokers' lists, is through the medium of the tape machines of the Exchange Telegraph Company. These tape machines are to be found in brokers' offices, clubs, and wherever a subscriber may care to have them, and from the ingenious instrument the tape issues forth all day, showing not only the prices, but the time at which they are quoted.
There is only one class of persons who may not subscribe for the Stock Exchange price service of the Exchange Telegraph Company, and those are outside brokers. Until about twenty years ago a roaring business in the way of betting on the tape used to be transacted in the offices of these outside brokers. Some say they derived their title of "bucket-shops" from the fact that the tape was made to fall from the machine into a bucket for tidiness' sake, but that derivation of the opprobrious title is doubtful. Then, however, the Stock Exchange Committee put a stop to the practice by informing the Exchange Telegraph Company that it must cease to supply outside brokers with the tape, or its privilege of collecting prices in the Stock Exchange would be withdrawn. It was with some difficulty that the privilege was obtained. The company collects the prices in the markets by means of its own staff, and the prices it telegraphs are by no means official.