The Official Paris Bourse is open from 12 noon to 3 P.M.; the coulisse from 11:45 A.M. to 4 P.M. The Official List is published daily, and is divided into two parts, the first containing a full list of all the officially listed securities and of the dealings in them, and the second part a list of the dealings in what we used to call in New York “the unlisted department.” Rates of Exchange, prices of gold and silver bullion, quotations of treasury bonds, and the rates of the Bank of France for discounts, interest, and loans, are also included. The coulisse also issues a list.
The volume of transferable securities in negotiation through the medium of the Paris stock markets was estimated by M. Alfred Neymarck in his report to the Institut International de Statistique, session of 1907, at 155,000,000,000 francs, an amount slightly in excess of the listed securities on the New York Stock Exchange. Of this total, which has been increased somewhat since 1907 through the admission of various Russian industrial securities, 65,000,000,000 francs were in French securities, 67,000,000,000 in foreign securities on the official (parquet) market, and 18,000,000,000 on the coulisse. Of home securities, the value of French rentes is here estimated at 24,000,000,000 francs, of bonds of the City of Paris, of treasury bonds, including those of the department and colonies, at 3,069,000,000; insurance securities at 702,000,000; those of the Crédit Foncier at 4,447,000,000; of banks and credit companies at 3,101,000,000; of railroad and navigation companies at 24,268,000,000; of railways and tramways at 2,200,000,000; of electricity, iron mills, foundries, and coal mines, at 2,463,000,000.
Of the foreign securities in the French market, Russian securities were valued at 10,000,000,000 francs in 1907, although they are to-day considerably in excess of that sum; divers foreign government funds at 47,000,000,000 and foreign railway securities at 6,000,000,000.[128]
Next to London, Paris easily leads the markets of the world from the standpoint of power and resources in an international sense. It is the great market for Russian bonds and for Russian industrials, speculation in the latter having reached such volume in 1912 as to lay the French public open to the charge of having lost its head, something that has not occurred in France since the Panama frenzy of 1894. France also holds most of the Spanish and Portuguese (3,500,000,000 francs) debt and has large capital invested in Egypt and the Suez Canal (3,500,000,000 francs). Capital investments in Roumania and Greece, Argentine, Brazil and Mexico, Tunis and the French colonies, Austria and Hungary, Italy, China and Japan, United States and Canada, Great Britain, Belgium and Holland, Germany, Turkey, Servia and Bulgaria, and Switzerland, aggregate 16,150,000,000 francs, distributed in value in the order named.
The caution of French investors is proverbial; notwithstanding the two outbursts of imprudence that have occurred in this generation, it is difficult to induce the Frenchman to place his money in anything not a safe interest-yielding security under French laws. In no other country is investment raised to a higher plane, and speculation confined to a lower one. The political nature of the relationship between France and Russia has resulted from time to time, in patriotic subscription of French funds to Russian government loans, and thence to Russian industrials of all kinds, but the latter have suffered so severely in the demoralization of the autumn of 1912 as to justify the prediction that their popularity with the French has been seriously impaired.
As to Russian government loans, the French investor is in a secure position, most of these issues having been endorsed by such powerful banks as the Bank of France, the Credit Lyonnais, the Comptoir d’Escompte, and the Société Génerale, and, indeed, it is to banks such as these and to the myriad smaller institutions throughout the country that investors of the peasantry and the middle classes are accustomed to turn for advice in financial matters. The large speculative clientele, as we know it in America, in England, and in Germany, is a decided minority in France, and those who indulge freely in speculation are canny and shrewd beyond their fellows in other lands. The foresight with which they diagnosed the events of the Boer War in 1899, and the celerity with which they disposed of their large speculative holdings of South African mining shares at top prices, is said by those who witnessed it to have been a prodigy of speculative skill.
Like all other careful observers French economists realize in a large sense that the creation of negotiable instruments and their distribution throughout all the countries of the world through the medium of the Stock Exchange is a very real cause of the wealth of nations; indeed, this point seems to be more thoroughly understood and appreciated by the mass of the French people than by the public elsewhere. When, in 1885, the government legalized transactions for future delivery and thus placed transactions in securities in the same category, under common law, with all other commercial transactions, it established a free market in France that has done wonders for the credit expansion of the Republic--an expansion likewise due, in no small measure, to the growth and development of the coulisse and to the consequent enlargement of a market that must have been restricted, of necessity, by a too rigorous strengthening of the stockbroker’s monopoly. In a word, the government, by France, of credit in its higher forms, clearly recognizes that as states, railways, and industrial enterprises have need to resort to credit through issues of securities, a wide market in constant contact with sources of wealth is required, and that nothing should be done by the government to interfere with the ebb and flow of these essential forces.
“The creating and successive issuing of this mass of securities,” to quote M. Neymarck, “always easy to purchase and to sell on the Bourse, have been the real cause of credit expansion. They were instrumental in accomplishing real marvels in France and abroad. As personal property has increased, endeavors have been made to render exchanges easy, and to make transfers as little expensive as possible; transferable securities, owing to their denomination, their form, their mode of maturity for the payment of interest, their conditions for redemption, and the ease with which they are negotiated, have been brought within the reach of all purses, and have thus developed the spirit of saving. The consolidation of capital, under the form of stock companies, issuing shares and bonds that everybody can obtain, encompasses on all sides the civilized nations of the world.
“We may say, with Paul Leroy-Beaulieu, that now, owing to capital being accumulated in the shape of negotiable instruments, it is the stock company which takes us on a journey; often it provides us with food and lodging, sells us coal and light, makes up our clothing, and even sells it to us; it procures news for us and inspires our newspapers. Further, it insures our lives and our dwellings; it feeds the unassuming Parisian in the ‘Bouillons’ (cheap cook-shops), and feasts the stylish Parisian in the fashionable wine taverns.
“The distribution of all these securities has materially contributed to the formation of small inheritances. It has influenced the development of savings institutions, mutual benefit societies, pension funds, and insurance; it has thus rendered invaluable service in the public rôle it has fulfilled. Thanks to it, these companies multiply and increase as the capitalization of their funds is made easier.
“It has also had another result. It has shown that there is no longer a plutocracy, but a veritable financial democracy; when these thousands of millions of certificates are minutely segregated, there are only found atoms of certificates of stocks and bonds, and atoms of income--so great is the number of capitalists and independent individuals who divide these securities and these incomes among themselves.”[129]
APPENDIX
REPORT
OF THE GOVERNOR’S COMMITTEE ON SPECULATION IN SECURITIES AND COMMODITIES
1909
NEW YORK, June 7, 1909
_Hon. Charles E. Hughes, Governor, Albany, N. Y._:
_Dear Sir_: The committee appointed by you on December 14, 1908, to endeavor to ascertain
“what changes, if any, are advisable in the laws of the State bearing upon speculation in securities and commodities, or relating to the protection of investors, or with regard to the instrumentalities and organizations used in dealings in securities and commodities which are the subject of speculation,”
beg leave to submit the following report:
We have invited statements from those engaged in speculation and qualified to discuss its phases; we have taken testimony offered from various sources as to its objectionable features; we have considered the experience of American States and of foreign countries in their efforts to regulate speculative operations. In our inquiry we have been aided by the officials of the various exchanges, who have expressed their views both orally and in writing, and have afforded us access to their records.
THE SUBJECT IN GENERAL
Markets have sprung into being wherever buying and selling have been conducted on a large scale. Taken in charge by regular organizations and controlled by rules, such markets become exchanges. In New York City there are two exchanges dealing in securities and seven in commodities. In addition there is a security market, without fixed membership or regular officers, known as the “Curb.” The exchanges dealing in commodities are incorporated, while those dealing in securities are not.
Commodities are not held for permanent investment, but are bought and sold primarily for the purpose of commercial distribution; on the other hand, securities are primarily held for investment; but both are subject of speculation. Speculation consists in forecasting changes of value and buying or selling in order to take advantage of them; it may be wholly legitimate, pure gambling, or something partaking of the qualities of both. In some form it is a necessary incident of productive operations. When carried on in connection with either commodities or securities it tends to steady their prices. Where speculation is free, fluctuations in prices, otherwise violent and disastrous, ordinarily become gradual and comparatively harmless. Moreover, so far as commodities are concerned, in the absence of speculation, merchants and manufacturers would themselves be forced to carry the risks involved in changes of prices and to bear them in the intensified condition resulting from sudden and violent fluctuations in value. Risks of this kind which merchants and manufacturers still have to assume are reduced in amount, because of the speculation prevailing; and many of these milder risks they are enabled, by “hedging,” to transfer to others. For the merchant or manufacturer the speculator performs a service which has the effect of insurance.
In law, speculation becomes gambling when the trading which it involves does not lead, and is not intended to lead, to the actual passing from hand to hand of the property that is dealt in. Thus, in the recent case of Hurd vs. Taylor (181 N. Y., 231), the Court of Appeals of New York said:
“The law of this State as to the purchase and sale of stocks is well settled. The purchase of stocks through a broker, though the party ordering such purchase does not intend to hold the stocks as an investment, but expects the broker to carry them for him with the design on the part of the purchaser to sell again the stocks when their market value has enhanced is, however, speculative, entirely legal. Equally so is a ‘short sale,’ where the seller has not the stock he assumes to sell, but borrows it and expects to replace it when the market value has declined. But to make such transactions legal, they must contemplate an actual purchase or an actual sale of stocks by the broker, or through him. If the intention is that the so-called broker shall pay his customer the difference between the market price at which the stocks were ordered purchased and that at which they were ordered sold, in case fluctuation is in favor of the customer, or that in case it is against the customer, the customer shall pay the broker that difference, no purchases or sales being made, the transaction is a wager and therefore illegal. Such business is merely gambling, in which the so-called commission for purchases and sales that are never made is simply the percentage which in other gambling games is reserved in favor of the keeper of the establishment.”
This is also the law respecting commodity transactions.
The rules of all the exchanges forbid gambling as defined by this opinion; but they make so easy a technical delivery of the property contracted for, that the practical effect of much speculation, in point of form legitimate, is not greatly different from that of gambling. Contracts to buy may be privately offset by contracts to sell. The offsetting may be done, in a systematic way, by clearing houses, or by “ring settlements.” Where deliveries are actually made, property may be temporarily borrowed for the purpose. In these ways, speculation which has the legal traits of legitimate dealing may go on almost as freely as mere wagering, and may have most of the pecuniary and immoral effects of gambling on a large scale.
A real distinction exists between speculation which is carried on by persons of means and experience, and based on an intelligent forecast, and that which is carried on by persons without these qualifications. The former is closely connected with regular business. While not unaccompanied by waste and loss, this speculation accomplishes an amount of good which offsets much of its cost. The latter does but a small amount of good and an almost incalculable amount of evil. In its nature it is in the same class with gambling upon the race-track or at the roulette table, but is practised on a vastly larger scale. Its ramifications extend to all parts of the country. It involves a practical certainty of loss to those who engage in it. A continuous stream of wealth, taken from the actual capital of innumerable persons of relatively small means, swells the income of brokers and operators dependent on this class of business; and in so far as it is consumed like most income, it represents a waste of capital. The total amount of this waste is rudely indicated by the obvious cost of the vast mechanism of brokerage and by manipulators’ gains, of both of which it is a large constituent element. But for a continuous influx of new customers, replacing those whose losses force them out of the “street,” this costly mechanism of speculation could not be maintained on anything like its present scale.
THE PROBLEM TO BE SOLVED
The problem, wherever speculation is strongly rooted, is to eliminate that which is wasteful and morally destructive, while retaining and allowing free play to that which is beneficial. The difficulty in the solution of the problem lies in the practical impossibility of distinguishing what is virtually gambling from legitimate speculation. The most fruitful policy will be found in measures which will lessen speculation by persons not qualified to engage in it. In carrying out such a policy exchanges can accomplish more than legislatures. In connection with our reports on the different exchanges, as well as on the field of investment and speculation which lies outside of the exchanges, we hall make recommendations directed to the removal of various evils now existing and to the reduction of the volume of speculation of the gambling type.
THE NEW YORK STOCK EXCHANGE
The New York Stock Exchange is a voluntary association, limited to 1100 members, of whom about 700 are active, some of them residents of other cities. Memberships are sold for about $80,000. The Exchange as such does no business, merely providing facilities to members and regulating their conduct. The governing power is in an elected committee of forty members and is plenary in scope. The business transacted on the floor is the purchase and sale of stocks and bonds of corporations and governments. Practically all transactions must be completed by delivery and payment on the following day.
The mechanism of the Exchange provided by its constitution and rules, is the evolution of more than a century. An organization of stockbrokers existed here in 1792, acquiring more definite form in 1817. It seems certain that for a long period the members were brokers or agents only; at the present time many are principles as well as agents, trading for themselves as well as for their customers. A number of prominent capitalists hold memberships merely for the purpose of availing themselves of the reduced commission charge which the rules authorize between members.
The volume of transactions indicates that the Exchange is to-day probably the most important financial institution in the world. In the past decade the average annual sales of shares have been 196,500,000 at prices involving an annual average turnover of nearly $15,500,000,000; bond transactions averaged about $800,000,000. This enormous business affects the financial and credit interests of the country in so large a measure that its proper regulation is a matter of transcendent importance. While radical changes in the mechanism, which is now so nicely adjusted that the transactions are carried on with the minimum of friction, might prove disastrous to the whole country, nevertheless measures should be adopted to correct existing abuses.
PATRONS OF THE EXCHANGE
The patrons of the Exchange may be divided into the following groups:
(1.) Investors, who personally examine the facts relating to the value of securities or act on the advice of reputable and experienced financiers, and pay in full for what they buy.
(2.) Manipulators, whose connection with corporations issuing or controlling particular securities enables them under certain circumstances to move the prices up or down, and who are thus in some degree protected from dangers encountered by other speculators.
(3.) Floor traders, who keenly study the markets and the general conditions of business, and acquire early information concerning the changes which affect the values of securities. From their familiarity with the technique of dealings on the Exchange, and ability to act in concert with others, and thus manipulate values, they are supposed to have special advantages over other traders.
(4.) Outside operators having capital, experience, and knowledge of the general conditions of business. Testimony is clear as to the result which, in the long run, attends their operations; commissions and interest charges constitute a factor always working against them. Since good luck and bad luck alternate in time, the gains only stimulate these men to larger ventures, and they persist in them till a serious or ruinous loss forces them out of the “Street.”
(5.) Inexperienced persons, who act on interested advice, “tips,” advertisements in newspapers, or circulars sent by mail, or “take flyers” in absolute ignorance, and with blind confidence in their luck. Almost without exception they eventually lose.
CHARACTER OF TRANSACTIONS
It is unquestionable that only a small part of the transactions upon the Exchange is of an investment character; a substantial part may be characterized as virtually gambling. Yet we are unable to see how the State could distinguish by law between proper and improper transactions, since the forms and the mechanisms used are identical. Rigid statutes directed against the latter would seriously interfere with the former. The experience of Germany with similar legislation is illuminating. But the Exchange, with the plenary power over members and their operations, could provide correctives, as we shall show.
MARGIN TRADING
Purchasing securities on margin is as legitimate a transaction as a purchase of any other property in which part payment is deferred. We therefore see no reason whatsoever for recommending the radical change suggested, that margin trading be prohibited.
Two practices are prolific of losses--namely, buying active securities on small margins and buying unsound securities, paying for them in full. The losses in the former case are due to the quick turns in the market, to which active stocks are subject; these exhaust the margins and call for more money than the purchasers can supply. The losses in the latter case are largely due to misrepresentations of interested parties and unscrupulous manipulations.
To correct the evils of misrepresentation and manipulation, we shall offer in another part of this report certain recommendations. In so far as losses are due to insufficient margins, they would be materially reduced if the customary percentage of margins were increased. The amount of margin which a broker requires from a speculative buyer of stocks depends, in each case, on the credit of the buyer; and the amount of credit which one person may extend to another is a dangerous subject on which to legislate. Upon the other hand, a rule made by the Exchange could safely deal with the prevalent rate of margins required from customers. In preference, therefore, to recommending legislation, we urge upon all brokers to discourage speculation upon small margins and upon the Exchange to use its influence, and, if necessary, its power, to prevent members from soliciting and generally accepting business on a less margin than 20 per cent.
PYRAMIDING
“Pyramiding,” which is the use of paper profits in stock transactions as a margin for further commitments, should be discouraged. The practice tends to produce more extreme fluctuations and more rapid wiping out of margins. If the stockbrokers and the banks would make it a rule to value securities for the purpose of margin or collateral, not at the current price of the moment, but at the average price of, say, the previous two or three months (provided that such average price were not higher than the price of the moment), the dangers of pyramiding would be largely prevented.
SHORT SELLING
We have been strongly urged to advise the prohibition or limitation of short sales, not only on the theory that it is wrong to agree to sell that what one does not possess, but that such sales reduce the market price of the securities involved. We do not think that it is wrong to agree to sell something that one does not now possess, but expects to obtain later. Contracts and agreements to sell, and deliver in the future, property which one does not possess at the time of the contract, are common in all kinds of business. The man who has “sold short” must some day buy in order to return the stock which he has borrowed to make the short sale. Short sellings endeavor to select times when prices seem high in order to sell, and times when prices seem low in order to buy, their action in both cases serving to lessen advances and diminish declines of price. In other words, short selling tends to produce steadiness in prices, which is an advantage to the community. No other means of restraining unwarranted marking up and down of prices has been suggested to us.
The legislation of the State of New York on the subject of short selling is significant. In 1812 the Legislature passed a law declaring all contracts for the sale of stocks and bonds void, unless the seller at the time was the actual owner or assignee thereof or authorized by such owner or assignee to sell the same. In 1858 this act was repealed by a statute now in force, which reads as follows:
“An agreement for the purchase, sale, transfer, or delivery of a certificate or other evidence of debt, issued by the United States or by any State, or municipal or other corporation, or any share or interest in the stock of any bank, corporation or joint-stock association, incorporated or organized under the laws of the United States or of any State, is not void, or voidable, because the vendor, at the time of making such contract, is not the owner or possessor of the certificate, or certificates, or other evidence of debt, share or interest.”
It has been urged that this statute “specifically legalizes stock gambling.” As a matter of fact, however, the law would be precisely the same if that statute were repealed, for it is the well-settled common law of this country, as established by the decisions of the Supreme Court of the United States and of the State courts, that all contracts, other than mere wagering contracts, for the future purchase or sale of securities or commodities are valid, whether the vendor is, or is not, at the time of making such contract, the owner or possessor of the securities or commodities involved, in the absence of a statute making such contracts illegal. So far as any of these transactions are mere wagering transactions, they are illegal, and not enforceable, as the law now stands.
It has been suggested to us that there should be a requirement either by law or by rule of the Stock Exchange, that no one should sell any security without identifying it by a number or otherwise. Such a rule would cause great practical difficulties in the case of securities not present in New York at the time when the owner desires to sell them, and would increase the labor and cost of doing business. But even if this were not the effect, the plan contemplates a restriction upon short sales, which, for the reasons set forth above, seems to us undesirable. It is true that this identification plan exists in England as to sales of bank shares (Leeman act of 1867); but it has proved a dead letter. It has also been used in times of apprehended panic upon the French Bourse, but opinions in regard to its effect there are conflicting. While some contend that it has been useful in preventing panics, others affirm that it has been used simply for the purpose of protecting bankers who are loaded down with certain securities which they were trying to distribute, and who, through political influence, procured the adoption of the rule for their special benefit.
MANIPULATION OF PRICES
A subject to which we have devoted much time and thought is that of the manipulation of prices by large interests. This falls into two general classes:
(1.) That which is resorted to for the purpose of making a market for issues of new securities.
(2.) That which is designed to serve merely speculative purposes in the endeavor to make a profit as the result of fluctuations which have been planned in advance.
The first kind of manipulation has certain advantages, and when not accompanied by “matched orders” is unobjectionable _per se_. It is essential to the organization and carrying through of important enterprises, such as large corporations, that the organizers should be able to raise the money necessary to complete them. This can be done only by the sale of securities. Large blocks of securities, such as are frequently issued by railroad and other companies, cannot be sold over the counter or directly to the ultimate investor, whose confidence in them can, as a rule, be only gradually established. They must therefore, if sold at all, be disposed of to some syndicate, who will in turn pass them on to middlemen or speculators, until, in the course of time, they find their way into the boxes of investors. But prudent investors are not likely to be induced to buy securities which are not regularly quoted on some exchange, and which they cannot sell, or on which they cannot borrow money at their pleasure. If the securities are really good and bids and offers bona fide, open to all sellers and buyers, the operation is harmless. It is merely a method of bringing new investments into public notice.
The second kind of manipulation mentioned is undoubtedly open to serious criticism. It has for its object either the creation of high prices for particular stocks, in order to draw in the public as buyers and to unload upon them the holdings of the operators, or to depress the prices and induce the public to sell. There have been instances of gross and unjustifiable manipulation of securities, as in the case of American Ice stock. While we have been unable to discover any complete remedy short of abolishing the Stock Exchange itself, we are convinced that the Exchange can prevent the worst forms of this evil by exercising its influence and authority over the members to prevent them. When continued manipulation exists it is patent to experienced observers.
“WASH SALES” AND “MATCHED ORDERS”
In the foregoing discussion we have confined ourselves to bona fide sales. So far as manipulation of either class is based upon fictitious so-called “wash sales,” it is open to the severest condemnation, and should be prevented by all possible means. These fictitious sales are forbidden by the rules of all the regular exchanges, and are not enforceable at law. They are less frequent than many persons suppose. A transaction must take place upon the floor of the Exchange to be reported, and if not reported does not serve the purpose of those who engage in it. If it takes place on the floor of the Exchange, but is purely a pretence, the brokers involved run the risk of detection and expulsion, which is to them a sentence of financial death. There is, however, another class of transactions called “matched orders,” which differ materially from those already mentioned, in that they are actual and enforceable contracts. We refer to that class of transactions, engineered by some manipulator, who sends a number of orders simultaneously to different brokers, some to buy and some to sell. These brokers, without knowing that other brokers have countervailing orders from the same principal, execute their orders upon the floor of the Exchange, and the transactions become binding contracts; they cause an appearance of activity in a certain security which is unreal. Since they are legal and binding, we find a difficulty in suggesting a legislative remedy. But where the activities of two or more brokers in certain securities become so extreme as to indicate manipulation rather than genuine transactions, the officers of the Exchange would be remiss unless they exercised their influence and authority upon such members in a way to cause them to desist from such suspicious and undesirable activity. As already stated, instances of continuous manipulation of particular securities are patent to every experienced observer, and could without difficulty be discouraged, if not prevented, by prompt action on the part of the Exchange authorities.