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 2s. 6d. per cent. on the nominal value of stock bought or sold; for Bank of England and Bank of Ireland stock it is 5s. 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, 5s. per cent. on the nominal value; for foreign Government bonds the rate is 2s. 6d. 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 1-1/2d. to 2s. 6d. 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 10s. 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.