The Stock Exchange from Within

by William C. Van Antwerp

One of the mistakes of members of the Stock Exchange in the past has been in trying to do too much business on too little capital. This is a subject that calls for plain speaking, since it directly caused two Stock Exchange failures in recent years, failures that were, I am sorry to say, essentially the result of dishonesty. Every Stock Exchange house is looking for business, and a house with small capital sometimes gets more than it should attempt to handle. Such a house borrows from the bank, as all houses do, and allows its bankers a 20 per cent. margin; so far so good. But it accepts business from its customers on a 10 per cent. margin, and this means financing the difference out of the firm’s capital. If the capital is large, the business is safe, but if it is small, the house finds itself “loaded up,” as the phrase is, and is then in such a predicament that it must either summon enough moral courage to refuse business altogether and so advertise its limitations, or abandon its moral courage, sell its customer’s stocks “short” and incur the risk of buying them back cheaper.

The latter course is dishonest; it is in fact nothing more or less than a form of “bucketing,” since the customer must lose for the broker to save himself, while, if the customer wins, the broker may not be able to pay. This is not a common practice of course—first, because 99 per cent. of the members are absolutely honest; second, because the majority of those who carry accounts on the books of Stock Exchange houses are wise enough to acquaint themselves with the firm’s resources and to withdraw when too much business becomes apparent, and, third, even though a broker were not himself essentially honest, he would not dare expose himself to the expulsion and disgrace that would attend exposure. Nevertheless, the thing has been done, and it may conceivably occur again. How then may it be avoided?

As the Stock Exchange is, as we have seen, an unincorporated body with a set of rules which no legislature and no court could enforce without depriving a man of his constitutional prerogatives, it is obvious that this and all other reforms must come from within; all the many reforms that are constantly lifting the Exchange to a higher level come from that quarter. There are 1100 members of the Stock Exchange and perhaps 600 of these are engaged in active commission business. A committee of the governors can enter any member’s office at any time, and demand every book or record without reserve. It has absolute power to compel him to do anything that in its wisdom seems desirable. If he is doing too much business on too little capital, he can be forced to restrict, or to retire from business altogether. Failure to comply immediately means expulsion and a peculiarly stinging disgrace. Naturally in the face of these despotic powers any plan of mutually guaranteeing brokers’ accounts, such as that employed by Lloyds in London, or by the Agents de Change on the Paris Bourse, would seem unnecessary.

The remedy lies, first with the members themselves in striving to attain continually to a higher standard of business morality, and second with increased watchfulness by the committee having this matter in charge. In point of fact it is apparent that both these solutions are now being employed to a greater extent than ever before. The two failures that occurred some years ago as a result of this iniquitous practice hurt the Exchange, and stung the members to the quick. It can never happen again if the vigilance of the governors can prevent it, and yet every now and then a bank fails even under the watchful eye of the bank examiner. No committee and no group of committees can watch the books of 600 houses engaged in a business in which the dividing line between sound and unsound business may be crossed and recrossed with surprising suddenness many times a day. The members themselves must look to this, and that is what they are doing to-day, as never before, with an earnestness begotten of real pride in their great organization.

If they do not do it, if they relax in any degree the vigilance upon which the proper conduct of their business depends in this important respect, they will be forced sooner or later to resort to the plan of guaranteeing the accounts of their fellow members, or to submit to that form of government incorporation or regulation which must impair, if it does not actually destroy, their usefulness. Members must also see to it that manipulation in its improper forms is driven out of the Exchange, and that every conceivable precaution is taken in the listing of new securities. These matters I shall discuss elsewhere. Meantime it is cheering to note that Stock Exchange failures, whether arising from this or any other cause, are diminishing in number. In London, at the account day immediately following the failure of the house of Baring, thirty Stock Exchange houses announced their inability to meet their obligations. Certainly the New York Stock Exchange has not witnessed so many failures in ten years.

One of the many excellent results of the work of the Hughes Committee from the standpoint of the Stock Exchange was the publicity that came of it. Critics of the institution had long found fault with it because of its atmosphere of aloofness, the air of mystery that seemed to surround it, its silence under attack, and its apparent unwillingness to defend itself from adverse comment. This reticence, however, while it did harm, was more apparent than real. In so far as the Stock Exchange is concerned the advantages of publicity have long been recognized. The difficulty has been in having its purposes and its methods properly attested by competent authority in a way that would enlighten the public and carry conviction. Members and friends of the Exchange feel very strongly that in this day and age, when the spirit of publicity is in the air, the Stock Exchange should fall in line with a resolute determination to assert itself and make itself heard on all proper occasions.

If a sub-committee of Congress retains as counsel a shrewd lawyer who by devious ex-parte methods reads into the record and thence into the newspapers only such biased and prejudiced information as will do harm to the Exchange, while rigidly excluding all that properly belongs there by way of refutation and explanation, energetic steps should be taken to remedy this obvious injustice by invoking that spirit of fair play which is essential to any judicial inquiry. These are not the days of the Inquisition. We have progressed beyond the point of the Star Chamber. Members of the Stock Exchange know that they will receive fair play from the newspapers whenever they seek it, but they cannot expect to find their side of the case stated unless they themselves take the necessary steps to secure its presentation. And the way to do this is to proceed with energy and determination against every avenue from which the malicious slander or the insidious suggestion emanates.

The time has passed to sit supinely under every sinister attack and imagine that a consciousness of rectitude will suffice as an answer. Let the Exchange bestir itself. If, as happened very recently, a judge on the bench can so lose his poise as to say to a common thief at the bar, “You have committed a petty theft and you must go to jail—but had you gone down to the Stock Exchange and stolen a million you would go free”—such an unworthy utterance should be handled promptly and without gloves by the Exchange authorities, and the same course of treatment should be applied vigorously to every thoughtless minister of the gospel and every cheap politician who, because the Exchange has so long remained silent, may think that such silence entitles him to utter any libel that comes to mind. The newspaper that publishes the original utterance of this judge or that preacher will publish also the steps taken by the Exchange to bring him to book, and even though the slanderer may escape the consequences of his act through the technicalities of the law, or otherwise, the knowledge that the Exchange is at last aroused from its lethargy and in a fighting mood will serve to deter others from similar indiscretions. I violate no confidence when I say that henceforth the Stock Exchange will be found defending itself manfully, and I venture to remind all noisy seekers of notoriety that “thrice is he armed who hath his quarrel just.”

The Stock Exchange has felt, since the report of the Hughes Commission in 1909, that such a report, by such a body of men, would inevitably stay the hand of many of its detractors by showing them just what the Exchange is trying to do, and just how the work is done. “The committee,” says its chairman, “was in session about six months. Its expenses were paid by the members themselves, and since frugality was a necessity the services of the stenographers were dispensed with, the members taking only such notes of the testimony of witnesses as each one deemed important to the matter in hand. The officers of all the Exchanges in New York City were invited to appear before the committee and answer questions both orally and in writing, and all of them responded promptly and courteously, as often as they were asked to do so. Many volunteer witnesses, citizens of the State, were heard. None such was refused a hearing. Citizens of other States were not called, or accepted, as witnesses unless they had given evidence, by published writings or otherwise, that they had something of value to contribute to the discussion.”[50] This committee was composed of Horace White, Chairman; Charles A. Schieren, David Leventritt, Clark Williams, John B. Clark, Willard V. King, Samuel H. Ordway, Edward D. Page, Charles Sprague Smith, Maurice L. Muhleman.

Nobody who read these names doubted the independence and public spirit of its members. It was precisely the sort of committee that all fair-minded men welcomed. The high character of the members carried assurance of their good faith; their wisdom and practical experience meant a critical analysis of the subject; their independence of spirit made a whitewash impossible. Here then was the long looked for solution.[51] If there were abuses, nobody was more anxious to know of them and of the remedies for them than the members of the Exchange; if indefensible conditions existed nobody stood readier to correct them. It was felt that this was the first and greatest step toward publicity under the right conditions, and that a valuable contribution to the popular knowledge of an intricate and greatly misunderstood subject would result. There was nothing ex-parte or one-sided about the committee’s deliberations; everybody with a grievance might state it, and both sides were accorded fair play. But, mirabile dictu, the very fact of its fairness is found, three years later, to afford a reason for flouting it at the hands of counsel for a congressional sub-committee that will not hear both sides! Is there anything just or equitable in the proceedings of such a body, or in the prejudiced emanations of its precious lawyer? Is it conceivable that the law-making branch of our government will give serious heed to a report thus conceived in bias and born in inquisition? I think not.