The Stock Exchange from Within

by William C. Van Antwerp

Passing to more agreeable topics, the late Addison Cammack is said to have remarked on one occasion that publicity was ruining the business of Wall Street and the Stock Exchange and would ultimately drive it all away. Those were the days of inadequate and unreliable balance sheets, of suppressed reports of earnings and assets, of accounts that were never subjected to independent audits, and of a general atmosphere of mystery that led to financial abuses of all kinds. As a result of those conditions there was created in the public mind another vague aversion toward the Stock Exchange, and a popular prejudice which has been hard to dispel. Cammack had been brought up in the old school; he saw what was coming, but he mistook causes for effects. He would probably turn in his grave could he see the new conditions and contrast them with the old. As a matter of fact nothing could be more democratic in principle than the way the business is conducted nowadays. The rights of stockholders to information, the reports and balance sheets submitted to them, the mass of Wall Street financial material in the magazines and journals, the stock ticker, the news ticker, the printed news bulletins, the card index system, the statistical manuals and the quotation lists published in the morning and evening newspapers, together with the market letters constantly circulated by brokerage houses, these are evidences that the public is entitled to full information and that many avenues by which it may safeguard its interests are always open.[52]

It has long been known that investors and speculators in America enjoy vastly more safety in their market operations through these various avenues of publicity than do investors and speculators abroad. There are no tickers worthy of the name across the water, and the daily list of business done, as published in our newspapers, with bid and asked prices and total transactions in detail, is unheard of among all the Bourses of Europe. The eminent French economist, Paul Leroy-Beaulieu, speaks very earnestly of the superiority of our New York Stock Exchange system in this matter; he says the need for a similar method in France is “very urgent,” that the information thus spread broadcast is “very instructive,” that the pledge of publicity “is better assured in the United States than in any other country of the world,” and that an immediate reform along these lines is “absolutely necessary” in Paris in the interest of the public.[53]

This leads to another word of caution suggested by the fact that the public, despite what is done for it, does not always avail itself of these safeguards. Men buy worthless mining stocks without bothering to inquire into their bona fides. They put their savings into new and untried enterprises and they neither read the balance sheets nor attend the meetings. A thousand stockholders will attend a meeting in London and they will have their questions answered whether the majority in control likes it or not. In New York almost nobody attends these meetings. The stockholder’s right to information is absolute, but he does not go and get it, and so finally when something goes wrong he writes angry letters to the newspapers and damns both Wall Street and the Stock Exchange because he has been burned, although the fire escape and the extinguisher were always at his hand. “It is all very well” says the Wall Street Journal, “to talk about what the law, the newspaper press, and the Stock Exchange can do to protect the investor, but the investor himself can do more than all his protectors put together. His investment, however conservative and secure, carries responsibilities as well as privileges, and it is his duty to discharge the one in order to safeguard the other.”[54]

He must learn to make inquiries, to discriminate, to use his wits, to read mortgages, to study sinking funds and operating ratios. He must eschew the financial columns of questionable newspapers and confine his attention to those of established probity. He must not put all his investment eggs into one basket. The Stock Exchange cannot do all this for him, but it is always ready to help him, and the information he requires may be had for the asking.

In a recent public address the president of a great American railway sounded an encouraging note. “We railway men,” he said, “have been in a practical school, having taken a thorough course in working economics. We have learned that a railway can thrive only as a result of the prosperity of the community it serves, and that the best policy, from the viewpoint of permanent railway interests, is one of co-operative helpfulness.”[55] The New York Stock Exchange has learned the same lesson, in a similar school. As an institution it realizes that if it is to grow in prosperity the public must grow, and that as the public is attracted to investment and speculation by the soundness of the institution through which it deals so it requires and must receive full information and an assurance of fair play. “Co-operative helpfulness” is the only way. Members of the Exchange who become discouraged now and then must bear this in mind. In the face of every harassing annoyance they must never cease their work of keeping their house in order, and of inviting that portion of the public that is open-minded to lend a hand. Their labors resemble the task of Sisyphus; like him they must cultivate the spirit of “everlasting hope,” and when unworthy assailants seek to prejudice the popular mind, they must stand forth, give blow for blow, and never say die.

Pessimists may blind their eyes to the manifold evidences of material progress on every hand, but just as the workshop, the farm, the school, the hospital, and the bank, each supplies proof of continuing improvement, so also in its sphere of usefulness does the Stock Exchange. Within a few years, for example, it has rid itself of the unlisted department, and this may very properly be mentioned as a distinct progression. Under the old system a limited number of industrial corporations were permitted to obtain a market on the Exchange for their securities, although they furnished but few figures to the Listing Committee in return. This was a practice wholly at variance with the duty of the Exchange to protect the investor, since it practically assures him that corporations admitted to the Exchange have demonstrated their worth to the authorities. That character and countenance should be given to the so-called “unlisted department” was a mistake, and it has been abolished.

In this reform the Listing Committee accomplished a twofold blessing in setting the Exchange right with the public by ridding their institution of anything approaching the blind pools of early days and at the same time forcing certain wealthy corporations to abandon their policy of concealment or lose the privilege of the floor. Certainly if the country’s leading steel corporation can afford to take its 150,000 stockholders and its 250,000 employees into its confidence and treat the whole public, including its competitors, with entire frankness, there is no insuperable difficulty about the others. In any case the desire to protect the investor, which is the controlling motive of the elaborate restrictions imposed by French and English laws in new security offerings, has advanced far in this country within the last few years, and the farther it goes the more popular it becomes.

That there is still work for the Listing Committee to do goes without saying. One of the most promising improvements that comes to mind at the moment is the one employed in London, where shares of new companies are not admitted to the Board unless a sufficiently large allotment has been made to the public. This is also the rule in New York, but perhaps we may add to its effectiveness by increasing the size of the public allotments. Another praiseworthy feature of the London system is that which has to do with vendor’s shares, which are not listed until six months after the admission of the company’s securities. Under this plan if one or more individuals secure a block of stock in payment for properties in the concern, they are prevented from unloading those shares on the public until a sufficient time has elapsed to determine the merit of the property.

Another instance of progress made in recent years in the internal mechanism of the Exchange, is the abolition of fictitious transactions or “wash sales,” utterly indefensible transactions not enforceable at law. These were always prohibited under the rules, yet despite this a flagrant instance of a violation was discovered in which the guilty were made to suffer. So far as I am aware it was the only case on record in which obvious collusion between buyer and seller in a Stock Exchange transaction was shown. The broker in this instance must have known that the Committee would demand his books and that it would appear that no genuine bargain had taken place. If he did not know it, he knows it now. The example made of him will, I fancy, prevent a recurrence of the episode.

This leads to the subject of “manipulation,” as it is termed, or the uses to which the facilities of the Exchange are sometimes put to give certain stocks an appearance of activity out of proportion to their normal movement. Now we must assume as our major premise in discussing this matter that any artificial interference with the natural operation of supply and demand is pernicious; from the standpoint of economics it is harmful. The Stock Exchange has nothing to conceal, and it recognizes not only that manipulation exists, but that at times it assumes the proportions of a real evil. Therefore it is doing what it can to stop it, and it will continue to do so. Whenever unwonted activity arises nowadays in a security long dormant, as happened very recently in the stock of a certain gas company, the governors of the Exchange entrusted with such things take the matter in hand and put a stop to it if obvious manipulation can be shown after investigation. The public and the newspapers know nothing about it; the vial of their criticism is poured forth only when something escapes the watchful eye of the Exchange authorities, as must inevitably happen now and then. But if these critics could know how indignant the members of the Exchange became when the Hocking Coal episode occurred, and if they could see the resolute determination of all hands to prevent another such occurrence, they would at least give the Exchange credit for faithfully attempting to suppress manipulation of the flagrant sort.