The Stock Exchange from Within

by William C. Van Antwerp

“Speculation in some form is a necessary incident of productive operation. 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. For the merchant or manufacturer speculation performs a service which has the effect of insurance. 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 legislation. We are unable to see how a 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. Purchasing securities on margin is as legitimate a transaction as the purchase of any property in which part payment is deferred. We, therefore, see no reason whatsoever for recommending the radical change suggested that margin trading be prohibited.”

Here are two reports at an interval of thirty-one years, made by independent investigators of high character, concerning the two foremost Stock Exchanges in the world. Both of these reports recommend changes and improvements, and each is firmly of opinion that the changes recommended are such as can be carried out by the Stock Exchanges themselves without the assistance or interference of the legislature.

As the London Stock Exchange is a voluntary association similar to that in New York, it was inevitable that the question of incorporation should have been brought before the royal commission of 1877, and that the question as to whether the public interest would be promoted by such incorporation should be given careful attention. As a result of these deliberations, a majority of the commission recommended that the London Stock Exchange should voluntarily apply for a royal charter or act of incorporation, but the reasons upon which this recommendation were based had to do with the temporary or shifting character of the membership, which gave very little assurance to the public of the permanence and stability of the rules, since members of the London Stock Exchange are only elected for one year. It need scarcely be added that such an argument would not apply to the New York Stock Exchange.

Now it so happened that, despite this opinion by the royal commission, the London Exchange was not compelled to incorporate, and remains to-day a purely voluntary association or club. The reason for this lies, in large measure, in the very intelligent minority opinions filed with the Board’s report by those of its members who dissented from the recommendation. As this is a matter of interest to members and friends of the New York Stock Exchange, I give herewith the substance of these dissenting opinions, calling the reader’s attention to the fact that the Hughes Commission of 1909 rejected similar proposals regarding the New York Stock Exchange.[80] The Hon. Edward Stanhope, M. P., said, regarding the proposed application for a charter:

“Supposing such an application to be made, and Parliament to be prepared to incorporate the Stock Exchange on the terms which are embodied in the report, the consequence would be that rules so established would be stereotyped, and could only be altered, even in the minutest details, with the approval of a department of the State. In my opinion this requirement would be either mischievous or nugatory. To attempt to regulate the manner in which business is conducted in the great money market of England is going far beyond the province of the State, nor is any government department in any way qualified to undertake it. The report, indeed, recommends that external control should be exercised with a sparing hand. But experience seems to show that the first commercial crisis, or the discovery of any gigantic fraud, would cause a pressure for further restrictions which the department entrusted with these duties could not possibly withstand. If incorporation is to be anything more than a theory, it seems to me that it must either be imposed compulsory upon the Stock Exchange, or it must be offered to them on terms which will make it worth their while to accept it. The first alternative I reject, for the reason given by the select committee on foreign loans, that it would destroy that freedom which is the life and soul of the institution. If, however, any voluntary scheme commends itself to the opinion of the Stock Exchange, its primary condition should be to reserve to that body absolute liberty in the transaction of their ordinary business (as to which we are all of opinion that, speaking generally, no just fault can reasonably be found), and also the power of adapting their rules, with the utmost ease and freedom, to the varying wants of the time.”

Mr. S. R. Scott of the dissenting minority was even more emphatic in his objections to incorporation. He said:

“In fixing my name to this report, I desire to make the reservations following: 1. With regard to incorporation, I object to recommend it for the following reasons: Hitherto, the Stock Exchange has been carried on with great success as a voluntary association, and has had a vigorous growth. It has not enjoyed a single legal privilege, yet it has thriven and the public have neglected more than one effort to establish an open market to resort to it for business, and to give it exclusive confidence. This royal commission has been sitting more than twelve months, yet no important or reliable evidence has been volunteered of a character adverse to the general practices or conduct of business on the Stock Exchange. If proof be required that the internal legislation and administration of the Stock Exchange enforce a higher standard of morality than the law can reach or enacts for the regulation of other trades, such proof is to be found in the fact that recently the committee of the Stock Exchange were assailed at law by a member whom they expelled on a charge of dishonorable conduct, the lawsuit being based on the ground that the action of the committee was not justified in law. The trial lasted seven days and proved abortive, the distinction between the standard enforced by the committee and the statutory provisions of the law not being appreciated by the special jury promiscuously selected from various trades, although quite intelligible to the judge. In maintaining this high standard the committee are compelled to go beyond the common law, binding their members to the observance of their rules and practices, even though not enforceable in a court of law. If, however, they should submit to incorporation, their rules would have to be assimilated to the law, and their freedom of action would be curtailed—results which might tend to cripple them in sustaining the standard alluded to, and operate in many ways as a hindrance to that rapidity of action which is an absolute necessity in critical times. Further, incorporation implies, in some sort, monopoly, and it remains to be proved that the public would gain by any restriction of the freedom of trade, even in stocks and shares. I adhere to the opinion expressed in 1875 by the Committee on Foreign Loans, on page 47 of their report, as follows: ‘That such a body (the Stock Exchange) can be hardly interfered with by Parliament without losing that freedom of self-government which is the only life and soul of business.’”

As I have outlined elsewhere in this volume the cogent objections to incorporation of the New York Stock Exchange, it only remains to say here that the great argument against such a step consists in the Governing Committee’s absolute power of summary discipline over the members, a power that greatly exceeds the authority of the common law, and one that protects the patrons of the Exchange to an extent that would not be possible if, under incorporation, members could invoke their constitutional prerogatives.[81] Said the governors in reply to a question of the Hughes Commission: “Appeals to the courts have been rare, considering the number of cases in which such power of discipline has been exercised, but we may well cite as substantiating in an extraordinary degree the fairness and right-mindedness with which members have been held to their obligations, the fact that, although in a number of instances appeals have been made to the courts for reinstatement by members who have been expelled or suspended for infraction of the rules, or for conduct which, although it might not be in violation of any express rule or regulation, or in violation of any law or legal obligation, the committee have held to be inconsistent with the maintenance and exercise of those standards of honorable dealing which it is the function of the Exchange to inculcate and maintain; nevertheless, in the last twenty-eight years there has not been a single instance of the judgment of the Governing Committee being reversed by the courts.”

The distinction between the expulsion of a member of such a voluntary unincorporated association and the expulsion or removal of a member of a corporation is very important. The moment the body receives a charter a different set of principles comes into play as regulating the relations between the member and the body.[82]

Germany dealt with a similar situation in very different fashion. In the autumn of 1891 there were disastrous failures of certain German banking houses, resulting from criminal misuse of bank deposits and from an undue participation in speculative transactions by the general public. The outcry that followed was no new thing in Germany, for as early as 1888 conditions that had arisen in the Berlin market and the Hamburg coffee market had led to petitions to the Reichstag demanding remedies for speculative evils. The cumulative effect of these difficulties was such that, as related by Doctor Loeb, bills directed against speculation on the Exchanges were introduced in November, 1891. “As early as February 16, 1892,” according to this authority, “the Chancellor of the Empire appointed a commission of inquiry of twenty-eight members, most of them lawyers, but with representation also of landed proprietors, economists, and merchants. The chairman was the President of the Directorate of the Reichbank, Doctor Koch. The commission began its inquiries in April, 1892, held 93 sessions, and summoned 115 witnesses, of whom the great majority were persons engaged in the transactions which it was proposed to regulate. The commission also made inquiries as to the state of legislation and trade usages in the several states of the Empire and in foreign countries.