The Stock Exchange from Within

by William C. Van Antwerp

War loans and a national debt increasing by leaps and bounds, with consequent activity in consols, was the principal source of business in those early days, and as these increased, so also the savings of the public and a new national spirit led to a steady growth in the business of dealing in securities. The dim receding voice of those early days still echoes in Capel Court through the medium of two holidays—May 1st and November 1st. More than a century ago these days marked the closing of the Bank of England’s books for the transfer of consols, and as consols were the only things then traded in, there was nothing for stockbrokers to do on those occasions; hence they took a holiday. And they still close the Exchange on these days—an eloquent instance of the Englishman’s adherence to tradition.

By 1801 there was not room enough in the old building, and, moreover, the report says: “It became apparent that the indiscriminate admission of the public was calculated to expose the dealers to the loss of valuable property.” Accordingly a group of Stock Exchange men acquired a site in Capel Court, close to the bank, raised a capital of £20,000 in four hundred shares of £50 each, and in May, 1801, laid the foundation of what has become through numerous additions the London Stock Exchange of to-day. The building was opened in March, 1802, with a list of five hundred subscribers, and the deed of settlement (March 27, 1802), vested the management in a committee of thirty members, chosen annually by ballot, with nine trustees and managers, separate from the committee, to have charge of the treasury and represent the proprietors. Although the rules and regulations have been amended and enlarged from time to time to meet new conditions, the constitution of the London Stock Exchange remains substantially unaltered.

As it stands to-day, there are nine managers who represent the shareholders or proprietors, and thirty committeemen, who look after the administration of the Exchange and the well-being of the members. The managers are elected in threes for terms of five years by the votes of the shareholders. They fix the admission fees, appoint almost all the officials, and look after the building and the property in general, while the thirty committeemen enforce the rules and regulations, adjudicate differences, and regulate the admission of securities. They are elected every year by the members, and they choose from their number a chairman and vice-chairman. In March of each year, before retiring from office, the committee elects all the old Stock Exchange members who wish to be re-elected, membership on the London Exchange being granted for one year only. Any member may object to the re-election of any other member, but this is a very unusual incident.

“The great principle upon which the committee acts,” says Mr. Francis W. Hirst, “and to which most of its regulations are directed, is the inviolability of contracts. It has power to suspend or expel any member for violating its rules, or for non-compliance with its decisions, or for dishonorable conduct. A member of the London Stock Exchange is prohibited from advertising or from sending circulars to any but his own clients. He is also forbidden to belong to any other Stock Exchange, or ‘bucket-shop,’ or other competing institution. New members are now compelled to become proprietors by acquiring at least one Stock Exchange share, paying a heavy entrance fee and an annual subscription of forty guineas. Yet the precautions against impecuniosity are inadequate. Defaults are far too common.”[104]

In such a dual form of control as that of these managers and committeemen it is obvious that causes of friction must of necessity arise from time to time, and that jarring and discord are inevitable. The owners or proprietors are, of course, a minority of the members, and their decisions on matters that come before them are necessarily biased in favor of a course that will increase the dividends on their shares. Naturally they would favor a practically unlimited membership, since the dividends are largely acquired from this source.

The plan of compelling each new member to become a shareholder or proprietor was devised to meet this difficulty, and in a measure it has succeeded. “Within the course of the next half century,” says the Quarterly Review, “it is pretty certain that the Stock Exchange, as a company, will belong to the members, of whom each will have a stake in the enterprise; and that happy consummation, when it arrives, will put an end to a good many minor problems which still harass the House in its workings, and possibly check those bolder plans for reform which are advocated by many of the members.”[105] The difficulties arising from these causes had their origin, as we have seen, as far back as the year 1801, when the new building was erected. As only the wealthier members of the association had provided the capital for the Capel Court structure, in order to protect their investment, they demanded control of its financial affairs; thus the Stock Exchange thenceforth consisted of two distinct bodies, proprietors and subscribers.

While there is but one way by which a man may become a member of the New York Stock Exchange, in the London Exchange there are various ways. The most direct way, and the easiest but most expensive way, is to pay an entrance fee of 500 guineas, and find three members who will stand surety for four years for the sum of £500 each, this £500 being forfeited to the estate if the member is “hammered”—i. e., if he fails during the period. The candidate must in addition buy three Stock Exchange shares, the price of which at present is about £190 each.[106] He must also purchase from a retiring member a nomination, which can be bought at present for £40, although they have sold as high as £700. Candidates who wish to join the Exchange under easier conditions may have their entrance fees reduced to 250 guineas if they have served for four years in the Stock Exchange as a clerk; and for these candidates concessions are also made in respect to sureties, of which they need provide but two, and to shares, of which they are required to buy but one instead of three. The committee is also empowered to elect each year a few candidates without nomination.

This is a rather curious practice which requires a word of explanation. In England, as elsewhere, there is a latent objection to monopolies of all forms, and the foresighted governors of the Exchange, with an eye to the possibility of difficulties that might be raised against their institution at some time in the future on the ground of monopoly, hit upon this expedient as a precautionary measure. Should such objection be raised, the governors have only to admit a few more members without nomination. The door is thus thrown open; and there is no de facto monopoly. It is very simple and very ingenious.

In all these cases the annual subscription, or dues, is the same. These, which were originally 10 guineas, then 20 and 30, are now 40 for all new members, while old members pay, of course, the subscription prevailing at the time of their election. As a condition precedent to election, a candidate must present himself before the committee with his sureties, and each of them must give satisfactory answers to the questions put to him.

From this it will be seen that a man who wants to become a member of the London Stock Exchange without first serving an apprenticeship of four years as clerk must pay for his entrance fee 500 guineas, his shares £570, his nomination £40, and his annual dues 40 guineas, or a total of about £1150, of which £570, the price of his shares, yields him a return in Stock Exchange dividends. These shares are, of course, excellent investments, and the managers may be relied upon to see to it that their value is not impaired. During the first seventy-five years of its existence Stock Exchange shares paid an average dividend of 20 per cent.; for the last completed year the dividend was 100 per cent. No one person may hold more than 200 shares, and holders must be members of the Exchange in all cases except those where representatives of proprietors acquired their shares before December 31, 1875. When a proprietor dies, his shares must be sold to a member within twelve months. The membership is not limited, strictly speaking, and whereas in 1802 there were 500 members, in 1845 there were 800, in 1877, 2000, and in 1910, 5019.