The Stock Exchange from Within

by William C. Van Antwerp

I say the membership is not limited, but when the time arrives, as it probably will within this generation, that the 20,000 shares are divided at the ratio of three shares for each member, 6666 members will then own all the shares and the membership will be full. Hence there is, in a way, a limit to the total membership.

One important respect in which the London Stock Exchange differs from all others—American, Continental, or Provincial—is the division of its members into two classes, jobbers and brokers, a division that appears to be as old as the Exchange itself. As to which of these classes it is better to belong there are differences of opinion, but the wise men in the business seem to be a unit in recommending a few years’ experience as a broker to be followed by the business of the jobber. The broker, under the London system, deals with the outside public and acts merely as agent between the public and the jobber, with whom he trades on the floor of the Exchange. The jobber, on his part, is not allowed to deal with the public at all, but must confine his activities to the brokers and to his fellow jobbers. “Thus the broker,” as Mr. Hirst puts it, “feeds the jobber much as the solicitor feeds the barrister,” or, continuing the metaphor, we may say that like the barrister the jobber gets the cause célêbre and all the great prizes, and like the solicitor the broker hunts up the business and must be content with small returns. The broker works for his commission; the jobber for what he can get out of the trade in the way of a profit.

The system in vogue in the New York Stock Exchange would seem to possess many advantages over this curious division of functions between the two classes. Here, as every one knows, brokers are not restricted in their operations; the field is alike open to all members, and the market is not limited by placing it in the hands of any one man or any group of men. On the London Exchange the attempt to define strict dividing lines between brokers and jobbers has not been successful; for years there has been a strong undercurrent of resentment between them because of acts which each regards as encroachments by the other upon its especial domain.

The quarrel reached an acute stage in the paralysis that hit the Stock Exchange after the South African war; there were too many members and too little business. Brokers took it upon themselves to make prices and to deal directly with other brokers and with outsiders, disregarding the jobbers altogether; and jobbers in turn sought in self-defence to establish connections of their own, outside the Stock Exchange, and with non-members. Both parties have violated the spirit, if not the letter of the Stock Exchange rules, and even at the present time, when much stricter rules have been passed defining the limitations of each division, the same unfortunate feeling of resentment is heard daily. Violations of the rule, however technical, are bound to create friction, and friction among the members of a Stock Exchange is not a good thing for the members nor for the business. Fortunately, there is nothing of that sort in the New York Exchange.

In active securities where there are very many transactions, Mr. Hirst is disposed to think that the separate existence of jobbers makes for a free market and close prices the very essence of an Exchange’s functions. This may be true, since the jobber is a host in himself, specialist, speculator, trader and jobber—all in one. Where there is a free market, the presence of such a participant undoubtedly adds to it, as any one knows who has dealt with him in lots of from 5,000 to 10,000 shares, at a difference of only a sixteenth. Such a market is a close market in excelsis. But in the New York Stock Exchange the same result is obtained far more openly and above-board by the presence in all active securities of a host of such jobbers—brokers, traders, specialists, and speculators—each actively bidding and offering by voice and gesture, and without collusion, and each thereby contributing to the making of the freest possible market and the closest possible price. In New York no middleman stands between the public and the market.

It is a fact recognized by all economists that the larger the number of dealers and the freer the competitive bidding, the more accurate the resultant price and the nearer its approach to true value; hence it would seem to follow that in this highly desirable attainment the New York system is superior to that of London. The same comment applies to the market for inactive securities. In London, notwithstanding the quotations printed in the Official List, the public has no assurance that jobbers can be found to deal at those prices, or at prices approaching them. “And when there is a slump in the market and a rush of selling orders with no support,” as Mr. Hirst candidly admits, “as happened in rubber shares in the months of June and July, 1910, the jobbers are apt to be away at lunch all day, and the brokers have to report to their clients that they simply cannot find a purchaser.”[107]

Such things do not happen in the New York Exchange, for when there is a slump in any group of shares, instantly there gathers a number of individuals who are there for the very purpose of making a market. It may be a “soft” market, with wide fluctuations, but it is a market for all that, and the timely absence at an all-day luncheon of any one man or any group of men cannot possibly affect it. There have been occasions on the New York Stock Exchange, no doubt, where a broker with a “hurry” order in a very inactive security has not found a market awaiting him, but there are various ways by which he may seek the desired market and ultimately he is sure to find it. In any case such an incident is the exception that proves the rule that a free market, affording all the advantages which excellent markets possess, is nowhere to be found more easily and more quickly than on the floor of the New York Stock Exchange. “American securities,” says the Paris correspondent of the Journal of Commerce in his cabled despatches of October 23, 1912—referring to the Balkan crisis in that city—“may with complete conservatism be regarded as having received a splendid advertisement in the French market by reason of their recent remarkable instantaneous conversion into cash.”

In the course of many years of active experience as broker, trader, and speculator, I do not now recall an instance in which I was unable to find a market on the New York Exchange for any security, however inactive, which I wished to buy or sell. If the specialist in this particular stock cannot satisfy me with his quotation, there are always room traders to whom I may submit my offer; there are also arbitrageurs, wire houses, and banking houses interested in this particular security. Somewhere among all these agencies the New York broker must inevitably find or create a market. But I fancy he would have a sorry time of it were he restricted, under the rules, to dealing with a jobber who “is apt to be away at lunch all day,” when trouble comes and risks are involved.

Such a system, it would seem, is all very well for the jobber, but quite unfair to the outsider and to the conscientious broker who is striving all the while to protect the interests of the public and maintain the welfare of the Exchange. Indeed, as it works out in London, the broker has all the worst of it in many ways. Even though the jobber “runs a book,” as the phrase is, his work is done at 4 P.M.—when the market closes—and if he is not doing a large business he may then follow his inclinations. Unless his business involves dealing in South Africans or Americans, his work is substantially completed with the official closing of the Exchange. But the broker, on the other hand, enjoys no such freedom. After the closing he must go to his office—for in the nature of things he must have one—and there he will find correspondence awaiting him, orders to be executed in the “Street markets,” and telephone messages to send to his customers. The mere fact that a London broker must use the London telephone is in itself a curse, for nowhere under the canopy is there a telephone service so dreadful and so exasperating.

Even in the ebb-tide of a dwindling summer business the London broker, who cannot begin his day’s correspondence until four, finds it difficult to leave his office until an hour long after his American colleague has played his eighteen holes or dressed for dinner. Aside from the horrors of the telephone service, this is due in a measure to the fact that they have no ticker in London and the mechanical efficiency with which this machine faithfully records all over America each fluctuation of the market, finds no counterpart in England. The broker in London has therefore to perform, in a measure, the work of the ticker in New York. Perhaps I should not say they have no tickers in London. In point of fact there is such an instrument, identical with our own, which four or five times a day, at stated intervals, reels off with mechanical monotony a list of quotations in certain active securities—the same group every day. They are limited in number, almost nobody looks at them, and many really enterprising houses do not install them at all.