The Stock Exchange from Within

by William C. Van Antwerp

Worst of all, the London broker until very recently was not properly paid for his work; he was not protected by a rigorous commission law, as we are in the New York Exchange. In New York a broker charges ⅛ per cent. commission on the par value of every hundred shares in which he deals for a non-member, each way, and the rules of the Exchange compel him to collect it in all cases. The slightest departure from this rule, however technical it may be, is severely punished, and no statute of limitations or other expedient will save him from the consequences of it. Thus all the brokers are insured an equal footing; competition for business is prevented, and the public which the Exchange seeks to serve is assured of equally fair dealing in every quarter. So rigorously is this rule enforced that the large and important branch of the Exchange’s business which has to do with joint-account trading between New York and foreign centres has recently been seriously restricted because, in the judgment of the governors, it involved an infraction of this important commission law.

On May 22nd of this year (1912) the London Stock Exchange put into effect an official scale of commissions, which was designed to remedy the unfortunate conditions that had prevailed, and this scale is now enforced. It provides for a charge of ⅛ per cent. on British government securities, Indian government stocks and foreign government bonds; ¼ per cent. on certain other special cases, ⅛ in railroad ordinary and deferred ordinary stocks at prices of £50 or under, and a sliding scale on shares transferable by deed, ranging from commissions of 1½d. per share to 2s. 6d. per share. On American shares the commission to be charged is 6d. per share on a price of $25 or under, 9d. on prices from $25 to $50, 1s. on prices from $50 to $100, 1s. 6d. on prices from $100 to $150; and 2s. on prices over $200.

In many other transactions the commission to be charged is left to the discretion of the broker who may, if he is doing a large business with a client in high-priced and low-priced shares on which the official scale of commission varies, arrange to charge ⅛ on all transactions, regardless of the rules. Whatever the London broker may lose in the quality of his commissions as compared with the New York broker appears, however, to be compensated by their quantity. A firm of jobbers of my acquaintance once handled in a single day 262,000 shares of “Americans” alone, and when it is borne in mind that this was but one of perhaps 150 firms doing a similar business, an idea may be gained as to how London brokers and jobbers contrive to keep the wolf from the door.

The system of settlements twice a month as employed in London is another method quite different from that employed in New York, and one, too, that seems to suffer by comparison with our system. On the New York Stock Exchange everything is settled on the day following the transaction. Each broker and each customer knows just where he stands, and every trade is settled in full when the next day ends. Tell an English broker that on a single day our Clearing-House settled and balanced transactions in more than 3,000,000 shares of an approximate value of 50,000,000 sterling and he gasps. He says that such a thing would be impossible in London, and he is right, it would be impossible indeed. Clearings in London vastly exceed ours, but they do not occur daily; indeed our system would not do at all in a centre that transacts, as London does, a large international business in which transfers must be sent hourly to Egypt and India and to all quarters of the globe. Daily clearings in such circumstances would be very troublesome and vexatious.

The New York system, however, makes failures and defaults commendably rare, while the London system, by postponing the day of reckoning, actually invites over-extensions in speculation leading to failures that could not possibly occur here. To make this point clear to the layman it may be said concisely that the man who settles daily is in a safer position both toward himself and his creditors than is the man who postpones his settlement. The daily settlement protects the public, as well, by putting limits on speculative commitments. These matters are self-evident.

A gentleman who was for many years identified with a London firm of jobbers, and who is now a member of the New York Stock Exchange and, therefore, quite familiar with the different methods employed in these Exchanges, tells me that the London system of brokers and jobbers, commission laws, and fortnightly settlements, is the best possible system for the London Exchange, while the very different methods employed in New York seem to him to be the best that can be devised for the New York Exchange. This may be true, since conditions governing the two markets are widely different. In New York the whole system is cash; in London, credit. Here brokers may accept business with considerable freedom, knowing that but a single day elapses before the reckoning; in London brokers exercise greater caution because they must trust their clients until settlement day.

Another point of difference between the methods of the two Exchanges lies in the phlegmatic deliberation of the Englishman. Here in New York there is a slap dash, touch-and-go system that is greatly facilitated by the use of the telephone and the private telegraph lines; a single commission house has 10,000 miles of leased lines. In London, where telephones and private lines are but sparingly used by brokers and clients, a broker often finds on his desk in the morning three or four hundred letters and telegrams. The care and attention required to handle an enormous lot of orders given in this deliberate manner is something with which New York stockbrokers are quite unfamiliar; indeed it may be doubted if they could meet such an emergency with their present facilities.

Publicity, as we are learning in the New York Stock Exchange, is a prime requisite of the business, and the advantages that thus accrue through the use of the ticker and the published summary of each transaction in the day’s work cannot be overestimated in its importance to the public and to the banks. In London, where a jobber may buy or sell large quantities of securities, the business is done quietly. Outside of the active participants in a transaction, nobody is permitted to know anything about it. There is no ticker service worthy of the name, nor is there a list of transactions published at the end of the day.

This, it seems obvious, would not do at all in America. We have here not only the ticker-tape, which prints an almost instantaneous report of prices all over the country, together with the volume of business done at those prices, but there are similar reports of the day’s business printed in all the morning and evening papers—one of the last-named going so far as to reproduce on its financial page a copy of the day’s tape from beginning to end. All the newspapers, moreover, print opening, high, low, and closing prices, together with the bid and offered price of each security at the market’s close.

In the course of the two days in which these lines are written, for example, 257,000 shares of Reading Railroad stock have changed hands within a range of 1⅜ per cent. The public is enabled, through the medium of the news-ticker, to learn who the buyers and sellers were that engaged in these transactions; the tape shows the specific volume of business done at each fraction, the various news agencies contain all the information and gossip that throws any light on the matter, and the financial columns of the morning and evening newspapers comment freely for the public benefit.