There is no fixed amount of margin called for by brokers, as circumstances differ widely with the character of the securities dealt in, the standing of the buyer, and the condition of the market; but in a broad way it may be said that members of the New York Stock Exchange exact a margin equivalent to ten points on middle-grade speculative issues, twenty points on high-priced and erratic securities, and five points on very low-priced shares that move slowly. There are, of course, certain securities on which no payment short of actual outright purchase in full would be accepted by reputable brokers, while on the other hand, in the case of securities that fluctuate but slightly, such as our government, state, or municipal bonds, a 5 per cent. margin would be ample. This is also the practice in London and Paris, generally speaking. In Paris the Agents de Change always insist upon a greater margin than the Coulissiers, or outside brokers, and here members of the New York Stock Exchange invariably pursue the same policy.
This affords an opportunity to say that the local evil of stock speculation arising from insufficient margins is one that may be laid at the door of outside Exchanges rather than the “Big” Exchange, as it is called, because, in the minor Exchanges, margins are notoriously small, and the smaller the margin the greater the number of “victims.” Indeed, if it were not for this practice it would be difficult for members of smaller Exchanges to exist at all. In so far as speculation in securities may merit criticism, this tendency to attract poor people by the bait of slim margins is undeniably a very real evil, and one which can only be corrected by the brokers themselves. The Hughes Committee, after devoting much time and labor to this matter, put its conclusions in these words:
“We urge upon all brokers to discourage speculation upon small margins, and upon the Exchange to use its influence, and if necessary its power, to prevent members from soliciting and generally accepting business on a less margin than 20 per cent.”[22]
Every one connected with the New York Stock Exchange knows that this suggestion, like all the others made by the Commission, was received with approval by all hands, and, if a hard and fast rule could have been devised to meet not merely the spirit but the letter of the recommendation, the Governors of the Exchange would have put it into instant operation. But there are difficulties in the way, and one of the duties of the Governors is to consider very carefully all sides of each perplexing question that comes before them, not merely in the interests of the Stock Exchange, but with due regard to the common law and the interests of the public. Margin trading is a matter of contract, and “the right of one private person to extend credit to another,” as the Chairman of the Hughes Commission himself points out, “is simply the right to make a contract, which, under the Federal Constitution, cannot be impaired by any State Legislature.”[23]
Here is a very considerable difficulty in the way of restricting margin trading, and one that is not fully understood by the outsider. He is prone to speak of contracts thus made as “gambling transactions,” missing altogether the essential point that there is a vast difference between a transaction with a contract behind it, enforceable at law, and one that has to do with bucket-shops and roulette, in which there is no contract, and is expressly prohibited by law. No matter what his intent may have been when he bought, and no matter what margin the broker accepted—the buyer has the right to demand his securities at any time, and the broker must always be prepared to deliver them; conversely, the broker may compel the buyer to pay for and to receive the securities he has bought. Motives and methods have nothing whatever to do with the transaction.
The broker who buys for a client to-day does not know, and sometimes the client himself does not know, whether the securities are “bought to keep,” or are to be sold to-morrow; similarly the broker has no means of knowing whether the client, who deposited a ten-point margin at the time of his purchase, will or will not deposit another ten points to-morrow, and continue such payments until his securities are wholly paid for. In the large majority of cases the intent of the speculative buyer is to sell as soon as he can get a satisfactory profit, but that does not make him a gambler by any means. Why? Because, if he bets $1000 on a horse race, one party to the transaction wins and the other loses; whereas, if he deposits $1000 as margin against a stock speculation and makes a profit of say $500, the broker loses nothing by paying him that profit when the account is closed. No property changes hands in the one case, while, in the other, actual property is purchased and held ready for delivery on demand. The law is clear in classifying the operations of bucket-shops with gambling transactions, because in a large majority of instances no actual purchase is made; the “buyer” merely bets in that case as to what subsequent quotations will be; the “trade” is between two principals, one of whom must lose if the other wins.
The Hughes Commission, as I have said, went very fully into all these matters. It was in session six months, and many witnesses were examined. After considering all the pros and cons of margin trading, the experience of England and Germany in dealing with speculation, the three-years’ debate in Congress on the Hatch Anti-Option Bill, and the voluminous reports of the Industrial Commission, the conclusion was reached “to urge upon all brokers,” as shown in the paragraph cited, a general agreement on margins of not less than 20 per cent. It must be borne in mind that this was not in the nature of a formal recommendation, but rather as the expression of a hope that some measure of reform might be accomplished if such concerted action by brokers were feasible.
That members of the New York Stock Exchange endorse this view goes without saying. They realize more fully than is generally known by the public that indiscriminate and reckless speculation by uninformed people who are beguiled into it by the lure of small margins is an undoubted evil that should be checked, and they are doing what they can to check it by discouraging such operations. For example, it would be very difficult to-day for a woman to open a speculative account with any reputable firm of brokers on the major exchange unless she were well known, peculiarly qualified for such transactions, and abundantly able to support them. Accounts will not be accepted from clerks or employees of other brokerage houses or of banks and other corporations in the Wall Street district; indeed, such transactions are expressly forbidden by the rules of the Exchange. No accounts will be accepted from any one who is not personally known to one of the firm’s partners—and the practice resorted to in earlier years of employing agents to solicit business under the nominal title of “office managers,” “bond department managers,” and all that sort of technical subterfuge, is likewise forbidden.
Members of the Exchange are not permitted to advertise in any way save that defined as of “a strictly legitimate business character,” and the governors are the judges of what is legitimate. The layman has but to glance at the bare and colorless announcements made by Stock Exchange houses in the advertising columns of our newspapers to see how rigidly this rule is enforced; indeed 90 per cent. of the members do not advertise at all. Best of all, speculation on “shoe-string” margins is now almost eliminated from the major exchange. The houses that notoriously offended in this respect ten and fifteen years ago are to-day inconspicuous in the day’s dealings. Their business is gone—in its very nature it could not last long—and if rumor be credited its demise carried with it a part of the capital of the firms involved. It was a lesson and a warning. All these instances serve to show that the Stock Exchange is doing what it can to remedy this evil, and, if circumstances arise in which more can be done, the governors and members will be found a unit in enforcing whatever restrictions are necessary.
At the moment it is difficult to see how an inflexible rule of 20 per cent. margins could be put in practice without seriously interfering with really sound business. A telegraphic order may be received from a customer of the utmost responsibility who may happen to be in Europe. Any stockbroker, and any business man in mercantile trade, would be glad to execute for such a person all the orders he chose to entrust, regardless of margins. In such a case no question of motive enters into the transaction; it may ultimately prove to be a speculation pure and simple, or the buyer may cable instructions to deliver the securities to his bank, in which case it would seem to be an investment; but, regardless of that, an insistence by the broker on a 20 per cent. margin would be silly, and would merely drive the business elsewhere or prevent it altogether.