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market ” and deposits the thousand dollars the year the rate for call money may vary with him. The broker goes on the Floor and from two per cent to six per cent, going up buys 100 shares of Steel at 60, the market as high, however, on perhaps two or three opening strong and Steel going up at once. days during the year, as twenty per cent. It
has gone up on extraordinary occasions to FINANCING A MARGIN TRANSACTION
fifty, sixty, or even one hundred per cent. The sale made, the broker has to provide The call money rate averages about four the rest of the money to complete the trans
This rate is a yearly rate, and does action. Every trade on the New York Stock
not of course mean that if a broker borrows Exchange is completed the next day.' Stock
for his customer one thousand dollars and sold to-day must be delivered to-morrow, keeps it for a day he will pay forty dollars for stock bought to-day must be paid for to-morrow. the use of it. If he kept it for a year and This purchase calls for a payment of $6,000, the rate did not fluctuate in the meantime, he while the broker has only $1,000 belonging would pay forty dollars for the use of it. If to his customer to apply on it. He must
he kept it for one day he would pay a trifle borrow the rest. So soon after eleven the
over ten cents for its use. next day he goes to the Money crowd at
But to return to our customer. When his Post Number Four—the Money Post. There broker has finished the operations necessary he finds several members who represent the to complete the purchase, the customer owns banks, among them our friend Mr. X. He
100 shares of the common stock of the naturally goes to the representative of a bank
United States Steel Corporation, and owes with which he is accustomed to dealing. Per- his broker $5,000. He also owes his broker, haps this is Mr. X. He goes to him, then, first, a commission of 78 of 1 per cent on the tells him that he wishes to borrow, say, par value of the stock bought, or $12.50; $30,000. He needs only $5,000 to finance
and, second, interest on the money the broker the trade we have been considering, but he has lent him to make up the purchase price, has four or five other customers also buying $5,000. The interest is figured at about on margin, so he needs more money for them.
one per cent higher than the broker has to All loans of this sort are made in units of
pay the bank—one per cent higher, that is, $5,000. He needs perhaps only $28,000 than the call money rate.
Since the rate on to cover the actual purchases of the day, but call money Auctuates from day to day, the he borrows $30,000, or six units.
rate the customer pays cannot be fixed in This borrowing on the Floor is a purely advance as on the ordinary time loan. Each verbal transaction, like any sale of stocks. month the broker strikes an average of the Both brokers make a note of the amount
rates he has paid on his loans during the and the rate and there their connection with month, and on this basis decides what to it ends. The loan so arranged for is finally charge his customers for what he has lent effected by the broker's office and the bank
them to carry their trades. The interest dealing directly.
which the customer has to pay is reduced, The bank will lend the broker 80 per cent however, by any dividends paid on the stock of the value of the stock. The stock is put while it is being carried, which belong to up with the bank as collateral. The loan is
the customer. what is known as a call loan ; the bank may
The stock which has been bought by the demand its payment at any time, the borrower broker for his customer has been put up as may pay it off at any time. The rate of
security with the bank making the loan. It interest on such loans is lower than the legal will be released when the loan is paid. The rate, and fluctuates almost daily. The rate customer, then, has bought 100 Steel for is determined by the law of supply and $6,000, paid $1,000 down and borrowed the demand. If there is a great deal of money balance from his broker. He has an equity in the banks available for this kind of loan, in the hundred shares of Steel stock of $1,000, money goes down. If the pendulum swings less the broker's commission and the interest and money becomes scarce because it is in
on the loan. The transaction is precisely demand for moving the crops or for other like that of buying land. similar purposes, money goes up. During
BUYING LAND-ON MARGIN "A single exception is to be found in the case of odd lot transactions in a stock during the time when the transfer
The customer, instead of buying Steel books of the corporation are closed. This will be referred to again later.
through a broker, might have gone to a real estate agent and bought land. Suppose he which is all in favor of the Exchange and illusbought a plot for $6,000. It is very little trates its chief function. There is no market likely that he would pay for it all in cash. He where real estate can be bought and sold at would put up a margin, get the real estate will. There is no institution where prices of agent to borrow the remainder of the purchase real estate are fixed by supply and demand price from some bank or some individual, and and Auctuate from day to day as those factors put up the property as security for the loan. change. The process is in effect the same. It is true The owner of a hundred shares of Steel that in the second transaction the customer can sell them at an hour's notice. He can uses a mortgage in putting up his land as tell from his daily paper every morning what security, but the necessity for this is obvious. the price of Steel is. He can even tell from Land is not portable and cannot be sent round the tape, if he is near a ticker, how the price to the bank by messenger and put away in Auctuates from hour to hour. A word to his its strong box. It is also true that one can- broker over the telephone sells his stock withnot borrow so large a proportion of the pur- out bargaining or delay or uncertainty. chase price of a piece of land as of a block of The owner of a piece of real estate can sell stock. But the reason for this involves an it only after a hunt for a buyer and a baressential difference between the real estate gain as to the price, and perhaps not then, market and the Stock Exchange, a difference for there may be no market for that particular
piece of land or no one ready to buy at a price he is willing to accept. There is always a market for stocks, always a market price. This is the chiefest service the Stock Exchange does for the investing and speculating public.
THE ETHICS OF MARGIN
In its essence trading on margin is as legitimate as any other business transaction in which the buyer pays only a part of the purchase price down and borrows the rest on the security of the purchased property.
In principle it is no more indefensible than any other form of buying on credit.
It is going on, just as I have de
COPYRIGHT 1913 NEW YORK STOCK EXCHANGE
THE SOURCE OF THE TICKER SERVICE “Reporters" sending out at one of the four pedestals on the Floor reports of sales which have just been made. In less than a minute the record of these
sales will be printed on the tape in 500 brokers' offices
THE SECOND STEP IN THE TICKER SERVICE
operator's hands with their long, facile fingers spell out the message again on the buttons before him"
THE MONEY CROWD
scribed it here, all over the world and all if it could be prohibited without violating the the time.
constitutional privileges of the individual, which But in practice it brings evils in its train. is extremely doubtful. But it should be surIt makes it possible for men who cannot rounded with every possible safety device like afford to lose to enter upon speculations in any other piece of useful but dangerous mawhich there is a considerable chance that they chinery—to keep out of this particularly atwill lose. It encourages men with small tractive form of speculation any man who canresources to undertake large ventures, a pro- not afford to lose his stake, to require amply ceeding dangerous to the individual under- sufficient margins of every speculator, and to taking it, in any sphere of life.
restrain the immoral practices of some large The evils which it produces spring from market operators and dishonest promoters, three sources. Many men speculate who most of whom are not members of the ought not to speculate, or with money which Exchange. ought to be kept safe, not risked. Some brokers do not insist that their customers keep the margin on which they are operating This little discussion of margin trading has amply large. Many men trade on margin interrupted Mr. X's telephone call, but perwithout adequate knowledge of what they haps it will help to explain it. The call is are entering upon; and, on the other side, from the bank which he represents in the some promoters of financial undertakings Money crowd on the floor. It tells him supply the public with glittering misinforma- that the bank has a million dollars which it tion which may easily mislead any but the wishes to put into call loans to-day. So off expert and the initiated. It puts a premium goes Mr. X to the Money post to wait for on the putting of prices up and down by big borrowers. Every broker who yesterday operators, for the speculator trading with bought more stocks for customers trading small resources and on narrow margins is on margin than he sold for customers must easily “shaken out,” to his own discomfiture be a borrower to-day. Between eleven and and—sometimes—the big operator's profit. two-thirty he must go to the Money crowd
Since trading on margin is essentially a to make his loans. perfectly legitimate process, to prohibit it When Mr. X's money is all loaned or twowould be to do more harm than good, even thirty has come, he is through vill three o'clock
except for keeping an eye on the mail:et and This is the “ Clearing House price,” the watching for calls to his telephone. So the purpose of which we shall see presently. day wears on.
The man with the list is one of the man
agers of the Clearing-House. As his list is THREE O'CLOCK—THE EXCHANGE IS CLOSED completed he hands it for a moment to a
At a half-minute before three the chair- reporter, who quickly sends the figures out man rises in his place. Al fifteen seconds on the tape. before the hour the big gong begins to hum,
Back in his office Mr. X finds that all the and as it ceases, precisely on the hour the orders which he has given to specialists and gavel falls. The Exchange is closed. An- $2 men during the day have been executed. other day has become yesterday.
The clerks are already making out the ClearMembers pour out of the room through ing-House sheet, which contains the record of the different doorways and make off to their the entire day's operations of the House in any offices to finish up the day's work before of the eighty-five Clearing House stocks and going “uptown" or under or over the river which must get to the Clearing-House before to New Jersey or Long Island. Around the seven o'clock. On a light day like this Money post is now gathering a new group. this is very easy. The boy will push the It is the “ loan crowd," and thither Mr. X sheet through the window at the Clearingbetakes himself. He has sold to-day 100 House soon after four. But there have been St. Paul and needs the stock for delivery to- days when, as seven o'clock came, the office
It might have been, of course, has had to apply at the Clearing House and that the customer who gave the order ask for an extension of time.
long” of the stock, and therefore The Clearing-House acts as the agent of had the hundred shares ready for delivery. its members in facilitating the business of But not this time. This was a “short” delivering the securities that have been sale, and the stock must be borrowed for sold by the members during the day and delivery to-morrow. In the loan crowd Mr. of making the payments for them. It is a X approaches a fellow-member who he has labor-saving device, just as tht bank Clearingreason to believe is long of St. Paul. But his House is. Its action is in principle and belief is unfounded, and he must seek a lender indeed in practice simple, but to attempt to in the crowd by the stereotyped Floor method make it clear by description would require of howling out his wants. In a moment he more space than I have at my disposai here. has found his man and made a note of the In brief, if A sells to B, B to C, and C to D transaction. For the loan of the stock he is the same number of shares of the same stock to put up the full market price.
at different prices during the day, A does not send a stock certificate to B and receive
a check at the sale price, B to C, and C to D. When he has sent a report of this last trans- Instead A sends a certificate to D and action to the office, his day on the foor is receives a check at the Clearing-House price done. Off he goes to his office. Before we already described. follow him let us watch for a moment this quiet Each party to this quadrangular transaction man who, with pencil and paper, is going the also receives from or pays to the Clearinground of the posts and jotting down figures. House the difference between the price at The list that he carries contains the names which it bought or sold the stock and the of eighty-five of the most active stocks, and Clearing-House price. The final result is opposite each stock he puts down a figure exactly the same as if there had been no after looking at the sheet at the post where Clearing-House, and each house had completed that stock is traded in. On the sheet some each transaction with every other to which it member-probably a specialist in that par- had sold or from which it had bought. The ticular stock-has written down as the gong only difference is that a great proportion of sounds the price at which the final sale was the clerical labor, of the running to and fro made. In St. Paul, for instance, the price of messengers, of the certification of checks, of, may have been 1084. The man with the in fact, the useless labor, has been done away list in his hand reads this figure and sets with. The Clearing-House does not in the slightdown opposite the name St. Paul the figure est degree alter the responsibility incurred in 108. If it had been 10876, he would have any transaction or change the essential facts put down 109.
of it. The Clearing-House alters nothing,
relieves of no responsibility. It is nothing poses-trading on margin. We have shown, but a machine.
I hope successfully, that trading on margin
is essentially neither illegitimate nor wicked. INVESTMENT AND SPECULATION
Another class of speculative transactions A certain proportion of the transactions is “short selling.” To sell a stock short is on the Stock Exchange are purely invest
to sell shares of it which you do not possess, ment transactions. They consist of pur- in the hope that at some time in the future chases of securities outright by individuals you can buy the shares at a lower price than with
money which they do not need for cur- that which you now receive. rent expenses and which they wish both to put in a safe place and to have yield them
SELLING WHAT ONE HAS NOT GOT an income. Such persons buy stocks and A common view of this kind of trading is bonds as they would put money in a sav- expressed by Miss Ida M. Tarbell in an ings bank. By using it to buy stocks and article on “ The Stock Market " in the “ Amerbonds, however, they can get a larger return ican Magazine " for June. She is quoting the on their money. This class of transactions testimony of Mr. Morgan before the Pujo includes also, of course, sales by the same Committee on this point : persons of securities which they have bought “I do not like it, not that I wish to criticise for investment. They may sell because they it at all, but I do not see how you can get along wish to invest elsewhere or because they
without it." have other uses for the money. Invest
“Why,” Mr. Untermyer asked, “ can you not
get along without a man's selling something ment transactions form but a small propor- that he has not got in the way of stocks." tion of the business done on the floor of the “That,” said Mr. Morgan, " is a principle of Exchange. The rest is speculation.
life, I think.” make that statement is not by any means to
What Mr. Morgan meant by a “principle of
life” was undoubtedly the “gambling instinct." condemn it or to write down the Exchange It would find a way. But why should the as an institution in which the bad far out- "greatest financial institution in the world weighs the good.
provide the way? Moreover, the same reasoning would forbid the curbing of the “principle
of life " which bids us take whatever we can put IS SPECULATION WICKED?
our hands on. Is there a more truly acquired Speculation has a bad name. The loose taste" than what we call respect for propertythinking which it is always so easy for the
or honesty! popular mind to indulge in lumps all specu- Apparently Miss Tarbell classes short selllation together, characterizes it as “gam- ing with stealing. She intimates that “ selling bling," and dismisses the subject. This is something that one has not got" is incomthe easy way to treat the question. But the patible with honesty. easy way is seldom the right way. The problems that arise from human relations are
SELLING SHORT IN MAGAZINE PUBLISHING not often solved in a word.
Let us transfer this “ selling something The popular conception of the Stock Ex- that one has not got" from the heated atmoschange could perhaps be expressed in a sim- phere of controversy that surrounds Wall ple syllogism :
Street in these days to the calm air in which Speculation is wicked.
is carried on a business whose legitimacy The Stock Exchange encourages specula- and high character Miss Tarbell would not, tion.
I am sure, asperse---magazine publishing. Therefore the Stock Exchange is a wicked The magazine publisher“ sells something institution.
that he has not got” every day of his life. A perfectly good syllogism, but, like every The magazine subscriber pays for his subsyllogism of this form, depending entirely for scription a year in advance. When the pubthe truth of its conclusion on the truth of its lisher of The Outlook accepts the subscriber's major premise.
$3 in December in payment for fifty-two Speculation is wicked.
issues of The Outlook to be delivered at But is it?
weekly intervals during the year, he is Let us see.
selling short with a vengeance.
He is We have already considered one of the “ selling something that he has not got." classes of transactions on the Stock Exchange Not only has he not got the completed which is largely used for speculative pur- product which he is to deliver, he in all