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probability has only a very small part of the notice and when your resources are sufficient raw material out of which the completed to insure your putting through the transacproduct is to be made. When he accepts tion. Brokers, like other men, have plenty the subscriber's $3 he could no more de- of sins of their own to bear. Let us not liver, within any reasonably short time, the ascribe to them as sins acts which in other property which i:e has sold, than he could fly men we hail as virtues. to the moon. He has neither the p: ver nor No. Short selling is neither unsound in the ink, the articles nor the illusations, principle, nor, within bounds, undesirable in nor the news on which it almost all depends, practice. which he is to deliver. He is selling short with a vengeance.

It is true there is one difference between On the other hand, short selling performs the short selling of the magazine publisher a well-nigh indispensable service. The priand the short selling of the stockbroker. mary function of the Stock Exchange is to The publisher will not make the final delivery provide a free, open, and broad market for of the property which he has sold until twelve the purchase and sale of securities. Such a months have elapsed, while he has accepted market must be responsive to the law of payment in advance. The stockbroker supply and demand, but it must be protected, makes delivery the next day, and receives as far as possible, from rapid fluctuations not a cent of money until he has made and wide price movements. The best mardelivery."

ket would be thi , in which the swings of the TO CLASS SHORT SELLING WITH STEALING

price pendulum were short but deliberate.

Short selling is a brake upon the market.

It narrows the limits of Auctuation and retards If Miss Tarbell's implication is right and

their speed. Curiously enough, the fact that "a man's selling what he has not got” be

short selling is possible has the same effect longs in the category with stealing and other

whether the market is going up or going forms of dishonesty which involve lack of

down. It checks both booms and panics, is * respect for property,” the magazine pub

a drag on both breaks and bulges. lisher is in a parlous way. But the sugges

Let us take the case of a boom. The tion is absurd. Neither the publisher who

“bulls,” those members who want to see contracts to deliver magazines which are not

prices go up or believe they will go up, are yet written, nor the tailor who agrees to sell

buying right and left. Prices are advancing a suit made out of cloth of which he has only rapidly. The only thing which can stop such a sample, nor the builder who pledges himself

a movement is for the bulls to find in the to build a house for which he possesess neithera

market a plentiful supply of the stocks they stone nor a brick nor a shingle, nor the broker

wish to buy. Now, in such a rising market, who agrees to deliver stock which he does

the bulls have not only to buy stocks which not possess, is violating any statute or eco

others are “ long” of, having bought them nomic or moral law. Publisher and tailor

" for a rise.” They must also buy other and builder are performing a service to the

stocks which traders do not possess but community. Why assume that the broker

which they are willing to sell short in the is not performing a service as well? It is

belief that the prevailing high prices are not wicked to “sell short” a magazine or a

only temporary and that a reaction is inevisuit of clothes or a house when there is a

table. The more shares the bulls have to market in which you can get the material

buy, the harder is their task. Short selling out of which and the labor by which they

adds to the actual supply of purchasable are to be made, and when your resources are such that you have reasonable certainty of

stock an increasing quantity of stock not now

in the possession of the sellers but to be being able to complete your contract. It is no

bought later. Short selling, therefore, is a more wicked to sell one hundred shares of

brake upon a bull market, a curb upon a stock short when there is a market where

wild boom. the stock can be obtained at a moment's

Now of course an advance in prices, when "Of course this is not true of dealings in commodities it is healthy and legitimate, is a good thing like wheat and cotton, on other ex hanges. Nor is it true of the London Stock Exchange, where settling day comes

(unless one happens to be on the bear side twice a month. But it is true on the New York Stock

of the market, in which case one's normal Exchange, where practically all trades are made "regular way," tor delivery and payment next day.

view of everything is stood upon its head).






Things ought to increase in value. Prices impossible would be a dangerous market for ought to go up. To have them go up is an any one to trade in. advantage to the investors. But advancing prices are good only when

SELLING they are based upon and reflect advancing values. Unhealthy booms are as bad as Another service which short selling renders unsound declines. If the price of a stock is to the small investor. The ownership of goes up because the earning value of the American corporations is widely distributed. property it represents is increasing, the The Steel Corporation has 150,000 stockresulting boom in the stock is healthy and holders; the Pennsylvania Railroad Company beneficial. But if the price of a stock goes has 80,000. Two hundred and forty-seven up because a group of men are trying to put of the large corporations of the country are it up for their own purposes, regardless of owned by more than a million stockholders. values, the boom is neither healthy nor bene- Of these million stockholders many must be ficial. Prices so raised seldom“ stay put." owners of small numbers of shares.

Anything that will retard such an advance siderable part of the people's savings is inin prices as that is a good thing for the whole vested in securities. of the public which is interested in buying It is of vital importance, therefore, that the and selling securities. This is precisely the interests of the small investor in stocks and service which short selling renders. It tends bonds should be adequately safeguarded. A to steady price advances, to check their im- market in which the small investor can easily petuous speed, and to keep them within and safely invest, and in which he always bounds.

finds a ready market for any securities he On the other side, short selling is a brake may wish to turn into cash, is, from this upon rapid and excessive declines in price point of view, a good market. This is not to say that by selling short

The New York Stock Exchange a movement of prices downward can

provides such a market. During the be checked. Short selling at such a

past forty years special facilities have time would, of course, have exactly

been created and developed to handle the opposite effect. But the presence

the business of the small investor and of “shorts” in a market—of men,

the small speculator as well, though that is, who have already sold stocks

it is probably true that the man who short in anticipation of a downward

goes into the stock market with a movement—is a check upon the de

small amount of money is in a majority cline. The “short” is a compulsory

of cases an investor. On the Stock buyer. He has sold something he

Exchange special facilities are neceshas not got, and at some time he

sary for handling this kind of business, must buy it. As prices go down the

for the unit in which trades are made shorts begin to “cover.' They buy

on the Exchange is the block of one stocks to replace those they have

hundred shares. All sales on the floor already sold. Their buying checks the

are made in “ hundreds." To have decline, steadies the market, sets a

such a unit of trading is obviously limit to the fall of prices.

necessary, and the advisability of If there were no short selling,

making it a fairly large unit has been booms would tend to be wild and un

shown by the experiences of all restrained, with inevi

Exchanges. Since the table disaster when the

unit iş one hundred break finally came ; de

shares, the small inclines would be sudden,

vestor who wishes to rapid, and extensive,

buy, say, with equally disastrous

shares of Pennsylvania consequences. Short

cannot have his order selling is the governor

executed by his broker on the engine. It

dealing with another steadies, equalizes, re

broker on the floor in strains. A market in

just the same way that which short selling was

it would be executed if

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it were for seventeen hundred shares. The proviso, “ Wait for a sale." On such an business of buying and selling blocks of stock order he waits until a sale has taken place, of less than one hundred shares is known as

and reports his own transaction at 18 above the “odd lot” business. There are five houses that price, if it is a purchase, at 18 below if in the Street that do an odd lot business ex- it is a sale. In other words, on such an clusively. The extent of their business is order Mr. A will pay 18 more than the suggested by the fact that these five houses prevailing price if he is buying, or will receive have forty-five members of the Exchange 7/8 less than the prevailing price if he is sellconnected with them. The customer does ing. But, in any case, he always finds a not deal directly with the odd lot houses as market for his shares, whether they be one he does with the commission broker. The odd or ninety-nine. lot houses, in fact, are not brokers, they are The odd lot dealer's business is of course dealers.

vastly more complicated than the single illusLet us see how their business works.

tration I have been able to give. Instead of a single order he has scores. In an

active market the odd lot business probably Mr. A, a man of modest possessions, finds makes up one-fifth of the entire business that he has a certain balance of savings and done on the floor. On a million-share day, proposes either to invest it or to indulge in which was not an uncommon occurrence mild speculation. After study and consulta- before the present period of stagnation struck tion he gives an order to his broker to buy the security markets of the world, the odd twenty-five shares of Northern Pacific at the lot business would amount to 200,000 shares. market. From his broker's office the order The odd lot house is continually selling odd is telephoned to the Floor, and his broker's lots-—from one to ninety-nine shares—to telephone clerk hands it to the representa- the customers of other brokers, and buying tive of one of the odd lot houses.

Now, in

“hundreds " against them from other traders order to make the explanation simpler, let us on the Floor. It is also continually doing the assume that this is the only order that the reverse process—buying odd lots and selling odd lot broker has to execute that day. The “ hundreds.” To do such a business requires odd lot broker goes to the Northern Pacific immense capital. The odd lot house-since post, finds that Northern Pacific is quoted at when it needs small amounts of stock it can 11318 offered, 113 bid. He immediately get them only by buying hundreds—has to reports to Mr. A's broker that he has sold

carry stocks in greater quantities than other him twenty-five shares of Northern Pacific at houses. Not that it lays in a stock to meet 11378 and to his own office the same fact. future demands as a grocer lays in sugar. The odd lot broker has now sold twenty-five For that would be speculating, and the odd shares Northern Pacific at 11378. He must lot house, broadly speaking, does not specumake delivery of this stock to-morrow, but late. But if the house has orders for 87 he has not the stock to deliver because he shares of a certain stock and must buy 100 cannot buy less than one hundred shares on shares to fill the orders, it must carry the 13 the Floor. How does he get the stock to shares, and in effect becomes a forced specdeliver ? He goes into the loan crowd, ulator to that extent. borrows one hundred shares of Northern There is another condition which Pacific, sends the certificate to the Northern quires the odd lot house to have ample Pacific transfer office and has it split into

At the times when dividends are two, one for twenty-five shares and one for paid the transfer books of corporations are seventy-five shares. The twenty-five shares closed for periods, in some cases, of a month. he delivers to Mr. A's broker the next day; During those periods the odd lot house canthe seventy-five shares he holds until he has not deliver its odd lots, for the splitting up of a call for them. Since the odd lot man has the hundred-share certificates must be done only borrowed the stock which he has deliv- on the transfer books of the corporation. But ered, he has sold the twenty-five shares short. the demand for odd lots does not stop merely

The odd lot man will always sell at the because the transfer books are closed. The "offered” price and buy at the “ bid ”price. odd lot house, therefore, must continue to There is another way, however, in which an buy its hundreds and hold them till the transorder may come to him. The order may be fer books are opened. The necessity for *. buy or sell at the market, but with the ample capital is apparent.





NEEDS THE ODD LOT Exchange of the small investor and the small HOUSE

speculator is through the odd lot dealer. The The odd lot business, because of this abso- conclusion is inescapable. Prohibit short selllute necessity for abundant resources, is prob- ing, and you strike at the small investor. ably the safest for the customer of any on

Prohibit short selling, and you narrow your the Street. No odd lot house has ever failed. market—and a narrow market is a bad marIt is reported that in the Hocking panic, when ket, a dangerous market. failures were numerous and no man was sure Short selling and trading on margin are of his neighbor's solvency, some traders instruments primarily of speculation. They and brokers took their hundred-share certifi- may touch the sphere of investment occacates, broke them into fifties and sold them sionally, but not to a great enough extent to to the odd lot houses, of whose ability to modify seriously the rule that they are specuweather the storm there was not the slightest

lative operations. question. The compliment to the odd lot houses, we may hope, helped to atone for

HOW ABOUT SPECULATION ? the burden thus thrown upon them.

This naturally raises the question of specuThe odd lot house is, from the point of lation as a whole. Should it be classed with view of the general public, the most interest- gambling as an anti-social practice, or with ing as well as the most important part of the legitimate business operations ? On this stock market. It is through the odd lot house point the testimony of students of economic (though the customers may not be conscious processes is, to all intents and purposes, of the fact, since they deal with it not directly unanimous. Speculation,” says Professor but through their brokers) that the small Edwin R. A. Seligman, an American student investor and the small speculator come into

of economics, "subserves a useful and in touch with the Stock Exchange. If there modern times an indispensable function." were no odd lot houses, the man with modest From France there comes similar testimony savings which he wanted to invest in securi- in the words of the great French economist, ties or venture in the hope of speculative

Paul Leroy-Beaulieu : " Complaint is made profit would have no avenue of approach to of the evils of speculation, but the evils that the market where such investment or such speculation prevents are much greater than speculation could be undertaken.

those it causes.” In England sixty years ago John Stuart Mill gave expression to the same judgment: " The interests of the speculators as

a body coincide with the interests of the pubThe odd lot dealer is indispensable to the lic; . . . they can only fail to serve the public small investor. And the odd lot dealer could interest in proportion as they miss their own." not exist if short selling were impossible. Just The services which speculation performs in consider the matter a moment. The odd lot modern business are, first, to segregate dealer always makes a market for those in many of the risks of commerce and cause quest of less than a hundred shares. If them to be assumed by a special class ; any one wants to buy, he must sell; if any second, to contribute the maximum share to one wants to sell, he must buy. It is a highly the formation of a broad and free market in competitive business, the odd lot business, which prices are kept steady by affording the and no man could refuse orders and live. widest range to the operation of the law of Suppose, now, the market is falling. Brokers supply and demand ; third, to make for the come to the odd lot man to buy for their individual investor a continuous market in customers. He must sell or shut up shop. which he may buy and sell at will the securiIf he buys before he sells, the market will ties representing his investments; and, fourth, run away from him. He will be selling always to bring together, through the market which at a loss. He will be committing suicide. speculation so largely creates, capital and the

He must sell the odd lots short and buy his commercial and industrial opportunities for hundreds to make them up when the market

In the performance of these valuhas gone down further. He must sell short able services speculation is indispensable, or be ruined.

To class it as an evil, as a detriment to the So the very life of the odd lot dealer public welfare, as a process illegitimate and depends on his ability to sell short. The indefensible, is a colossal error. The reason access to the great free market of the Stock for being of the Stock Exchange lies largely




its use.


in the fact that it provides extensive and If, however, the stock at any time during the elaborate facilities for the speculative process. day, in any quantity however small, sells at any

To deny, on the other hand, that illegiti- price below 108, no matter where the broker mate forms of speculation, detrimental to the was at the time, and no matter if Pennsylvania welfare of the individual and the community, shot up to 110 the next minute, the broker are made possible by the facilities provided must give the stock to his customer at 108. by the Stock Exchange for legitimate specu- On a selling order the same rule holds; the lation, would be an equally colossal error. broker suffers for his carelessness or preWhere the opportunity for speculation exists, occupation or bad fortune. men will speculate who ought not to do so, If, however, on an order to sell Steel at and in ways that are illegitimate.

5738, the broker should actually make the sale

at 575/6, he must give the customer the benefit THE STOCK EXCHANGE PROTECTS THE of the higher price. For the broker to absorb

the difference himself would be to violate the That this is true the New York Stock Ex- cardinal rule that a man may not be principal change has fully realized. It has undertaken and agent in the same transaction. to minimize the possibilities for the illegiti- The customer cannot lose through his mate practices of speculators to a considerable broker's error, but he may gain through it. extent in the past and to a larger extent in If he suspects that something is wrong, he the present and the future.

can apply to the secretary of the Exchange. The Stock Exchange, like many other The trade will be verified through the house commercial organizations during the past ten which took the other end of the transaction. years, has been awakened to a more lively If the broker has made the trade at one price sense of its responsibilities to the community and reported it at another, he has committed by the force of an awakening public opinion. the cardinal sin. The penalty is expulsion. The sentiment of the members of the Stock The Exchange has an arbitration committee Exchange is moving forward with the times. which settles disputes between members, and The group of progressive members who have disputes between a member and a customer for years been exerting their influence toward if the customer wishes the committee to do a raising of the standards of the Exchange so. Any customer can bring a member before and more stringent safeguards against illegit- the arbitration committee, willy-nilly ; but a imate speculation are finding their way member cannot bring a customer there unless easier as public opinion inside as well as the customer is willing. outside of the Exchange is being educated.

The Exchange has for a long time done much to protect the interests of the public.

FICTITIOUS TRANSACTIONS It is doing more. It will in the near future, The Exchange protects its customers against I believe, do more still.

its members. It also seeks to eliminate illeThe rules of the Exchange are framed to gitimate forms of transaction. Among such protect the customer. For instance, no error forms are “wash sales” and “matched made by a broker can accrue to his advan- orders." Wash sales are fictitious sales in tage ; the customer always gets the benefit, which no stocks actually change possession. if there is a benefit. But the customer never Matched orders are orders given by an indisuffers the loss, if there is a loss. In the vidual to one broker to buy shares of a phrase of the Exchange, "6 A broker's error given stock and to another broker to sell account cannot show a profit."

shares of the same stock. In such a transLet us suppose a customer has given an action there is obviously no real change of order to buy Pennsylvania at 108. If the ownership. One broker must of course stock sells at 108 during the day, the broker deliver the stock to the other and receive may explain that he was in the crowd when payment for it. But since the customers of the sale took place, but was unable to buy each broker are one and the same person, because not enough stock was offered to meet the principal in the case is evidently selling the demand. But if he was not in the crowd himself stocks with one hand and paying or was absent from the Floor when the sale himself for them with the other. was made, he must “ put the stock in" for The acceptance by members of orders for his customer at 108, taking the loss arising such transactions, as well as the giving of them, from his having to buy it at a higher price is forbidden by the rules. The penalty is sus


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