$2 on each hundred shares. He is a rover, executing orders for other members all over the Floor. He too receives a slip from Mr. X:

Copper 7475 ху

As the market opens he will be found boring into the Copper crowd, offering to buy his 200 copper at 74% until the market comes to his price and some fellow-broker cries "sold" to him, or waiting until the stock is offered down" to his stipulated price and then shooting a terse "take two hundred" at the offerer. If he succeeds in completing the trade during the day, he also reports directly to Mr. X's telephone. This disposes of order Number 3.

MR. X MAKES SOME PURCHASES HIMSELF

The last two orders on his list Mr. X decides to handle himself. With that in mind, he slips into the "Steel crowd" which has already formed between Posts One and Five and the " arbitrage" rail. His order to buy 100 Steel sets no particular price, but is to be executed "at the market." If it is filled, therefore, at the opening price, the instructions of his client will be carried out. As he waits in the crowd for the opening, he has the good fortune to rub elbows with a fellow-broker who says to him, "I'll sell 100 Steel at the opening." "I'll take your 100 at the opening," replies Mr. X. So the trade is agreed to, since what one has to sell the other is authorized to buy, and both are directed to trade at the opening price, the price, that is, at which the first sale of the day is made; but it cannot be finally consummated until the gavel has fallen-first, because they do not know what the price is to be until the market has opened and a sale has been made, and, second, because trading before the open

He then slips away to the Union Pacific crowd to fill his other order. There he finds that Union, which closed the night before at 151, influenced perhaps by a pessimistic rumor as to the progress of the dissolution plans of the Union Pacific-Southern Pacific merger, has broken on the opening. The opening price is 14934. He accordingly shouts into the little pandemonium that is surging at the center of the crowd, "9 for 300," but no one pays any attention to him for the moment. His price is too far below the market. But a small selling fever is on, and eighth by eighth, to the accompaniment of shouted offers, eager responses of "Sold," "Sold," of waving arms with upraised fingers to indicate the number of "lots " the man at the other end of the arm is prepared to buy or sell, of lunging shoulders and digging elbows, as each man strives to hold his place in the shifting crowd, the price is hammered down until it is close to 149. Then our worthy guide springs more vehemently into action, brandishing three upraised fingers and striving to make it clear above the racket of his neighbors' voices that he is prepared to buy three hundred shares at 149. As he shouts he suddenly feels his arm clutched by a hand from behind, and, turning at the magic word "sold" in his ear and recognizing the owner of the hand and voice, he drops out of the

crowd and scribbles down on the slip on which is already a record of the order the name of the house from which he has bought the stock.

Burs
300 lup
все
149
Barnum Bailey
XY

Meanwhile the other party to the transaction has jotted down on his pad a similar memorandum on his slip, putting the name of X and Y in place of that of his own firm. That is all there is to it. A transaction involving fortyfour thousand seven hundred dollars is entered into as easily and simply as that. Nothing passes between the parties to the transaction but a word or a nod or a gesture. No record is made but two scribbled sets of memoranda; there is nothing to " bind the bargain," nothing to hold either party to it but his word. Buying and selling on the Floor are done on honor. A broker's word given there is as good as a written contract. "Welshing" is unknown.

A BREATHING SPELL

His business of the morning done, this being a dull day, Mr. X has nothing to do for a time but wander about the Floor chatting with his friends, listening to rumors and gossip, watching the progress of the market. Now and then as he glances from habit at the number-spotted blackboards he sees his own number displayed. Off he steps to his telephone to receive a message from his office partner, to get an order which has just come into the office by letter, telegraph, telephone message, or personal visit, or to answer the personal inquiries of an anxious customer who believes that the board member from his point of vantage on the Floor must know much more of the direction in which the market winds are blowing or are likely to shift than any one who is merely

watching the tape. This seeking of news of the market direct from board members seems like an obsession with some customers, and, however much it may interfere with his work on the Floor, the broker cannot neglect to humor the peculiarity. Gratified customers mean increased business and a larger volume of commissions. A customer who feels himself neglected by his broker has many other brokers to choose from.

Toward eleven o'clock Mr. X is called to his telephone to receive a message from one of the big downtown banks. He is the agent through whom this bank lends money on the Floor to brokers who have margin trades to finance for their customers.

TRADING ON MARGIN

Perhaps this would be as good a time as any to describe trading on margin and to consider for a moment whether it is a legitimate and essential good, a crying and indefensible evil, or perhaps an inextricable combination of the two.

Trading on margin is, broadly speaking, what makes widespread speculation possible. But let us not jump to the conclusion that therefore it is unqualifiedly bad. Perhaps speculation itself is not quite such an unmixed evil as it sounds in the common ear.

Trading on margin may be described as buying stocks on mortgage. Stocks may

also be sold short on margin, but in that case the analogy is not quite the same, though the underlying principle is. Let us consider the case of buying.

A customer has a thousand dollars with which he wishes to buy stocks in the hope that they will advance in price and he will therefore make money out of them. He knows that for his thousand dollars he can buy not more than ten shares of any stock selling at par if he buys them outright. On ten shares his profit, on any advance that would be likely to come soon, would be very small. He therefore tells his broker that he wishes to buy on margin. After consultation with his broker he decides to buy Steel Common, which was selling the night before at 5934, for he believes that Steel is more likely to go up than down. On this purchase he must "put up" a ten point margin. He must deposit, that is, for each share of stock that is bought, ten dollars. His thousand dollars, therefore, will "margin" a purchase of one hundred shares. He gives the order to his broker to "buy 100 Steel at the

This shows that on June 2 the first sale followed 300 Union

after the opening was 100 shares of American Car and Foundry Company Preferred at 112. The next sale was 200 shares of Missouri Pacific at 32. Then Pacific at 1474, 100 Nevada Consolidated Copper Company at 16%, 600 Utah Copper Company at 494, 100 Chicago, Milwaukee, and St. Paul Railroad at 106%, 200 Great Northern Railway Preferred at 1254, and 100 California Petroleum Corporation at 374.

THE TAPE FIFTEEN MINUTES AFTER THE OPENING

THE TAPE HALF AN HOUR BEFORE THE CLOSE

These two sections of the tape just after the opening and just before the close on June 2 show the decline in prices which took place on that day when extensive European liquidation sent prices down rapidly. This decline in prices was led by Canadian Pacific, the sign for which on the tape is CA. It will be noted that in the morning it was selling at 2194, while in the afternoon it was down to 21334. The decline affected also stocks all along the line, though not so seriously. Steel (US) which was selling in the morning at 58% had dropped in the afternoon to 574; Pennsylvania (PA) dropped from 108% to 108; Reading (RG) dropped from 1594 to 158; Union Pacific (U) from 147% to 144%.

THE CLEARING-HOUSE PRICES ON THE TAPE

These are the prices which are used as a basis for settlement through the Clearing-House. The Clearing-House price is always the nearest even price to the last sale made before the close in each Clearing-House stock. If, for instance, a stock closes at 1504, the Clearing-House price will be 150; if it closes at 150%, the Clearing-House price will be 151.

market" and deposits the thousand dollars with him. The broker goes on the Floor and buys 100 shares of Steel at 60, the market opening strong and Steel going up at once.

FINANCING A MARGIN TRANSACTION

The sale made, the broker has to provide the rest of the money to complete the transaction. Every trade on the New York Stock Exchange is completed the next day.1 Stock sold to-day must be delivered to-morrow, stock bought to-day must be paid for to-morrow. This purchase calls for a payment of $6,000, while the broker has only $1,000 belonging to his customer to apply on it. He must borrow the rest. So soon after eleven the next day he goes to the Money crowd at Post Number Four-the Money Post. There he finds several members who represent the banks, among them our friend Mr. X. He naturally goes to the representative of a bank with which he is accustomed to dealing. Perhaps this is Mr. X. He goes to him, then, tells him that he wishes to borrow, say, $30,000. He needs only $5,000 to finance the trade we have been considering, but he has four or five other customers also buying on margin, so he needs more money for them. All loans of this sort are made in units of $5,000. He needs perhaps only $28,000 to cover the actual purchases of the day, but he borrows $30,000, or six units.

This borrowing on the Floor is a purely verbal transaction, like any sale of stocks. Both brokers make a note of the amount and the rate and there their connection with it ends. The loan so arranged for is finally effected by the broker's office and the bank dealing directly.

The bank will lend the broker 80 per cent of the value of the stock. The stock is put up with the bank as collateral. The loan is what is known as a call loan; the bank may demand its payment at any time, the borrower may pay it off at any time. The rate of interest on such loans is lower than the legal rate, and fluctuates almost daily. The rate is determined by the law of supply and demand. If there is a great deal of money in the banks available for this kind of loan, money goes down. If the pendulum swings and money becomes scarce because it is in demand for moving the crops or for other similar purposes, money goes up. During

A single exception is to be found in the case of odd lot transactions in a stock during the time when the transfer books of the corporation are closed. This will be referred to again later.

the year the rate for call money may vary from two per cent to six per cent, going up as high, however, on perhaps two or three days during the year, as twenty per cent. It has gone up on extraordinary occasions to fifty, sixty, or even one hundred per cent."

The call money rate averages about four per cent. This rate is a yearly rate, and does not of course mean that if a broker borrows for his customer one thousand dollars and keeps it for a day he will pay forty dollars for the use of it. If he kept it for a year and the rate did not fluctuate in the meantime, he would pay forty dollars for the use of it. If he kept it for one day he would pay a trifle over ten cents for its use.

But to return to our customer. When his broker has finished the operations necessary to complete the purchase, the customer owns 100 shares of the common stock of the United States Steel Corporation, and owes his broker $5,000. He also owes his broker, first, a commission of 1% of 1 per cent on the par value of the stock bought, or $12.50; and, second, interest on the money the broker has lent him to make up the purchase price, $5,000. The interest is figured at about one per cent higher than the broker has to pay the bank-one per cent higher, that is, than the call money rate. Since the rate on call money fluctuates from day to day, the rate the customer pays cannot be fixed in advance as on the ordinary time loan. Each month the broker strikes an average of the rates he has paid on his loans during the month, and on this basis decides what to charge his customers for what he has lent them to carry their trades. The interest which the customer has to pay is reduced, however, by any dividends paid on the stock while it is being carried, which belong to the customer.

He

estate agent and bought land. Suppose he bought a plot for $6,000. It is very little likely that he would pay for it all in cash. would put up a margin, get the real estate agent to borrow the remainder of the purchase price from some bank or some individual, and put up the property as security for the loan. The process is in effect the same. It is true that in the second transaction the customer uses a mortgage in putting up his land as security, but the necessity for this is obvious. Land is not portable and cannot be sent round to the bank by messenger and put away in its strong box. It is also true that one cannot borrow so large a proportion of the purchase price of a piece of land as of a block of stock. But the reason for this involves an essential difference between the real estate market and the Stock Exchange, a difference

COPYRIGHT 1913 NEW YORK STOCK EXCHANGE

which is all in favor of the Exchange and illustrates its chief function. There is no market where real estate can be bought and sold at will. There is no institution where prices of real estate are fixed by supply and demand and fluctuate from day to day as those factors change.

The owner of a hundred shares of Steel can sell them at an hour's notice. He can tell from his daily paper every morning what the price of Steel is. He can even tell from the tape, if he is near a ticker, how the price fluctuates from hour to hour. A word to his broker over the telephone sells his stock without bargaining or delay or uncertainty.

The owner of a piece of real estate can sell it only after a hunt for a buyer and a bargain as to the price, and perhaps not then, 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 TRADING AND ITS

DANGERS

Is trading on margin, then, an illegitimate practice? Is it an evil? Is it indefensible? Should we be doing a service to the community if we prohibited it?

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