it were for seventeen hundred shares. The business of buying and selling blocks of stock of less than one hundred shares is known as the "odd lot" business. There are five houses in the Street that do an odd lot business exclusively. The extent of their business is suggested by the fact that these five houses have forty-five members of the Exchange connected with them. The customer does not deal directly with the odd lot houses as he does with the commission broker. The odd lot houses, in fact, are not brokers, they are dealers.

Let us see how their business works.

THE BUSINESS OF THE ODD LOT HOUSE

Mr. A, a man of modest possessions, finds that he has a certain balance of savings and proposes either to invest it or to indulge in mild speculation. After study and consultation he gives an order to his broker to buy twenty-five shares of Northern Pacific at the market. From his broker's office the order is telephoned to the Floor, and his broker's telephone clerk hands it to the representative of one of the odd lot houses. Now, in order to make the explanation simpler, let us assume that this is the only order that the odd lot broker has to execute that day. The odd lot broker goes to the Northern Pacific post, finds that Northern Pacific is quoted at 113% offered, 113 bid. He immediately reports to Mr. A's broker that he has sold him twenty-five shares of Northern Pacific at 113% and to his own office the same fact. The odd lot broker has now sold twenty-five shares Northern Pacific at 113%. He must make delivery of this stock to-morrow, but he has not the stock to deliver because he cannot buy less than one hundred shares on the Floor. How does he get the stock to deliver? He goes into the loan crowd, borrows one hundred shares of Northern Pacific, sends the certificate to the Northern Pacific transfer office and has it split into two, one for twenty-five shares and one for seventy-five shares. The twenty-five shares he delivers to Mr. A's broker the next day; the seventy-five shares he holds until he has a call for them. Since the odd lot man has only borrowed the stock which he has delivered, he has sold the twenty-five shares short.

The odd lot man will always sell at the "offered" price and buy at the "bid" price. There is another way, however, in which an order may come to him. The order may be to buy or sell at the market, but with the

On such an

proviso, "Wait for a sale." order he waits until a sale has taken place, and reports his own transaction at % above that price, if it is a purchase, at % below if it is a sale. In other words, on such an order Mr. A will pay more than the prevailing price if he is buying, or will receive % less than the prevailing price if he is selling. But, in any case, he always finds a market for his shares, whether they be one or ninety-nine.

The odd lot dealer's business is of course vastly more complicated than the single illustration I have been able to give. Instead of a single order he has scores. In an active market the odd lot business probably makes up one-fifth of the entire business done on the Floor. On a million-share day, which was not an uncommon occurrence before the present period of stagnation struck the security markets of the world, the odd lot business would amount to 200,000 shares.

The odd lot house is continually selling odd lots--from one to ninety-nine shares-to the customers of other brokers, and buying "hundreds " against them from other traders on the Floor. It is also continually doing the reverse process-buying odd lots and selling "hundreds." To do such a business requires immense capital. The odd lot house since when it needs small amounts of stock it can get them only by buying hundreds-has to carry stocks in greater quantities than other houses. Not that it lays in a stock to meet future demands as a grocer lays in sugar. For that would be speculating, and the odd lot house, broadly speaking, does not speculate. But if the house has orders for 87 shares of a certain stock and must buy 100 shares to fill the orders, it must carry the 13 shares, and in effect becomes a forced speculator to that extent.

There is another condition which requires the odd lot house to have ample resources. At the times when dividends are paid the transfer books of corporations are closed for periods, in some cases, of a month. During those periods the odd lot house cannot deliver its odd lots, for the splitting up of the hundred-share certificates must be done on the transfer books of the corporation. But the demand for odd lots does not stop merely because the transfer books are closed. The odd lot house, therefore, must continue to buy its hundreds and hold them till the transfer books are opened. The necessity for ample capital is apparent.

THE SMALL INVESTOR NEEDS THE ODD LOT

HOUSE

The odd lot business, because of this absolute necessity for abundant resources, is probably the safest for the customer of any on the Street. No odd lot house has ever failed. It is reported that in the Hocking panic, when failures were numerous and no man was sure of his neighbor's solvency, some traders and brokers took their hundred-share certificates, broke them into fifties and sold them to the odd lot houses, of whose ability to weather the storm there was not the slightest question. The compliment to the odd lot houses, we may hope, helped to atone for the burden thus thrown them. upon The odd lot house is, from the point of view of the general public, the most interesting as well as the most important part of the stock market. It is through the odd lot house (though the customers may not be conscious of the fact, since they deal with it not directly but through their brokers) that the small investor and the small speculator come into touch with the Stock Exchange. If there were no odd lot houses, the man with modest savings which he wanted to invest in securities or venture in the hope of speculative profit would have no avenue of approach to the market where such investment or such speculation could be undertaken.

THE ODD LOT DEALER CANNOT LIVE WITHOUT SHORT SELLING

The odd lot dealer is indispensable to the small investor. And the odd lot dealer could not exist if short selling were impossible. Just consider the matter a moment. The odd lot dealer always makes a market for those in quest of less than a hundred shares. If any one wants to buy, he must sell; if any one wants to sell, he must buy. It is a highly competitive business, the odd lot business, and no man could refuse orders and live. Suppose, now, the market is falling. Brokers come to the odd lot man to buy for their customers. He must sell or shut up shop. If he buys before he sells, the market will run away from him. He will be selling always at a loss. He will be committing suicide.

He must sell the odd lots short and buy his hundreds to make them up when the market has gone down further. He must sell short or be ruined.

So the very life of the odd lot dealer depends on his ability to sell short. The access to the great free market of the Stock

Exchange of the small investor and the small speculator is through the odd lot dealer. The conclusion is inescapable. Prohibit short selling, and you strike at the small investor. Prohibit short selling, and you narrow your market and a narrow market is a bad market, a dangerous market.

Short selling and trading on margin are instruments primarily of speculation. They may touch the sphere of investment occasionally, but not to a great enough extent to modify seriously the rule that they are speculative operations.

HOW ABOUT SPECULATION?

This naturally raises the question of specu lation as a whole. Should it be classed with gambling as an anti-social practice, or with legitimate business operations? On this point the testimony of students of economic processes is, to all intents and purposes, unanimous. Speculation," says Professor Edwin R. A. Seligman, an American student of economics, subserves a useful and in modern times an indispensable function." From France there comes similar testimony in the words of the great French economist, Paul Leroy-Beaulieu: "Complaint is made of the evils of speculation, but the evils that speculation prevents are much greater than 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 public; . . . they can only fail to serve the public interest in proportion as they miss their own." The services which speculation performs in modern business are, first, to segregate many of the risks of commerce and cause them to be assumed by a special class; second, to contribute the maximum share to the formation of a broad and free market in which prices are kept steady by affording the widest range to the operation of the law of supply and demand; third, to make for the individual investor a continuous market in which he may buy and sell at will the securities representing his investments; and, fourth, to bring together, through the market which speculation so largely creates, capital and the commercial and industrial opportunities for its use. In the performance of these valuable services speculation is indispensable. To class it as an evil, as a detriment to the public welfare, as a process illegitimate and indefensible, is a colossal error. The reason for being of the Stock Exchange lies largely

in the fact that it provides extensive and elaborate facilities for the speculative process.

To deny, on the other hand, that illegitimate forms of speculation, detrimental to the welfare of the individual and the community, are made possible by the facilities provided by the Stock Exchange for legitimate speculation, would be an equally colossal error. Where the opportunity for speculation exists, men will speculate who ought not to do so, and in ways that are illegitimate.

THE STOCK EXCHANGE PROTECTS THE
CUSTOMER

That this is true the New York Stock Exchange has fully realized. It has undertaken. to minimize the possibilities for the illegitimate practices of speculators to a considerable extent in the past and to a larger extent in the present and the future.

The Stock Exchange, like many other commercial organizations during the past ten years, has been awakened to a more lively sense of its responsibilities to the community by the force of an awakening public opinion. The sentiment of the members of the Stock Exchange is moving forward with the times. The group of progressive members who have for years been exerting their influence toward a raising of the standards of the Exchange and more stringent safeguards against illegitimate speculation are finding their way easier as public opinion inside as well as outside of the Exchange is being educated.

The Exchange has for a long time done much to protect the interests of the public. It is doing more. It will in the near future, I believe, do more still.

The rules of the Exchange are framed to protect the customer. For instance, no error made by a broker can accrue to his advantage; the customer always gets the benefit, if there is a benefit. But the customer never suffers the loss, if there is a loss. In the phrase of the Exchange, "A broker's error account cannot show a profit."

Let us suppose a customer has given an order to buy Pennsylvania at 108. If the stock sells at 108 during the day, the broker may explain that he was in the crowd when the sale took place, but was unable to buy because not enough stock was offered to meet the demand. But if he was not in the crowd or was absent from the Floor when the sale was made, he must "put the stock in" for his customer at 108, taking the loss arising from his having to buy it at a higher price.

If, however, the stock at any time during the day, in any quantity however small, sells at any price below 108, no matter where the broker was at the time, and no matter if Pennsylvania shot up to 110 the next minute, the broker must give the stock to his customer at 108. On a selling order the same rule holds; the broker suffers for his carelessness or preoccupation or bad fortune.

If, however, on an order to sell Steel at 573%, the broker should actually make the sale at 575%, he must give the customer the benefit of the higher price. For the broker to absorb the difference himself would be to violate the cardinal rule that a man may not be principal and agent in the same transaction.

The customer cannot lose through his broker's error, but he may gain through it. If he suspects that something is wrong, he can apply to the secretary of the Exchange. The trade will be verified through the house which took the other end of the transaction. If the broker has made the trade at one price and reported it at another, he has committed the cardinal sin. The penalty is expulsion.

The Exchange has an arbitration committee which settles disputes between members, and disputes between a member and a customer if the customer wishes the committee to do so. Any customer can bring a member before the arbitration committee, willy-nilly; but a member cannot bring a customer there unless the customer is willing.

THE EXCHANGE TRIES TO PREVENT
FICTITIOUS TRANSACTIONS

The Exchange protects its customers against its members. It also seeks to eliminate illegitimate forms of transaction. Among such forms are "wash sales" and "matched orders." Wash sales are fictitious sales in which no stocks actually change possession. Matched orders are orders given by an individual to one broker to buy shares of a given stock and to another broker to sell shares of the same stock. In such a transaction there is obviously no real change of ownership. One broker must of course deliver the stock to the other and receive payment for it. But since the customers of each broker are one and the same person, the principal in the case is evidently selling himself stocks with one hand and paying himself for them with the other.

The acceptance by members of orders for such transactions, as well as the giving of them, is forbidden by the rules. The penalty is sus

pension for not more than one year. Such transactions, fictitious in reality, but perfectly good on their face, have unquestionably been much used in the past by operators who have sought

to bring about artificial price movements. The stringent rule of the Exchange, combined with the law of the State making such a fictitious transaction a felony, has probably reduced them to the vanishing point.

TRADING ON LIGHT MARGINS

It is apparently a difficult thing to frame definitions of speculation and gambling which draw the line in exactly the right place. But that, in the language of the Hughes Commission, whose report on the Stock Exchange is a classic document, many of the transactions on the Exchange are "virtually gambling" there can be no question. At any rate, whatever our definitions may be, a considerable amount of the speculation on the Stock Exchange has, for the individual indulging in it and hence the community, all the evil results of gambling. The chief cause of this form of speculation is trading on insufficient margin, and trading by men who cannot afford to lose. The latter practice it is well-nigh impossible to control. To curb the right of the individual to do what he will with his own is rather beyond the province of any private organization of men. even this practice would be restricted if no brokers would accept orders except upon ample margin. Ten points is probably the usual margin. Many houses make a practice of requiring a twenty-point margin except in unusual cases. But unfortunately not all houses require so much as a ten-point margin. On smaller margins than ten points the danger of being

But

"shaken out" on a comparatively small change of price up or down is a serious one for the customer with small resources. Doing any business on a small margin is a dangerous undertaking, but it is especially so in the business of speculation.

To eliminate from the Stock Exchange dealing on insufficient margins would be to eliminate one of the big of loss and suffering. It would go far to remove a stigma that has rested upon the business of dealing in stocks and bonds.

sources

The New York Stock Exchange has undertaken to bring about this elimination. A rule adopted in February of the present year declares that a member accepting an account "without proper and adequate margin" may be proceeded against and disciplined even to the extent of losing his seat. A new committee has been appointed to carry out this rule and others relating to the business conduct of members. This committee is an active one, and steps have already been taken to make effective the rule against insufficient margins. There seems little doubt that the Governing Committee of the Exchange can do much to eliminate this dangerous practice, if it wants to badly enough to take sufficiently drastic action. A good beginning has been made. Perhaps a system of examinations by expert employees of the Exchange of the books of each Stock Exchange house, at unexpected intervals, as National banks are examined, might be established to advantage to deal with this question. The Exchange is trying to curb this evil; if it tries hard enough, it will succeed. It ought to have the full support of public opinion in its endeavors. It ought also to have the continued spur of public opinion toward the improvement of the conditions of trading on the Exchange to the greatest possible degree.