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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 %s 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 18 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 11376 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 lays in a stock to meet 11348 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,


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 resources. 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 to 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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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 margir., 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. But 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



"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 sources of loss and suffering. It would go far to remove a stigma that has rested upon the business of dealing in stocks and bonds.

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.


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