The Machinery "f Wall Street WHY IT EXISTS, HOW IT WORKS AND WHAT IT ACCOMPLISHES BY G. C. SELDEN Author of "Psychology of the Stock Market," "A. B. C. of Bond Buying," "Investing for Profit," etc. THE MAGAZINE of WALL STREET 42 BROADWAY NEW YORK COPYRIGHT, 1917 MAGAZINE OF WALL STREET Latest Revised Edition, 1919 A f\ FT A r~^ CONTENTS I Why Do We Need a Wall Street ... 7 II The Banks Bank Statement Clearing House Sub-Treasury 20 III The Money and Credit Markets .... 33 IV Foreign and Domestic Exchange Balance of Trade 44 V The Corporation as an Element in Wall Street 55 VI The Bond Market 68 VII How Business Is Done on the Stock Ex- change 79 VIII How Business Is Done on the Stock Ex- change (Continued) 90 IX Inside the Broker's Office 103 X Broker and Customers The Unlisted Mar- ket 114 XI The Curb Market Private Bankers . . .126 XII The Promoter Underwriting Syndicates . 137 XIII Distribution of News and Quotations . . 149 XIV Theory of Speculation Speculative Terms . 161 CHAPTER I Why Do We Need a Wall Street? TO most people the machinery of Wall Street seems intricate and mysterious. There is probably no part of the business activities of the country that is so much misun- derstood. The popular idea of Wall Street, picked up from miscellaneous sources, such as news- paper headlines, cartoons, magazine stories and moving pictures, seems to embrace a hodge-podge of corpulent, side-whiskered bankers surrounded by champagne bottles, haggard speculators bending feverishly over stock tickers, habitually risking their last dol- lar and generally losing it, Mephisto-like ma- nipulators always determined to ruin each other or be ruined in the attempt, and child- like young gamblers whose touching confi- dence in human nature leads them to risk their widowed mothers' patrimonies in a single throw on any "tip" which may be offered them. To the man who is earning his livelihood day 7 8 THE MACHINERY by day in the clock-like, well-ordered, efficient business life of the Street, these popular ideas seem so absurd that he thinks they must be mythical. It is only when he leaves his habit- ual haunts and mingles with the people on the farms, in the stores and in the factories that he awakes with a start to the monumental ig-, norance of the public in general about the things that seem to him nothing but daily business routine. But while the details of the machinery of Wall Street are complicated, just as are the de- tails of the steel industry or boot and shoe manufacturing or any other specialized depart- ment of modern life, its main features and pur- poses are comparatively simple and very inter- esting. Why a Wall Street? Why do we need a Wall Street? For it must be that we do need it or we should not have it. Nothing could call it into existence except a demand of some sort for the services rendered. To start at the beginning, it is, as all the OF WALL STREET ^ economists tell us, division of labor that per- mits and to a great extent causes the advance of civilization. So long as each individual grows for himself or makes for himself every- thing that he needs, he is a slow and clumsy producer. He has to do everything on suchj a small scale that he can make use of no ma- chinery and only of the simplest tools. He has little chance to rise above the standard of liv- ing of a savage. With the division of labor comes a great gain in production, and the gain is constantly in- creasing through the use of more and better machinery, which only the division of labor permits. But division of labor means that each man, or each group of men, makes a different prod- uct hence these various products must in some way be exchanged before they can be put to use where they are needed. At first the man who has too many potatoes exchanges some of them with his neighbor, who has too much corn, and so' on. But this is a slow and awkward process, and the next step is for all the people who have any exchanging to do to meet together at some agreed place, and do 10 THE MACHINERY it all at once in other words, a market is es- tablished. So long as transportation is slow and crude, each community has to have its own little market; but the larger the market the more conveniently the process of exchanging can be carried on, and now that railroads, mails, telegraph and telephone bind whole nations together, it is possible to have sectional, na- tional or even world markets. There is another thing besides transporta- tion that permits the exchanging process to be centralized for a large area, and that is the intricate network of credit that binds the modern community together. The Dakota farmer, for example, can, by establishing a credit at Chicago, sell his wheat there by telegraph to be delivered at some future date and at the same time the New York or Liverpool merchant can btfy at Chicago in the same way. And as the use of credit develops, the credit itself comes to be something to be bought and sold for a certain rate of interest, so that a central market for credit is also needed the money market, in current phraseology. OF WALL STREET 11 Next, large-scale production requires the corporation because one man would not ordi- narily have money enough to finance large- scale production, so that it is necessary for many persons to club together and put up the money. Each member of such a club gets a certificate showing his share as the English logically say in the ownership of the corpora- tion, and these shares or stocks have to be bought, sold and exchanged somewhere in a central market. \ Thus in a perfectly natural and obvious way, to meet the necessities o the modern industrial organization, the money market anhas sold $10,000 worth of cotton to England while B has bought $10,000 worth of pocket- knives, there is obviously no sense in A's send- ing; $10,000 in gold across the ocean only to have it sent back again to B. Stripped of all technicalities, the foreign exchange market simply enables B to pay the $10,000 to A, thus closing up both transactions. This could only be done through some sort of central market, as otherwise A and B would never get in touch with each other. The principal reason why we need a Wall Street, then, is to bring together buyers and sellers, borrowers and lenders, from all over the world. Capital flows through Wall Street into varied industries just as the heart dis- tributes the blood to the different parts of the body. It is like the big central exchange of a telephone system. From it the wires run to all OF WALL STREET 19 the people who want to do business in the things with which Wall Street deals. The man who has a few shares of stock to sell or a few thousand dollars to loan is indirectly put in touch with the whole world for a market. It is a splendid piece of machinery, probably the most valuable to the country of any mechanism or organization the mind of man has devised. It will be well worth our while to examine its parts more in detail. The Banks Bank Statement Clearing House Sub-Treasury THE modern bank grew up out of the ancient business of money-changing, or __ exchanging the money of one country for that of another. That business was always unpopular because the money-changer did not appear to be doing any real work for the profits he made out of the exchange, and because the money-changers often drove unfair bargains with those who were at their mercy. The Middle Ages did not recognize the legitimacy of interest on borrowed money. It was looked upon as extortion, the economic function of capital being altogether too abstract a conception for the people to assimilate and that is still true of many untrained minds in every country. Most of the diatribes against the "Money Power," the "sharks of Wall Street," and so on, are really the off-spring of this ancient prejudice. It is, perhaps, an evidence of the natural selfishness of mankind that the money- 20 OF WALL STREET 21 lender has always been hated by the borrower, with or without cause; but the advent of the corporation has done much to remove this prejudice by taking the personal element out of business. The first bank worthy of the name is sup- posed to have been established in Venice in 1157. The word bank signified a "pile" or "mass" of funds. The early Italian banks were chiefly for the handling of government obliga- tions. The next step was for the bank to undertake the care of money for individuals and firms, and at a later date for corpora- tions. Money so deposited is always subject to the order of the depositor, either on demand or at a certain date, or after a specified notice. Interest may or may not be paid on these deposits, according to the agreement; but to pay the cost of handling the money, and the interest, if any, the bank is allowed to lend the deposits out at interest, always keeping in hand a certain amount of cash to meet the cur- rent demands of depositors. In this way we arrive at the main items of the modern "bank statement" deposits, loans and re- serves. 22 THE MACHINERY Trust Companies are chartered under State laws, and are authorized to do a general bank- ing business, but cannot issue currency, that power being reserved for banks having the National charter. Trust Companies may also undertake almost any kind of trust as their name indicates, and engage in nearly every kind of legitimate business. They are of re- cent development. The first one was estab- lished in New York in 1822, and as late as 1871 there were none in Boston. Trust Companies at first confined themselves to handling funds left in trust, but as they were not so closely restricted by law as the banks they gradually found themselves able to pay a higher rate of interest on deposits, and hence did more and more a general banking business. In New York they are now almost equal to the banks in importance. The Bank Statement All banks except private bankers issue public statements of their condition from time to time. The U. S. Comptroller of the Currency calls for such statements from all National Banks about once in two months. The exact OF WALL STREET 23 date is not fixed until after it is past, to prevent the banks from making special preparations for the statement. The banks of several of the big Eastern cities issue statements weekly, for the convenience of the public. Far the most important of these weekly statements is that of the banks and trust companies which are included in the New York Clearing House. It is given out on Satur- day, and is printed or summarized in the lead- ing newspapers throughout the country. Although at first glance the Bank Statement appears rather formidable, its main features are simple enough. Each institution gives its capital; its net profits; the total of its loans, discounts and investments; the amounts of various kinds of money it has on hand; the amount of cash it has on deposit in other bank- ing institutions which, under the law, may be counted as a part of its reserves ; its own "net deposits" that is, the total of the funds that have been placed in its care; and, in the case of a National Bank, its outstanding "circula- tion," or the total of the currency which it has itself issued. 24 THE MACHINERY The figures given out for each of the above items represent the average for all the days of the week covered by the statement. The aver- age is used to prevent any temptation to "win- dow-dressing," or trying to make an especially good showing for the particular day of the report. The several items are then totaled in three groups banks which are members of the Fed- eral Reserve system ; State Banks not members of Federal Reserve ; and Trust Companies not members of Federal Reserve. Finally, the three groups are combined to give the total of each item for the entire Clearing House. A supplementary statement is also issued showing the totals for each of the three groups on the day the statement is issued. This Is called the "Actual Condition," and is in most general use for judging money conditions, since it gives the latest available information. As the provisions of the new Federal Re- serve law in regard to reserves are somewhat complicated, a special statement is added show- ing the "Reserve Position/' both average andl actual. With such complete weekly statements of OF WALL STREET 25 the condition of each bank, manipulation of the accounts becomes impossible, and the state- ment of the New York Clearing House is per- haps the most important weekly financial showing in the world. Its only possible rival would be the statement of the Bank of Eng- land, and since that does not cover other Lon- don banking institutions it is necessarily less comprehensive. Certainly no other table of figures will show the trained observer so much about financial and economic conditions in the United States. Surplus Reserves The figures most closely watched by Wall Street are the Surplus Reserve and the rela- tion between "Net Demand Deposits" and "Loans, Discounts, Investments, etc." The re- serve consists of two parts cash in vault, and reserve in the hand of other depositaries as permitted by the law and this total reserve must equal or exceed a specified percentage of each bank's own deposits. If for any tem- porary reason a bank's reserve falls below this percentage of deposits, the reserve must be restored to the legal requirement at the earliest 26 THE MACHINERY possible moment, and State and Government officials will see that this is done. When, on the other hand, the reserve ex- ceeds the legal requirement, as it nearly always does, a "surplus" reserve arises, anti the amount of this surplus shows the relative strength of the bank's cash position. Hence this item is carefully watched as an index to the supply of money available for loans. Since a great many securities are always being car- ried by their owners partly on money bor- rowed from the banks, the amount of this sur- plus reserve has a more or less direct rela- tion to the stock market. The relation between deposits and loans is not so generally understood as the surplus reserve. These show not so much the condi- tion of the banks as the condition of the busi- ness men who are their patrons. When the banks' customers are depositing more money than they are borrowing, they are manifestly prospering. When they are borrowing more than they are depositing it is evident that they are not so prosperous, and when this condition continues for a long time a danger point may be reached where some business men have OF WALL STREET 27 difficulty in meeting their loans and may even have to fail. Under normal conditions the total loans of Clearing House institutions may be some- what greater than deposits, because a bank may lend not only the money that other people deposit in it but also its own money that is, its capital and its surplus of net profits. Hence if deposits exceed loans, a strong posi- tion is shown; but when the loans begin to show a large excess over deposits the situation will bear watching. j It must be noted, however, that loans made on Government bonds or Treasury certificates as security are considerably different from loans made on ordinary business men's notes, arising out of general trade. These Govern- ment securities are so nearly equivalent to money that loans made on them have a much higher standing than loans on commercial paper. And when an excess of loans over de- posits consists entirely or almost entirely of these loans on Government paper, it does not necessarily indicate any special weakness in the business situation. 28 THE MACHINERY The Clearing House The "clearing" of numerous transactions be- tween two or more persons by offsetting one debt against another and so simplifying the payments to be made, is a custom so old that its beginnings can hardly be traced. In Ro- man law it was called compensatio. The prin- ciple was used throughout the Middle Ages and it is rather surprising that the New York Bank Clearing House was not organized until 1853. It is a slow process for each bank to collect checks from all the other banks separately, involving a great waste and duplication of time and labor. This is avoided by establishing to quote from the Pennsylvania Supreme Court "a place where all the representatives of the banks in a given city meet, and under the supervision of a competent committee or of- ficer selected by the associated banks, settle their accounts with each other and make or re- ceive payment for balances and so 'clear' the transactions for the day for which the settle- ment is made." Every bank is, in essence, a merchant of credit, constantly buying credit from its de- OF WALL STREET 29 positors and selling credit to its borrowers ; and credit which is vouched for by established banking institutions is practically a uniform commodity. Since Wall Street is a sort of central market for this credit, serving the whole country, there are a vast number of credit transactions which may be offset against each other without cash payments. New York City bank clearings for 19f5 were $110,563,374,000, which was 59 per cent, of the total for the whole United States. Moreover, the ten largest New York banking institutions clear more checks than all the rest of the Clear- ing House combined, so that the handling of the country's credit is pretty well centralized. Whether or not there are dangers arising from this extreme centralization, it is exceed- ingly convenient and efficient. Each institu- tion sends two clerks to the Clearing House every day, one to present checks to other banks and one to receive checks from them. The process usually takes only a few minutes.' Seven of the biggest institutions clear their mutual exchanges by themselves an hour earlier, in order to accelerate the final clearing. Payments amount to about four per cent, of 30 THE MACHINERY the total clearings, as a rule. They are some- times made in cash and sometimes in Clearing House certificates representing deposits of cash by member banks in the Clearing House vaults. The Clearing House also serves the pur- pose of bringing all the banks together into a central organization for other objects besides the sirnple process of clearing checks. Banks which are entirely solvent, but have become in- volved in temporary difficulties, are often as- sisted by the Clearing House and thus saved from suspension ; and, in times of panic, Clear- ing House loan certificates have several times been issued to take the place of money. In 1907 this practice spread all over the country, and was undoubtedly the means of preventing a general crash. In future the notes issued by the Federal Reserve banks will obviate the necessity of Clearing House loan certifi- cates. The Sub-Treasury Of the nine Sub-Treasuries which act as branches of the Treasury Department at Washington in receiving money and paying OF WALL STREET 31 Government bills, the one in the Wall Street district handles about two-thirds of the total business. The relations of the Sub-Treasury with the banks are necessarily close. The assistant treasurer, who has charge of it, is a member of the Clearing House, and in times of stress he is in frequent consultation with leading bankers and co-operates with them in handling the situation. The Sub-Treasuries were established in 1846 because the Government had lost considerable money through the failure of depositary banks in which it had been kept. From then until the establishment of the National Bank system in 1864 the Government kept entirely free from the banks, and even after that most of the Government's balances were held at the vari- ous Sub-Treasuries. In times of prosperity the Government re- ceipts were naturally large and consequently the Sub-Treasury withdrew a great deal of money from the market just when it was most needed. In recent years, therefore, it became necessary for the Secretary of the Treasury to deposit Government money in the banks at 32 THE MACHINERY times to prevent stringency in the money mar- ket. Now that the twelve Federal Reserve Banks are in operation, the Sub-Treasuries are be- ginning to look like an unnecessary duplication of Government facilities, since the banks could without difficulty perform all the work. CHAPTER III The Money and Credit Markets THE word "money" is used in Wall Street and in commercial circles generally to mean two entirely separate and distinct things. This is unfortunate, since it causes a great deal of confusion in the minds not only of students and novices, but even in quarters where a better knowledge might naturally be expected. It is therefore necessary to get these two meanings thoroughly in mind before considering the workings of the money market. The first meaning of money is cash or cur- rency gold, silver and paper money of all kinds. This is the money we carry in our pockets, or which is deposited in the Sub- Treasury, or imported and exported, or shipped back and forth between the country banks and those located in the big financial centers. The second meaning of money is short-term credit, such as call loans, time loans, com- mercial paper, checks, bank deposits, etc. For example, when a man says he has money in his 33 34 THE MACHINERY purse he refers to the first meaning of the word, but when he speaks of his money in the bank he means something very different his credit balance at the bank. This double use of the word grew up because a credit balance at the bank could be instantly turned into money at any time. When the savings bank depositor takes a hundred dollars of cash around to his bank and deposits it, he knows that he can draw that cash out again whenever he wants it, and very naturally he speaks of his "money" in the bank; but the bank does not hold all its depositors' money in the form of cash. If it did it could not pay any interest, since to earn interest it must loan the money out in some way. The bank simply credits its patron with the amount of his deposit, and what he really has in the bank is a credit balancej Thus the "money market" is really a credit market, for hardly any one ever borrows or lends the actual cash. Nearly all the trans- actions in the money market are in bank checks, which merely serve to transfer bank credits from one person to another. Even loans on the notes of business firms commer- OF WALL STREET 35 cial paper which may run for six months or a year or even longer, are included in the gen- eral term "money market." How the Money Rate is Fixed Since credit can be transferred anywhere in the United States by the simple process of mailing a check, or even by telegraph if neces- sary, the whole country is practically included in the "money market." A merchant in Kansas City wants to borrow $10,000 for the purpose of increasing his stock of goods. He goes to his bank and if his credit standing is good the bank lends him the money. This perhaps leads the Kansas City bank to withdraw $10,- 000 which it was carrying on deposit in a Chi- cago bank, and may again lead the Chicago bank to draw- an equal amount from its New York correspondent bank or trust company. In all these transfers of credit no cash is moved unless the bankers of one city or com- munity, taken as a whole, begin to find them- selves short of cash. Then they arrange for the transfer of currency or gold from some other city. For instance, if Chicago banks find them- 36 THE MACHINERY selves running short of cash while New York still has plenty, the rate of exchange at New York on Chicago will rise to such a premium that it will be cheaper for New York to send the actual cash than to buy exchange on Chi- cago. The workings of the foreign and do- mestic exchange markets will be explained more fully in the next chapter. Most of the borrowing and lending done in the entire country is thus arranged privately between individuals or firms and institutions and the rates of interest are fixed by two in- fluences : (1) the credit standing of the bor- rower the rate being lowest to the concern whose credit is the strongest ; and (2) the gen- eral demand and supply of money, as observed by each bank in its dealings with business men and with other banks. Under ordinary circumstances more than half of the total bank clearings of New York City result from stock and bond operations of one kind or another, though not all on the Stock Exchange. OF WALL STREET v 37 Call Money The principal form of credit that arises from these extensive security transactions is that known as "call money." The broker or dealer in stocks and bonds naturally wants to borrow the very large amount of credit that he re- quires at the lowest possible rate of interest, and the bank can afford to allow the lowest in- terest rate on loans that it can call in at any time when the money may be needed for other uses. This situation gives rise to the very gen- eral use of call money in Wall Street. The market for call money is so broad and so large a part of the demand is from mem- bers of the Stock Exchange that it is conven- ient for the brokers to gather in the "money crowd" after the close of the regular market each day and bid for and offer call money just as they do a stock during the session. The principal supply comes from a comparatively small number of institutions that make a sort of specialty of this class of business. While the interest rate on call money is gen- erally lower than that on money loaned for a fixed period of time, it may be higher under exceptional circumstances. When there is a 38 THE MACHINERY great scarcity of available credit, usually as the result of panic, time loans may be unob- tainable, and since the broker must have credit or fail, a tremendous demand sometimes con- verges on the call money crowd, forcing the rate to high figures. There have been occa- sions when the rate has gone to 365 per cent, or even higher call money being excepted from the operation of the usury laws. It is probable that these extreme quotations for money have now been done away with by the new Federal Reserve Bank system, since that provides for an elasticity of currency and credit in cases of emergency that will prevent the conditions that have sometimes arisen in the past when money was almost unobtainable at any price. Commercial Paper Rates The call money rate fluctuates so widely and at times so violently that it does not afford the best index of the money market as a whole. The commercial paper rate, however, reflects general money conditions pretty faithfully and is the nearest approach we have to the official Government bank rates of Europe. OF WALL STREET 39 Six per cent, has in the past been a relatively high rate for commercial paper at New York and 4 per cent, has been a relatively low rate. After the Federal Banks went into op- eration, in November, 1914, money rates tended downward and for two years were ab- normally low. This was partly due to the great increase in credit made possible by the new law and partly to the big gold imports resulting from the war demand for our pro- ducts abroad. This was a temporary condition and in due time commercial paper rates again reached 6 per cent. ; but it is likely that such extreme rates as 8 or 10 per cent, at New York will in future be avoided, for the same reasons that will prevent very high call money. Credit in the Banks Since the banker is primarily a merchant in credit, any considerable increase in borrowing either on collateral security or on commercial notes will at once be reflected in the loan ac- counts of the banks. And a moment's thought shows that it will also be reflected in the de- posit accounts; for when the banker grants a 40 THE MACHINERY loan to his customer he simply credits the amount of the loan to the customer's deposit account with the bank. Thus bank loans and deposits tend to rise and fall together. Since the bank has the right to loan out not only the money deposited with it by its pa- trons but also its own capital and surplus if it so desires, loans may exceed deposits and, taking the country as a whole, they nearly always do; but for the New York banks (ex- cluding the trust companies) loans and de- posits are usually not far from equal, some- times one account being the greater and some- times the other. Credit Based on Money Since the banks have to keep a fixed per cent, of cash reserve behind their deposits, and since deposits rise with an increase in loans, it follows that cash reserves set a limit on loans. This condition has often been likened to an in- verted pyramid, the cash forming a small base at the bottom on which a large amount of credit is built up. A comparatively small in- crease in cash permits a large growth of credit, OF/WALL STREET 41 while a decrease in cash necessitates a much greater contraction of credit. Changes in the supply of cash in the banks depend upon four factors : (1) The amount of money in the sense of cash and currency being used by the business of the country; that is, carried about in peo- ple's pockets, kept in their tills, or hidden away in old stocking-feet. There is more difference in this factor at various times than might be expected at first thought. When people are prosperous they carry more money. When business is good, tradesmen have more money in their cash registers. And when for any rea- son a feeling of panic spreads among the peo- ple, a great deal of money is hidden away. The reason is that panic at times jerks the cash out from under the pyramid of credit and brings the structure down with a smash. In the past we have had no way of increasing the supply of cash at such times, but the Fed- eral Reserve law permits such an increase and it is hoped that panics may thus be avoided. (2) Exports and imports of gold. (3) Production of gold in the United States. 42 THE MACHINERY (4) The amount of cash carried in the sev- eral Sub-Treasuries. T> Since Wall Street is the great banking cen- ter, any increased demand for cash is usually passed along to Wall Street by the country banks. On the other hand, gold imports and Sub-Treasury operations are mostly centered at New York, so that any increase in the sup- ply of cash is quickly felt there. The result is that Wall Street, in this matter of cash sup- ply as in most other ways, is a sort of barome- ter of conditions, and is far more sensitive to changes than other sections of the country. Brokers' Credits Active brokers often buy and sell several hundred thousand dollars worth of stocks or bonds in a single day. These are paid for by certified checks. Hence the same broker may pay out half a million dollars in certified checks during the day, while at the same time he re- ceives an equal amount from other brokers. If there were no way of off-setting these cred- its before the end of the day, he would have to carry half a million dollars of loans all the time simply as a matter of bookkeeping. OF WALL STREET 43 To avoid this the practice of over-certifica- tion arose, by which the bank certified the broker's checks to an amount exceeding his credit balance with the bank at the moment, while the broker restored his balance before the end of the day by depositing other checks. This practice has been held to be illegal and has now been mostly abandoned in favor of other methods. One method is for the broker, when doing a heavy business, to make fre- quent deposits during the day, so that his ac- count at any hour, if it were to be reckoned up, would show a credit balance. Another method is for the bank to make a "morning loan" to the broker on his note, thus substitu- ting his personal credit for over-certification. CHAPTER IV Foreign and Domestic Exchange Balance of Trade THE subject of foreign exchange is usually considered so complicated that the aver- age man makes no effort to understand it except in the most hazy and general way. Yet the principles on which it is based are simple and even the details of exchange opera- tions are not so difficult as they are commonly esteemed. Suppose, for example, that A, an American dealer in cotton, makes a sale to the value of 10,000 to a Liverpool firm, B. Of course, B does not want to go to the expense and trouble of sending 10,000 in gold to America, so he cables A to draw on C, a London bank- er with whom B has a deposit, for the amount due. A then makes a draft, or bill of ex- change, on C for the 10,000 and deposits it in his New York bank, where he is credited with the value of the draft in dollars at the current rate of exchange. 44 THE MACHINERY OF WALL STREET 45 The draft is usually accompanied by the bill of lading and insurance receipt for the shipment of cotton, and it may be payable on demand or in 30, 60 or 90 days, according to A's arrangement with B. Interest on the money up to the date when it can be actually obtained in London is deducted from the credit allowed A by the New York bank. Since there is always a large general trade in all sorts of merchandise between England and America, a great quantity of these bills of exchange are always afloat in New York. They are transferred by indorsement just like checks, and of course, the more indorsements they bear the stronger they become. Hence a market arises for them and they are sold back and forth like stocks or wheat. When the demand exceeds the supply the price of ex- change rises above par which is $4.8666 for the amount of gold contained in the pound sterling and if the supply exceeds the de- mand the price falls. Thus we have a daily market price for sterling exchange and in the same way for exchange with all other commer- cial countries. The upper limit of the exchange rate is the 46 THE MACHINERY cost of shipping gold to make the necessary payment, and the lower limit is the cost of importing the gold; for the American banker who must make a certain payment at London would be foolish indeed to pay more for a bill of exchange than it would cost him to send the gold gold being the only form of money that is generally acceptable in making international payments. The gold export and import points vary with the cost of freight and insurance on the gold. Under normal conditions the ex- port point is about $4.884 and the import point $4.833. Thus the main factor in fixing exchange rates is the relation between the amount of money we owe other countries and the amount they owe us. Influence of the Money Rate There is, however, another factor which often has considerable influence, and that is the relative interest rates on money in the two countries involved. Every bill of exchange represents money and money may be worth a higher rate of interest in New York than in London. In that case the London banker to OF WALL STREET 47 whom a payment is due will naturally prefer to leave the money in New York and have it loaned out at interest there. Hence New York does not have to make the payment at London at that time, this decreases the demand for New York exchange on London, and there- fore the sterling rate at New York falls. Like- wise if interest rates are higher in London, New York bankers want to send money there to be loaned, which increases the demand for sterling exchange and raises the rate at New York. i Eventually, however, whatever is owed has to be paid, so that the influence of money rates is only temporary. ; Domestic Exchange The principles of foreign exchange apply in exactly the same way to domestic exchange between the various cities of one country. In England this is known as "inland exchange." At New York, for example, exchange rates are regularly quoted on Boston, Chicago, St. Louis, San Francisco, etc., and these rates go to a premium or a discount according to whether the balance of payments between two 48 THE MACHINERY cities is in favor of one or the other. In this case shipments of money can be made in cur- rency and not necessarily in gold, but the money will not move from one city to another unless it is cheaper to send it than to buy a draft at the current rate of exchange. How International Payments Arise When we begin to go deeper into the sub- ject and discuss the various reasons which lead people to want to make payments in other countries, and therefore affect the rates of ex- change, we naturally find many complications, for these reasons cover pretty much the whole field of financial, economic and business condi- tions. Broadly speaking, international payments arise from: (1) The purchase and sale of merchandise, including all raw and manufactured products. (2) Securities bought and sold. (3) Interest payable on foreign investments. (4) Money loaned abroad and its repay- ment. (5) Expenses of travellers. (6) Freights and insurance payable to the OF WALL STREET 49 country where the shipping or insurance com- panies are located. (7) Remittances by immigrants, whether gifts to individuals or deposits in foreigti banks. With the exception of the first, the amounts of these several items can be only roughly guessed at. Our Government keeps a record of merchandise exports and imports, although it is to be feared that it is not as accurate as might be desired. Imports, in particular, are often undervalued in order to reduce the amount of ad valorem duties to be paid. The totals of exports and imports, of merchandise and gold separately, are given to the press monthly. In regard to the other items only indefinite estimates are possible. Finance Bills Item (4), money loaned abroad, is especially important, since it may radically affect the rate of exchange, especially between New York and London. Temporary loans between the bank- ers of the two cities are effected by means of "finance bills," as they are called, which are 50 THE MACHINERY in essence nothing but 30, 60 or 90 day notes, issued in the form of bills of exchange drawn on foreign banks. During periods of very high money rates at New York, the bankers of that city have often sold these finance bills to Lon- don in large amounts, lending the money thus obtained at rates returning a satisfactory profit. The operation represents merely a transfer of credit. London banks are glad to get the finance bills, as they can thus get a higher rate of interest than could otherwise be obtained with the same degree of security, and the New York banks in turn are able to make a profit by reloaning the money at a still better rate. In times of panic the extensive issue of finance bills has several times affected the ex- change rate so much that many millions of gold have been transferred from London to NevJ York as a result. An International Clearing House It will be seen that the foreign exchange market as a whole serves as a sort of inter- national clearing house, by which all the inter- national business transactions of the world are offset against one another so far as it is possi- 1 OF WALL STREET 51 ble for that to be done, so that the actual transfers of gold needed to balance the account are few and far between in comparison with the tremendous aggregate of the business handled. Foreign and domestic exchange do for busi- ness substantially what the bank clearing house does for bank checks. Exchange operations frequently become very complicated. For example, suppose an Ameri- can manufacturer has sold $10,000 worth of agricultural machinery to Russia, a Russian grain dealer has sold $10,000 of wheat to Ger- many, a German exporter has sold a like value of toys to South America, and Brazil has sold the same amount of coffee to London, while London has loaned $10,000 to New York on finance bills. Evidently these transactions, taken together, will balance each other with- out any transfer of gold ; but before that can be accomplished it is necessary for the bankers of the five different countries to get in touch with each other in some way. London, by the prolonged leadership of Eng- land in foreign commerce, has grown to be the center through which such roundabout 52 THE MACHINERY transfers of foreign exchange are handled. It had always been, up to the beginning of the European war, the foreign exchange clearing house of the world, and it is likely that it will resume that position now that the war is over. Balance of Trade The term balance of trade is applied to the excess of a country's merchandise exports over its imports, or the excess of imports over ex- ports. For a long time it was generally be- lieved that, for a country to be truly prosper- ous, it must export more merchandise than it imported, thus getting a money balance in its favor. The absurdity of the idea is evident when we consider the prosperity of the world as a whole. It would be manifestly impossible for all nations to go on continuously importing gold on balance, hence, according to this theory, one country could prosper only at the expense of some other country. Economists have long since come to see that foreign trade is mutually beneficial to all the nations in- volved. If England is short of wheat and America is short of tin, it is plainly to the OF WALL STREET 53 advantage of both to exchange wheat for tin. Moreover, as we have already seen, our for- eign trade in merchandise is only one of numer- ous factors which affect the exchange market and eventually lead to the export or import of gold. Under normal conditions before the war the United States had a big yearly excess of merchandise exports over imports, and this excess went to pay the interest on our securi- ties owned abroad, expenses of our foreign tourists, transportation charges owed to for- eign steamship companies, etc. The situation is now reversed, in that Europe owes us a big annual balance of interest payments instead of our owing Europe. How Europe will meet these payments is as yet unsettled. But although our exports or imports bal- ance has no permanent significance, it does have an important bearing on our immediate prospects for prosperity or depression in busi- ness. An unusually large export balance of merchandise means an early flow of gold and credit to this country, and that must neces- sarily exercise a powerful and beneficial effect upon our industries and our security markets. On the other hand, if our exports balance falls to a low level or is even transformed into an 54 THE MACHINERY import balance as occasionally happens gold or credit or both will flow out of our banks to foreign countries, to our temporary disadvantage. For this reason Wall Street always watches the gold movement closely and studies the monthly figures of our merchandise balance of exports or imports. An unusually heavy movement of mer- chandise exports may not result in immediate gold imports, for our bankers may prefer credit to gold. If our bank reserves are over- flowing with gold, there is no advantage in drawing more gold from abroad simply be- cause it is due us on the balance of our mer- chandise exports over imports. If London owes New York $100,000,000 as a result of our big exports, New York may prefer to leave the money at interest in London, and, of course, will do so if the interest rate is higher abroad than at home. Considered as a broad economic question, there is neither advantage nor disadvantage in a "favorable balance of trade." But the im- mediate effect of such a balance on our busi ness conditions is always stimulating. CHAPTER V The Corporation as an Element in Wall Street SINCE all stocks and bonds are issued by corporations, there would be very little to Wall Street without the corporation. It is the corporation which makes possible the centralization of capital, the accumulation of great funds in a single organization and the unified control of big enterprises. Hence with- out the corporation the stock and bond markets would be non-existent, the money market would be much more restricted and even the foreign exchange market would be somewhat affected. About the only department of the Street which would be uninfluenced by the abolition of corporations would be the commodity mar- kets. At present a great deal of business is done even in cotton, grain, coffee, copper, etc., by corporations, but the corporation is not a necessary element in the handling of those lines. 55 56 THE MACHINERY Origin of the Corporation The idea of creating "an invisible, intangible person existing only in contemplation of law," endowed by the state with the right to transact certain business and limited by a charter, orig- inated in Rome, as did most of the devices of modern commerce. Under the Roman law three or more persons might organize a corporation. Apparently each person must have had something to show for his part in the ownership, corresponding roughly to the stock certificate of our times, but exactly what it was history has not re- corded. From the fact that the Roman law 'had so little to say about corporations it is natural to conclude that such organizations did not enter largely into the business life of that day. The business corporation as we now know it is of very modern growth. In deciding a case in England in 1770, Lord Mansfield said of the stock certificate : "This is a new species of property arisen within the compass of a few years." The point to be decided in that case was whether a 'stock certificate was money OF WALL STREET 57 and Mansfield held that it was not. The very nature of the suit shows that at that date stock certificates lacked definite standing in the courts. Hence the corporation as an important ele- ment in business made its appearance almost simultaneously with the birth of the United States as a nation, and it is here that corpora- tions have made the greatest growth and have been subjected to the least legal control. This has been due largely to the division of powers between the states and the Federal Govern- ment. As each state has the right to charter corporations, the states have competed with one another for the business and have therefore been more and more liberal in the powers granted by charter. Of late, however, it has appeared that the corner had been turned in this growth of liberality on the part of the several states, and the Federal government, through its control of interstate business, has been taking an increasing hand in corporation control. 58 THE MACHINERY The Corporation a Necessity While there is now, and always has been in this country, a good deal of antagonism toward the corporation because of frequenti abuses of power, yet the great majority of the people recognize the absolute necessity of some such form of business organization. It is difficult to imagine any way in which the Pennsylvania Railroad, for example, could be managed except as a corporation. To build up such an enterprise a vast amount of capital must be drawn together and welded into a practical, working unit. Each contributor must have something to show for his part in the enterprise. The business must be con- trolled by officers, for the number of partners is too great for personal consultation in regard to the policies of the company. The powers of these officers, as well as the rights of the partners, must be established by law, as other- wise the officers would be too nearly omnipo- tent for the good of either the community or the stockholders. Also, the business of such a company is of necessity permanent. The death of a partner OF WALL STREET 59 cannot be permitted to disturb the continuity of the enterprise. Business policies must be laid out far into the future, with a view to the successful development of the company and without regard to the immediate financial necessities of any individual. In the building of the Pennsylvania tunnel and terminal in New York City the officers of the company were looking ahead half a century or more, and that far-sighted, impersonal view is abso- lutely necessary for the best results, no matter whether we consider the interests of the stock- holders or of the public. The Holding Company Among the powers frequently granted by the states to corporations has been that of buying and holding the stocks or bonds of other corporations. Out of this arose the hold- ing company a corporation formed for the purpose of owning and controlling other com- panies. Around this plan a tremendous amount of litigation has centered, but the holding com- pany still exists and is pracllcally undamaged in its essential features. The holding company is not strictly neces- 60 THE MACHINERY sary for the transaction of business, as is the corporation. We could get along very conn fortably without it. But it has substantial ad- vantages when its great powers are not abused. The principal advantage has undoubtedly been the greater facility with which a big business unit can be built up. Perhaps there is a point beyond which the growth of the business unit brings no addi- tional advantage, though that remains to be proved. The fact that some widely extended corporations have shoAvn a tendency to fall to pieces of their own weight does not necessarily show that they were too big the trouble may have been that their managers were not big enough. But the fact has certainly been demonstrated that as a general rule the big business has advantages over the little business in permanency, in economical operation, in distribution of risks, and in obtaining and being able to pay for competent managers. The holding company is especially useful in handling doubtful or highly speculative under- takings. For example, take a dozen small companies each of which is engaged in develop- ing a prospect for a gold mine. Each of these OF WALL STREET 61 dozen different enterprises is necessarily doubtful, for the prospect may not prove to be a good one. Even after the mine is in oper- ation the supply of paying ore may give out at any time. Hence investors hesitate to put their money into it. But when the twelve small companies are combined under the ownership of a holding company the risks are greatly reduced. If one mine proves a failure another may do twice as well as expected. If a vein "pinches out" at one point a still better vein may be located elsewhere. The stock- holders in the holding company get the benefit of the principle of averages and their invest- ment is therefore much more secure than if placed in any one mine alone. The same principle applies to the public util- ity holding company, which operates, perhaps, street railways, gas and electric companies in twenty different cities. If the gas business is less prosperous than expected, the electric branch of the undertaking may be more so. lij one city fails to flourish, another may grow with unexpected rapidity. The investor is safe- guarded against accident and his average year- ly returns are more secure. 62 THE MACHINERY There are two principal objections to the holding company. One is that minority stock- holders in subsidiary companies may not get a fair deal, because the interests of the holding company as a whole may not exactly coincide with the interests of minority stockholders in the various sub-companies. The other is that the multiplication of corporations like wheels within wheels makes dishonest management easier to conceal. Whatever tends toward simplicity of organi- zation is best and likely to prove most perma- nent. For that reason a direct merger of sev- eral small corporations into one larger one, where that is possible, is undoubtedly better than to employ the holding company device. This is the direction in which corporation or- ganization is now tending, but such a merger is often difficult to bring about, and the device of the holding company may sometimes permit a beneficial enlargement of the unit of business operation which otherwise could not be ob- tained. In many cases the holding company comes first, as the only possible way at the time to get the benefits of larger operations, OF WALL STREET 63 and is followed later by an outright merger when that becomes feasible. Stock Watering When a corporation is formed the question at once arises how much stock shall be issued; Since each share of stock represents nothing except a fraction of the whole enterprise, it really makes no difference how many are is- sued. If the business is worth $1,000,000 and only 1,000 shares are issued, then each share is worth $1,000; if 10,000 shares are issued, each is worth $100 ; and if 100,000 shares are issued, each is worth only $10. The trouble arises when each share is given a par value a term which as applied to stocks really means nothing at all. If in the above case 100,000 shares were issued having a nom- inal par value of $100 each, then, according to the current use of the terms, nine-tenths of the stock would be "water" that is, would repre- sent no tangible value. But the real mistake is in giving the shares a par value of $100 when they represent only $10 each, and if the in- 3 vestor understands as most investors do if 64 THE MACHINERY they stop to think that the term par value does not pretend to represent the actual value of the property behind the stock, then he is not deceived, and the question of how many shares of stock are issued is merely one of bookkeep- ing. In practice it is generally impossible to say just what value any share of stock represents, because the worth of the whole enterprise does not necessarily depend on the value of its tangible assets. A corporation owning $1,000,- 000 worth of property may not be able to earn anything for its stock, while another owning only $100,000 worth may pay 50 per cent, yearly on its stock. For the above reason it is gradually becom- ing the custom to assign no par value to an issue of common stock. Each share then pur- ports to be just what it is a specified fraction of an enterprise, of unknown value. It is the business of the investor to decide for himself what that value is. It is curious how often the public gets ex- cited about the wrong thing. Probably the majority of the people consider "watered stock" the crowning iniquity of Wall Street; OF WALL STREET 65 yet the whole trouble lies in the highly re- spected term "par value." A bond or a note has par value, because it represents a specified amount of money to be paid at a definite time. A share of stock has no par value because it represents nothing but a fractional ownership in the company, which may be worth at some times more, at other times less, Preferred Stock Since a stock certificate represents nothing but a share in the business, why do we have two classes, preferred and common? The answer is, to accommodate different kinds of investors. Investors wish to take differing de- grees of risk for corresponding degrees of profit. One wants merely his interest and his original money back in two, ten or fifty years ; he buys a bond. Another is willing to take a direct share in the business, but wants to be reasonably sure of his interest ; for him the preferred stock is created, giving him a higher interest than the bond but limiting the interest rate to a fixed amount yearly, so that he is excluded from the higher rate of profits that the common stock may some time earn ; a third 66 THE MACHINERY is willing to take the greater risk of the com- mon stock in the hope of participating in the greater profits which may accrue to it. It is a somewhat common practice for a cor- poration to issue preferred stock up to the estimated value of its tangible property (after deducting the amount of the bonds outstand- ing), thus leaving the common stock to repre- sent only good-will, patent rights, and prob- able or possible earnings above ordinary inter- est rates. Then if the business turns out as well as expected the common stock gradually becomes more and more valuable ; but if results are disappointing the common may never have any real value. There need be no serious objection to this method of organization so long as the buyer of the common stock knows what he is getting, but there is a phase of dishonesty in engraving "Par Value $100" on stock certificates of this character. At best it can only mean that the promoters hope the stock will some day be worth $100 a share. And yet Congress is con- sidering a law to prohibit the issue of stocks without a par value! OF WALL STREET 67 Limited Liability A partner in a business is personally liable for all its debts. A small partner say the owner of one share in the Pennsylvania Rail- road could hardly take this risk. Hence it is necessary that the liability of stockholders be limited to the amount paid in. The worst that can happen to them is to lose their invest- ment. On the other hand, this evidently increases the danger of foreclosure and reorganization during periods of unprofitable business. The members of a partnership may pull through by using their personal credit, but the corporation has no personal credit. Foreclosure may be forced by any holder of the company's bonds, notes, or unpaid ac- counts due, who cannot get his money from the company. Under foreclosure the common stockholders can usually regain control of the company if they are willing to put up the nec- essary money to pay its debts and set it on its feet again which, of course, they hardly ever do. Sometimes the preferred stockhold- ers reorganize the business and pay its debts ; but in most cases the company goes to the bondholders, who are obliged to take it over and run it in order to get their money out of it. CHAPTER VI The Bond Market WHEN a corporation desires to attract capital, for the prosecution of an en- terprise that its managers believe will prove profitable, it will naturally offer for sale different classes of securities adapted to the varied requirements of the numerous investors who are to be interested. For the man who wants to be an actual part- ner in the enterprise, to take the risk of its fail- ure along with the possibility of very large profits, the common stock is created. For the more conservative investor, but who neverthe- less wants a good interest return, one or more classes of preferred stock are issued. But a large number of investors do not want any share in the enterprises at all they simply want interest on their money. For them bonds are offered, bearing a fixed rate of interest and payable in cash at maturity. What Is a Bond? The bond itself is nothing but a note under seal. In that particular all bonds are alike. 68 THE MACHINERY OF WALL STREET 69 But the essential feature of a bond is the secur- ity behind it, and in that bonds vary In almost every conceivable way. There may in fact be no security behind the bond. It may be nothing but the corporation's promise to pay an unsecured note as in the case of the debenture bond. Such a bond is a lien on the assets of the company, but not on any specified assets. Hence all creditors who have any specified liens on particular as- sets must be satisfied before the holders of .the debenture bonds can get anything. Almost any sort of provision can be in- serted in a bond. For example, there is the income bond, on which interest is payable if it is earned and not otherwise. The only way in which it differs from the first preferred stock is that it has a definite date of maturity while the stock has no maturity. It is a very poor class of security. The object in creating an income bond is to attach a high sounding name to a low grade of security. The great majority of bonds, however, are secured by mortgage. Such a bond is prac- tically a fraction of a mortgage; that is, each bond is a note under seal, and its security con- 70 THE MACHINERY sists of a fraction of a mortgage which covers all the bonds of that class together. The property covered by the mortgage is explained in the bond, and is of course speci- fied more exactly in the mortgage itself. It may be a first, second or third mortgage, in which case the first must be satisfied before the second, the second before the third, etc. It may be a "general" mortgage, covering a great deal of property on which other mort- gages have already been placed the other mortgages constituting "prior liens." In such cases a long investigation is usually necessary to find out exactly what security lies behind the general mortgage. The individual investor is hardly ever in a position to make such an investigation and he has to depend on his bond dealer to make it for him. For this reason he should deal only with bond houses of estab- lished reputation. The name of a bond tells nothing about its degree of safety. For example, a debenture bond, which is an unsecured note, may be a great deal better than a mortgage bond. It depends on what other securities precede the bond in each case and on the amount of asserts OF WALL STREET 71 and earnings available for that particular bond. A municipal bond is practically a debenture, but since it is not preceded by any other form of security it constitutes a lien on the property within the municipality and therefore as a rule ranks very high. Some industrial corporations have no bonds outstanding except a small amount of debentures, and their bonds there- fore may rank much higher than the general mortgage bonds of a railroad which is liberally plastered with prior liens. Some very odd situations are encountered in the study of bonds. There is a small railroad in the South which has no securities outstand- ing except first mortgage bonds and short term notes for floating indebtedness. In this case the bonds are about equivalent to stock ; for the notes mature first and being all construction liens of one kind or another they get the first crack at the assets. The bondholders are the sole owners of the property, but nevertheless they are entitled only to their interest and pay- ment at maturity. If a big surplus should be built up it would belong to the company, but no individual could get any of it without a change in the form of the organization. 72 THE MACHINERY The convertible bond should perhaps be classed as the highest form of security which can be issued provided, of course, that it is well secured by having plenty of assets behind it. A convertible bond is one which may be turned into some other form of security usu- ally stock under conditions specified therein. For example, take a debenture bond having abundant assets behind it and convertible into common stock at par at the option of the holder a common form of convertibility. So long as the company's earnings on its stock are small, the owner of the bond draws his regular inter- est as a bondholder; but if earnings become large, so that the stock sells above par, he can convert his bond into stock and thus partici- pate in the profits on the stock. A fact not usually mentioned is that the existence of convertible bonds operates against the interests of the stockholders, for the amount of stock outstanding is automatically increased when the earnings become large enough to carry the stock above the conversion price. The possibilities of profit on the stock are cut down by an amount equal to the partici- pation of the bonds. OF WALL STREET 73 It is evident, then, that the investor cannot allow himself to be influenced in the least by the name of any security that may be offered to him. There is no magic in the word "bond." It is necessary to go further and find what security lies behind the bond and what prior liens precede the bond in their claim on the assets or on the specified property on w r hich the bond is based. The Market for Bonds Nearly all railroad bonds are listed on the Stock Exchange and traded in on the floor. Many other bonds of which large amounts are outstanding, so that buying and selling of them is frequent, are also listed. Only a small part of the total trade in bonds, however, is transacted on the Exchange, be- cause of the immense multiplication of the number of issues. Most of the dealings in bonds proceed "over the counter" and the pro- portion of the bond trade on the Stock Ex- change to that outside is growing steadily smaller. The "bond house" occupies a very important position in the Street. When an issue of bonds is contemplated the issuing corporation usually 74 THE MACHINERY seeks the assistance of one or more of the lead- ing bond houses in placing the bonds among investors. This is necessary because the pri- vate investor has not the facilities for investi- gating the assets behind the bond or determin- ing its value. It is the business of the bond house to make the investigation and if the con- ditions under which the bond is issued are found to be satisfactory it is then offered to the customers of the house at what is considered to be a fair price. For this service the bond house makes a profit which on the average is considerably less than it would cost the investor to investigate for himself to say nothing of the fact that the investigation is likely to be much more thor- ough and dependable. The standing of the house is at stake with every bond it offers to its customers; therefore self-interest requires every effort to avoid mistakes. Many bond houses acquire such a reputation for care and conservatism that their endorse- ment of a bond guarantees the success of the issue. Investors know that the house would not touch the bond if it was not "all right." In that way the well managed bond house OF WALL STREET 75 gets a following which gives it great power in the Street. Some banking houses take the most extrava- gant precautions before endorsing a security. One such house recently called in an expert and asked him to look up a certain bond. He told the manager that the bond had already been investigated by a well-known authority and the report was available, and that he doubted whether he could add anything to it. The manager, however, replied that he already had that report but wanted the expert to make an independent investigation and confirm it or otherwise as the facts might warrant. The result was that the expert went to the property in question and studied it as though he had never heard of it before. His bill amounted to nearly $2,000 and yet he was un- able to add anything of importance to the facts previously in hand. But the banking house was perfectly satisfied. With Accrued Interest Bonds are commonly quoted at a certain price "and accrued interest." For example, a bond quoted at par would really be worth 103 76 THE MACHINERY the day before a three per cent, coupon was payable. If the coupon was semi-annual, the bond would be worth about 101% three months before the date of payment, and so on. The prices of many bonds change but little. Hence if they were dealt in "flat," or without regard to accrued interest, the price would gradually crawl up from one interest payment to the next, when the interest would be paid and the price would go back and take a fresh start. A price quoted on a bond at any time would result in loss of the interest if the buyer took up the offer a month later. This caused so many complications that the custom was adopted of quoting bonds at a certain price "and accrued interest." A six per cent, bond quoted at par and interest three months after the date the last coupon was due would, for example, cost the buyer about 101%. Bond Yields. Another complication in fixing the value of a bond lies in the fact that it is to be paid off at par when it matures although it may in the meantime sell considerably above or below par. OF WALL STREET 77 The method usually adopted assumes that the investor will reinvest his interest aj: the same rate as the yield on the bond and elabor- ate tables are compiled which show the in- vestor just what his actual yield will be on a bond at any rate of interest and due in any number of years.* This method, is however, open to some ob- jections. It assumes that an investor holding two bonds yielding respectively 6 per cent, and 4 per cent, will reinvest the interest from the first at an average rate of 6 per cent, and the interest from the second at 4 per cent. This he may not be able to do. A fairer method would be to figure the inter- est rate on the reinvested sums at an average normal interest rate for the entire period; but what is such an average interest rate and how could it be determined? It is evident that * THE MAGAZINE OF WALL, STREET also publishes a book "Bond Yields at a Glance," consisting of seven simple diagrams which show the yield to maturity of any bond. This plan reduces the bond tables to a much smaller and more convenient form. there is no such thing as a general average interest rate. Interest varies according to conditions with the money market and with the character of the investment. We could 78 THE MACHINERY not even find an average interest rate for past years, to say nothing of estimating it for the next 20 years. It is probable, therefore, that the customary method is as good as any that would be prac- ticable. It assumes that an investor hold- ing a bond yielding 6 per cent, will be likely to seek a similar investment for his interest pay- ments as th6y become available, and that the holder of a bond yielding 4 per cent, will fol- low the same principle. CHAPTER VII How Business Is Done on the Stock Exchange THE wide public interest in the Stock Exchange really began with the twen- tieth century. The business boom which began in 1898 resulted in big advances in the quotations for all kinds of securities, and the rapid growth of the daily press and of the reading public brought this condition to the attention of millions of persons. There is, of course, no way of knowing how many persons are actively interested in the market at any time. The number varies greatly, according to whether or not condi- tions are such as to encourage speculation. Certainly not less than 100,000 persons are ac- tively interested in the sense of being fre- quent buyers and sellers, and it is very prob- able that the number is much greater. Listing Before any security can be traded in on the Stock Exchange it must be "listed," that is, 79 80 THE MACHINERY admitted to the list of securities dealt in. Listing does not imply anything as to the value or lack of value of the security. It simply means that the corporation issuing the security is legally organized, makes reports of its income and expenditures at least as often as once a year and issues a balance-sheet show- ing its condition at the end of its yearly fiscal period. The public must judge for itself what if anything the security is worth. The Stock Exchange confines itself to furnishing facilities for buying and selling the security. The Exchange does not, and in the nature of the case could not, guarantee the correct- ness of all these corporation reports. As to that also the public must form its own judg- ment. Objects of the Exchange The constitution of the Stock Exchange says that "Its objects shall be to furnish exchange rooms and other facilities for the convenient transaction of their business by its members as brokers; to maintain high stand- ards of commercial honor and integrity among its members; and to promote and inculcate OF WALL STREET 81 just and equitable principles of trade and busi- ness." In regard to the first of these objects there is, of course, no difficulty. The second has been fairly well carried out better, probably, than in any other line of organized business but there have been occasional lapses. With- out doubt the Exchange's present standards of "commercial honor and integrity" are higher than ever before. In fact, one's memory needs to run back only a decade to note a decided improvement in that respect. Just what the Exchange does toward accomplishing the third object it would be difficult to say, except as the third is included in the second. Many believe that the Exchange should do more than it now does toward checking riot- ous speculation and that its listing require- ments should be more stringent; but the authorities have always taken the position that the Stock Exchange should be the servant of the public, not its tutor that its business is to furnish the people facilities for buying and selling legitimate securities, not to reform the morals of corporations or to guard the public against its own follies. 82 THE MACHINERY Exchange Members There are 1,100 members of the Stock Ex- change. These comprise the following classes : (1) Capitalists, whose principal reason for holding memberships is the saving of commis- sions on their large purchases and sales. The annual cost of holding a membership is over $3,000 a year, including interest and dues. This represents the commission on more than 25,- 000 shares of stocks bought or sold, hence it is only large operators who can make any saving in this way. (2) Brokers, who solicit business from the public and hold memberships to enable them to transact it. (3) Room Traders, who buy and sell only for their own account. Most of them make their profits out of the small fluctuations,, standing ready to buy a little below the cur- rent market or to sell a little above. On the Chicago Board of Trade they are called "scal- pers" and the nickname fairly well expresses the nature of their business. (4) Specialists, who make a specialty of dealing in one or more securities. Their gen- OF WALL STREET 83 eral method of business is similar to that of the room traders. This is the department of the business in which there is greatest oppor- tunity for dishonesty. Active brokers leave with the specialist their orders to buy and sell the particular stock in which he is working, and he also buys and sells for his own account. It is obvious that it would be possible for him to "cheat" in the handling of these orders. As a matter of fact, however, the Stock Ex- change specialist soon finds that honorable dealing pays him best not to credit him with any higher motive, which, of course, often exists. The specialists are a necessary part of the machinery of the Street and generally speaking they handle their part of the business fairly, though not always to the complete satis- faction of brokers and their customers. (5) Two-Dollar Brokers, who execute orders for other brokers at the established rate ofi $2.00 a hundred shares. There are two or three hundred of these, and they are always ready to handle business for brokerage houses dealing direct with the public in case the regu- lar representative of the house has not the time to take care of all his orders. 84 THE MACHINERY (6) Odd Lot Dealers, who stand ready to buy or sell lots of less than 100 shares. Their business is about like that of the room traders, except that they do not deal in 100 share lots except for the purpose of evening up their pur- chases and sales in odd lots. These dealers have a standing agreement as to the terms on which they will buy or sell odd lots. The market for any stock never con- sists of a single quotation, but of a bid price and an asked price. This is equally true whether the trade to be executed is for 100 shares or for an odd lot. An order for 100 shares coming through a brokerage house can be bought at the offered price or sold at the bid price. These prices are usually l /% or % apart. The odd lot dealer, therefore, buys or sells on the same terms he will buy at the bid price or sell at the asked price. The only im- portant way in which he differs from many other room traders is that he deals only in odd lots. The odd lot dealer, however, does one thing that the other room traders do not do he will buy l /% below or sell l /& above the next quota- OF WALL STREET 85 tion after the order reaches him. Thus it often happens, in an inactive security, that the odd lot customers may actually get a better execu- tion than if his order had been for 100 shares. In this matter a good deal of confusion arises from the fact that the execution of a 100 share order is quoted on the tape, while the odd lot trade is not quoted. The 100 share order is certain to be executed at the apparent market because it creates the market, but the odd lot execution may appear to be a fraction away from the market, even though a 100 share order executed at the same moment would have been at exactly the same price as the odd lot execution. For this reason the odd lot customer usually believes that he gets an execution about ^ "against him." Taking the average of all odd lot orders and all 100 share orders for any day, it is a question whether any difference worth mentioning could be discovered in favor of the 100 share trader. If so, the average difference would certainly not be more than 1-16. "Seats" on the Exchange vary in market value according to the amount of business 86 THE MACHINERY being done. The term is now out of date, as members have no regular seats, nor, as a rule, time to sit in them if they had them. The word "membership" is often used instead. In 1871 seats sold as low as $2,750, and in 1909 at $96,000. The value of seats always advances in a bull market and falls in a bear market, in- fluenced by the degree of public speculation and the necessities of members. The Exchange has always been strict about admitting applicants to membership, insisting upon an honorable record and a good business reputation. Some of the men who have helped make Stock Exchange history by their big operations were never members and could not have gained admittance. Members are sus^ pended or expelled for infraction of the rules or for dishonorable conduct in business mat- ters. There is a Committee on Business Con- duct to watch over these things. How Business Is Handled. The Exchange opens at 9 :30, trading begins at 10 and closes at 3, after which hour the "money crowd" gathers for the borrowing and lending of the money needed to carry securi- ties. OF WALL STREET 87 Scattered about the room are posts bearing the names of different securities, and those Those who wish to buy bid for "100 at respective posts. Some have orders from cus- tomers or other brokers at fixed prices or at "the market," others are ready to trade for their own account. Those who wish to buy, bid for "100 at 7Sy 2 ," "500 at 78^," etc. Those wishing to sell offer "200 at 79," "100 at 78^," and so on. As soon as a trade is agreed upon a waiting messenger takes a memorandum of it to the representative of the ticker company on the floor and the quotation is sent out over the tickers to hundreds of brokerage houses and private individuals and is posted on the Stock Exchange board. Each post also has an indi- cator showing the lost quotation made. Each broker makes a memorandum of his transactions and with whom made. In very active markets as soon as he has leisure after executing a number of orders, he seeks out the other party to the transaction and checks the item. Tn case of a misunderstanding a com- promise is necessary, but this rarely occurs. 88 THE MACHINERY This personal comparison on the floor is often neglected, but the broker or house mak- ing a sale is required by the rules to compare the transaction at the office of the buyer not later than one hour after the close of the Ex- change. This comparison is effected by an exchange of memorandum slips. Each broker has a number, and when he is wanted at the door or at the rail, his number is flashed on the electric annunciator which occupies one side of the room. The lights behind these numbers are of different colors, signifying where the broker is wanted. Sales may be made for "cash," which means for delivery on the day of sale ; "regular," for delivery on the next business day; "three days," for delivery on the third business day, or on "buyer's and seller's options," which may run not less than four nor more than 60 days. Sales are often made "seller 30" or "seller 60" when the securities sold are not in New York, but are to come from another city or from abroad. Brokers' deliveries of stock certificates sold must be made before 2:15 of the same day if "cash" or of the next day if "regular." When OF WALL STREET 89 the books of a corporation close for the pay- ment of a dividend, the stock sells "ex-divi- dend" on the Exchange that is, the amount of the dividend is deducted from the price of the stock. The dividend check goes to the holder of record of the stock certificate, but if the certificate has been endorsed in blank and sold to someone else, the brokers who have handled the transactions pass the dividend check along and it is credited to the present owner of the stock on the books of the broker- age house which is carrying the stock for him. CHAPTER VIII How Business Is Done on the Stock Exchange (Continued) MOST of the methods of the Exchange are readily understood in fact, they are little more than the most obviously convenient way of handling the purchase and sale of securities. There are, however, some parts of the necessary machinery that the pub- lic does not easily grasp. Among these are short sales, the borrowing and lending of stock certificates and the Stock Exchange Clearing- House. Short Sales The whole world is accustomed to sales of all sorts of goods for delivery some time in the future ; yet when sales of stocks, grain or cot- ton are made in this way on an exchange, they are often stigmatized as a form of gambling. The very farmer who sells his own crop of standing wheat for delivery after it is har- vested and threshed wil often be heard criti- 90 THE MACHINERY OF WALL STREET 91 cising the practice of short-selling on the Chi- cago Board of Trade. On the grain and cotton exchanges and the London Stock Exchange short-selling consists simply in the sale of contracts for the future delivery of the goods. It is the failure to grasp this idea that causes much confusion of mind on this subject. The short-seller of grain, cotton, or of stocks, in London, does not really sell those articles himself he sells a contract for the delivery of the articles some time in the future. All the business is handled through responsible brokers, who make the contracts in their own names. Hence the contracts can be passed from hand to hand among the brokers just about as readily as so many dollar bills, and may be sold and resold any number of times. For example, if you wish to sell short 5,000 bushels of May wheat, at 90 cents a bushel, you say, in effect, to your broker: "I agree to furnish you, on or before the end of May, an acceptable contract for the de- livery of 5,000 May wheat of standard quality at 90 cents. I believe I can buy such a con- tract from somebody else before that date for 92 THE MACHINERY less than 90 cents a bushel. If not, of course, I shall have to pay more; but in any event I will protect my agreement." For your agreement the broker substitutes his own since you are not known on the Ex- change and sells it at 90 cents in the open market. You protect him by a reasonable de- posit of cash in his hands. Short sales of stocks may be and sometimes are made on the New York Stock Exchange in exactly the same way, but the customary method is a slight variation of the above. In- stead of delivering to the buyer a contract for the future delivery of the stock, your broker borrows the stock certificate from someone who has it on hand and delivers the certificate itself. The effect is substantially the same. Sooner or later you have to furnish your broker, in some way, \vith a certificate to be returned to the person from whom the broker has bor- rowed one. If you have the certificate in your safe deposit box, or perhaps in another city you get it at your leisure and turn it over to your broker. If you haven't the neces- sary certificate, then you will eventually have to instruct your broker to buy one for you in OF WALL STREET 93 the market- in other words, you "cover" your short sale by buying a certificate on the Ex- change, which your broker can then return in place of the one he borrowed to sell for you. So far as you are concerned, this is a sale for future delivery. The only difference is in the system by which the broker handles it. Your broker, having your agreement to supply the stock whenever he wants it, is safe in not only selling the stock, but in borrowing it from someone else and delivering it to the buyer. You are saf^e in entering into the agreement, for even though you may not have the stock yourself you know that you could at any time arrange with some other broker to supply it to your original broker in case he should want it, which rarely occurs. And in the end you close the whole deal by instructing your broker to buy the certificate in the market to fill your short sale, at a lower or higher price, accord- ing as your judgment has been correct or in- correct. As to the usefulness of short-selling there can be no doubt. In order that the price of a stock may be kept as nearly as possible at its 94 THE MACHINERY true value, it should be possible for anybody to buy at a price below what he believes to be a just valuation or to sell at a price above that valuation. Without short-selling he could buy at any time, but he could not sell unless he happened to have the stock on hand. The result would be a one-sided market, such as is seen now in many stocks which are so scarce that it is impossible to borrow them for the purpose of short sales. And, of course, any amount of short-selling makes no permanent difference in the demand and supply. Borrowing and Lending Stocks. Since there are always some people short of most of the active stocks, a great many cer- tificates have to be borrowed every day by the various brokers. There is usually no difficulty about this. The broker who has a lot of stock certificates in his vault takes no particular satisfaction in seeing them there. On the con- trary, he usually puts them up with his bank and borrows as much money on them as he can, which is perhaps 70 per cent, of their market value, and he pays the current rate of interest for the use of the money. If another OF WALL STREET 95 broker wants to borrow some of them, broker No. 1 says: "All right, I will put them up with you in- stead of with the bank, if you will lend me their full market value at the same rate of interest." There are generally plenty of stock certifi- cates in Wall Street, but to borrow money it is necessary to pay interest; hence it is the lender of stocks that pays interest to the bor- rower on their money value, which is just the opposite from what the novice usually sup- poses. What borrowing stocks really means is lending money on the stocks as security up to their full market value. No one would be willing to do that except the broker who wants the certificates to fill some of his short sales. In this way a regular loan market arises for the borrowing and lending of stock certifi- cates, and the rate of interest allowed on the money value of the stocks may be quoted dif- ferently for different issues, according as those particular certificates are scarce or plentiful in the Street. If the certificates of a stock are plentiful, the loan rate on that stock will usu- ally be the same as for call money, but if they 96 THE MACHINERY are scarce the interest rate may be lower than the call money rate, or they may loan "flat"- that is, no interest at all is paid on the money which is loaned on the stocks as security or even at a premium, which means that the usual order of things is reversed and the borrower of the stocks is obliged to pay something to get them. All these details the broker handles, so that the process of short-selling so far as the cus- tomer is concerned is just as simple as that of trading on the long side. On the long side the customer buys first and sells later; on the short side he simply reverses the operation, selling first and buying later. Nevertheless the public does very little short-selling. To most people it seems mys- terious and they are a little afraid of it. If the market goes against them on the short side they are disturbed, while on the long side they are not much worried. "There is a bottom but no top," they sometimes say which may be true theoretically, but not in actual practice. Also, the great majority of people are tempera- mental bulls and prefer to work on the bull side for that reason. OF WALL STREET 97 Professional and semi-professional traders operate just as freely on the short side as on the long and it would probably be a good thing for the market and for the public interest if the public could do the same; but that would require far more intellectual acuteness and de- tachment than the majority of persons are like- ly to attain. Stock Exchange Clearing-House Formerly every stock certificate sold was delivered by messenger, in exchange for a check for the value of the stock. This made a great deal of unnecessary work, but it was the tremendous value of checks that had to be issued every day that really compelled a change in methods. In 1892 the banks rebelled against issuing so many checks, a practice only rendered possible by extensive over-certifica- tion and the Exchange adopted the Clearing- House method, which had long been success- fully used in Philadelphia, Boston and Chi- cago. This is an adaptation of the bank clear- ing-house system to the trade in stocks. For example, Broker A has sold B 100 Read- ing for $75,000; B has sold 100 to C for $74,- 98 THE MACHINERY 000; C has sold 100 to D for $74,500; and D has sold 100 to A for $75,250. There is evi- dently no reason why four different deliveries of 100 Reading should be made, accompanied by the issue of four checks for the full value of the stock in each case. The stock is back where it started from and all that is necessary is the issue of small checks to cover the differ- ences in value. If the 100 Reading, instead of getting back to A had gone to E, it would only have been necessary to make one delivery of the stock, from A to E. Extend this example over a large list of active stocks and you have the Stock Ex- change Clearing-House. A force of clerks is employed and the system has been carefully worked out and improved by experience. Each broker sends in his clearance sheet and every trade is represented by a ticket. The tickets are distributed in boxes like mail in a post- office. Then all trades in each stock are listed on a sheet and examination shows what trades, will balance each other and what deliveries will be necessary. On the following morning the various brokers are notified what deliveries they must make. OF WALL STREET 99 Loans of stocks, as explained above under short-selling, appear on the clearance sheets as sales, since the lender receives their full value just the same as though he had sold them. On the side of the borrower the trans- action goes through the Clearing-House as a purchase. The Clearing-House is surrounded by as much secrecy as possible so that information in regard to important purchases and sales may not leak out. Pratt, in The Work of Wall Street, gives the number of shares cleared in 1901 as 926,347,300, having a value of $77,- 853,500,000, and the number of share balances, which had to be delivered, as 134,395,000, hav- ing a value of $10,930,853,600. The great sav- ing resulting from the system is obvious. The number of shares traded in on the Ex- change in 1901 was 265,944,659, while the num- ber going through the Clearing-House was 926,347,300 a point which mystifies many even among those who consider themselves well informed on the methods of the Street. Since each trade is cleared by both the buyer and the seller, that makes the clearance double the shares traded in ; and the remainder of the 100 THE MACHINERY excess is accounted for by the borrowing and lending of stocks, which as we have seen go through the Clearing-House just like purchases and sales. The Consolidated Stock Exchange. Some of the methods used on the Consoli- dated differ a little from those of the New York Stock Exchange. This organization re- sulted from the consolidation of a mining and an oil exchange, hence its name. In the 70's and 80's there was a big speculation on it in this class of securities, and when that died out the exchange took up trading in the same stocks listed on the New York Stock Ex- change, i The quotations made on the bigger exchange are posted on the Consolidated and are the basis for trading there. Naturally this is not pleasing to the New York Stock Exchange, but the smaller institution has succeeded in making a place for itself and at present the business on it is about one-tenth that of the big exchange. It is, however, differently dis- tributed. The business in some of the estab- lished speculative favorites, like U. S. Steel, OF WALL STREET 101 Anaconda, Smelting, or Reading, is usually more than one-tenth that of the primary mar- ket, while some of the inactive issues are rarely dealt in. Most of the business is in lots of less than 50 shares. Settlements are made weekly in- stead of daily, so that the customer who closes his trade in the same week it is made escapes the payment of interest. The market for odd lots of the active stocks is about the same as on the big exchange, but for larger quanti- ties or in the less active stocks execution is sometimes erratic, owing to the relative nar- rowness of the market. Government of the Exchange. The final authority on the New York Stock Exchange is the Governing Committee, which consists of a president and a treasurer elected annually and 40 members, 10 of whom are chosen each year. The governors are divided into various sub-committees on arrange- ments, admissions, arbitration, commissions, constitution, finance, law, the stock list, the Clearing-House, etc. In 1913, by an amendment to the Constitu- 102 THE MACHINERY tion, a committee on Business Conduct was created "to keep in touch with the course of prices listed on the Exchange, with the view of determining when improper transactions are being resorted to," and having the power "to examine into the dealings of any members, \vith respect to the above subjects." This is one of the steps taken in recent years to raise the standards of the business. One object of this committee is to prevent the execution of "matched orders," a subject which will be dis- cussed in another chapter. CHAPTER IX Inside the Broker's Office STOCK brokerage as a business origniated in England in the latter part of the seven- teenth century, when the East India Com- pany attracted a great deal of public attention. In the United States the business can scarcely be identified before 1790, although there were doubtless many individual cases before that date in which one person acted for another in the purchase or sale of stocks. Before a sale of stock can be consummated the seller must find a buyer or the buyer find a seller. It would usually be a long and trouble- some job for the buyer or seller to do this personally, so the work is turned over to some agent who is already in touch with many buyers and sellers. This agent is the broker, and for convenience the brokers have an exchange where they meet to compare buying and selling orders and adjust prices. Thus the Stock Exchange. Each broker must have his place of business. A small broker, who does business principally for himself and for a few clients, may need only 103 104 THE MACHINERY deskroom, arranging with another broker, who has all the necessary machinery, to "clear" his transactions for him. But the active broker has to surround himself with clerks and bookkeepers and provide facilities for his customers to watch the market and place their orders promptly. This is the brokerage house as the public knows it. Such a house has one or more members on the floor ot the Exchange, to whom orders are telephoned and from whom reports of execu- tions of the orders are received. It has one or more office partners, who oversee the work of the office and consult with customers. It has a "cage," containing the order clerk, cashier, margin clerk, delivery clerk, bookkeepers, etc. It has messenger boys to deliver stock certifi- cates and checks to other brokers as may be necessary. Most such houses provide a "customers' room" where quotations from all exchanges of which the house is a member are posted on a black- board as fast as they come out on the tickers, and the principal newspapers and news services are kept on file. Some houses, however, even though doing a large business, do not like the customers' room and abolish it, doing business OF WALL STREET 105 with their clients over the telephone, telegraph, by letter, or by personal consultation. This is because an open customers' room is apt to attract a great many "chair warmers," who do very little business but make a nuisance of themselves by foolish conversation. Such traders may repel a better class of business men, and yet it is a disagreeable task to invite them to take their account elsewhere. Brokers are always glad to have strangers drop into their offices to glance over the market, but they naturally object to having their customers' rooms turned into loung- ing places for idlers. The most important part of a broker's busi- ness usually comes in over the telephone and telegraph, although many mail orders are also received from out of town. Novices are some- times surprised that the broker is willing to ac- cept orders by telephone since this evidently gives a dishonest client the opportunity to repu- diate the order if the market goes against him, by asserting that the order was misunderstood. But the average broker is a good judge of human nature and rarely permits a customer to get on his books who would be capable of such trickery. 106 THE MACHINERY The Handling of Orders An account is opened with a broker by the depositing of a check. Theoretically some sort of introduction is supposed to be required, but a fair-sized check is usually a good introduc- tion although if the check was from an un- known person the broker might naturally wish to collect it before executing orders. In this way the broker acts in the double capacity of banker or "pledgee," and agent in the execution of orders. Formerly many houses called themselves "Bankers and Brokers" in recognition of this double function, but that term became so widely used by bucketshops and non- members of the exchanges that it has been prac- tically dropped by the better class of brokers. The account having been opened, the customer is free to place orders. The house will, in nearly all cases, suggest suitable investments if desired, but in doing this, the broker accepts no respon- sibility. He merely gives his client the benefit of his judgment without in any sense guarantee- ing it to be correct. It is to be regretted that the broker is not usually as ready to tell his customer when to OF WALL STREET 107 sell as when to buy. He. nearly always leaves the customer to select his own point for taking a profit or a loss, as the case may be. The principal reason for this is that the customer is usually much disgusted if his stock advances further after the broker has recommended that he take profits. That is unreasonable but it seems to De human nature. Also, the broker seems to feel that he has done all that can be expected of him if he has recommended a pur- chase that turns out well. So long as the cus- tomer has a profit in his open trade, the broker sees nothing to worry about. This is unquestionably a wrong viewpoint. The proper closing of a trade is just as impor- tant as the making of it, and it is all the more necessary that the broker should watch this end of the transaction because the average customer is much more ready to buy than to sell. The number of shares of any stock that the broker will be willing to buy or sell for the customer on his deposit depends entirely on the character of the stock selected. On many active stocks, having a good market, the broker will f be satisfied with a deposit of $10 a share though he will generally recommend that a larger margin 108 THE MACHINERY be carried. On other stocks, $20, $30 or $50 may be necessary to protect the broker from a possible loss, and still others he will not buy unless they are paid for in full. If the customer's deposit is equal to $10 a share on the stock bought, a decline of ten "points" will evidently exhaust the deposit or margin and the customer must then either de- posit more margin or sell the stock. Inexperi- enced traders often think that the broker might "carry" them a little below this "exhaust point," but the broker who attempts to do it is headed for certain financial ruin and is unsafe to do business with. There is only one safe way to handle a brokerage business and that is on a strictly cash basis. Margins The broker will always "call" his customer for more margin when the price of the stocks held begins to approach the limits of the cus- tomer's deposit in fact, he is required by law to do that. If the customer does not respond or if, in a very active market, he cannot be reached in time, the broker has the right to protect himself by closing out the trade; and OF WALL STREET 109 to cover any possible legal complications on this point, the broker usually prints somewhere on his stationery the statement that all orders will be executed in accordance with customs of the New York Stock Exchange, or he may be even more explicit and say that he reserves the right to close trades without notice when margins are running out. The safe plan, of course, is for the customer to keep in his broker's hands ample funds to cover all contingencies. The customer is the legal owner of all stocks he buys. The broker acts as his agent. If the broker faithfully carries out his customer's in- structions, with such a degree of care and skill as may reasonably be expected of any expert and reliable broker, and in accordance with the customs of the exchange on which the order is executed, he has acquitted himself of all further responsibility. The result is "up to" the cus- tomer. When the customer deposits only a part of the value of stocks bought, the broker lends him the rest. Then the broker,' as a rule, takes the stock certificates to his bank and borrows as much as he can on them. Thus if the stock is bought for $80 a share, the customer's de- 110 THE MACHINERY posit may represent $10 of that, the broker may lend him another $10 a share, and the broker may borrow from his bank on the certificate as security the remaining $60, which in turn he also lends to the customer. This is called rehypothecation. The customer hypothecates his stock with the broker and the broker rehypothecates it to the bank. A recent New York law requires that the broker shall not rehypothecate to the bank for more than the amount owed on the stock by the customer unless by the customer's express consent. It is therefore necessary for every active brokerage house to get the customers' consent to the rehypothecation of all stocks, regardless of the amount the broker is loaning the customer on them; for it would be a very difficult and laborious task for the broker to continually watch all his loans so as to avoid borrowing in any particular case more than he has loaned the customer. The cus- tomer readily gives his consent, since his inter- ests are not affected. The buyer of a stock is entitled to a certifi- cate or certificates for the number of shares bought, but not to any particular certificates since all the certificates are alike, each representing OF WALL STREET 111 merely a certain share of the whole company. Hence the broker is not obliged to get back from his bank the exact certificate on which he origi- nally borrowed money for his customer's use. A customer will sometimes request his broker to use a certain amount of discretion in executing an order for example, to buy at a certain price if the market looks right to the broker when that price is reached. The broker will hardly ever do this unless as personal favor to a friend, and even then he almost always has occasion to regret having been too accommodating, for the friend is pretty sure to feel some dissatisfac- tion uttered or unexpressed, but too frequently uttered with the broker's judgment. Most ex- change members have an absolute rule that no discretionery orders will be accepted, and under any ordinary circumstances the house that ac- cepts them will be regarded with suspicion. Interest The broker charges his customer interest for money loaned him just as a bank would. The rate of interest is usually an average of the rates the broker is paying for his various call and time loans, with a trifle added for the cost 112 THE MACHINERY of handling. Many brokers always charge 6 per cent. or more if the current market rate is higher on odd lots of stocks, because the trouble of handing a 10 share lot is just as great as that of handling 1,000 shares. A smaller rate of interest is credited to the customer on money lying idle in the broker's hands. Since statements of accounts are usually ren- dered to the customer monthly, the interest charge, whether on the debit or the credit side, is compounded monthly. Hence when the cus- tomer borrows heavily from his broker the inter- est paid becomes a somewhat important item another reason in favor of paying for stocks in full or keeping large margins. The present scale of commissions on the New York Stock Exchange is as follows: Stocks selling under $10 $7.50 per 100 shares Stocks selling at $10 and under $125.15.00 per 100 shares Stocks selling at $125 and upward. .20.00 per 100 shares Minimum commission $1.50 Liberty Bonds 25c for each $100 or fraction thereof Other listed Bonds, $1.25 per $1,000, with minimum of $1.25. On the selling side there are taxes of four cents a share. Also, the execution of buying and selling orders at the same moment is usually OF WALL STREET 113 % or X apart since the "market" consists of a bid price and asked price. The buyer, for example, pays 81 1 /4 while the seller gets only 81^. Hence it may be said that the trader who is trying to make a profit in a stock selling above $10 really starts with a loss of not less than $46.50 or $56.50 per hundred shares, to which must be added interest when he is operating on the long side, and on the short side another $2 tax if the broker has to borrow the stock. The short-seller does not have to pay inter- est, but if his stock sells ex-dividend while he is short of it he is charged with the amount of the dividend. This often puzzles the novice, but it is evident that the buyer of the stock must get his dividend from some source, and if it is a short sale the only possible source of the dividend is the short-seller. CHAPTER X Broker and Customer The Unlisted Market SINCE the broker acts as the customer's banker, holding for him securities and cash in large sums, in addition to being his agent in the execution of orders, it certainly behooves the customer to exercise the greatest care in the selection of a broker, just as much care as he would show in picking out a bank in which to make a large deposit. It is a curious fact, however, that the average customer does not do this. The great numbers of people who deposit large sums and valuable securities with brokers in regard to whom they know almost nothing, and who are in many cases not members of any exchange, is a standing cause of wonder to the initiated. It seems that these people are doing business in a gambling spirit and look upon the risk of placing their good money in the hands of an unknown broker as merely a part of the gamble. It should be un- necessary to say that the person who approaches 114 THE MACHNERY OF WALL STREET 115 Wall Street in that spirit is bound to lose. He might much better do his money and securities up in a neat bundle and present them to a Home for the Feeble Minded, where he stands a chance of eventually getting some indirect benefit out of them. Brokers and Brokers There are, of course, plenty of perfectly reli- able brokers dealing in unlisted securities who are not members of any exchange also plenty of unreliable ones. The novice, unless he has the means of informing himself fully in regard to the trustworthiness of brokers not members of exchanges, will do better to deal with such houses on a cash basis that is, buying his securi- ties for cash and taking them away with him, or selling for cash and immediately depositing in his bank the check which he receives. Membership in a leading exchange is not of course, an absolute guarantee of the trustworthi- ness of a broker, but it is very strong evidence, since the principal exchanges make every pos- sible effort to limit their membership to brokers of high standing. Many persons are ignorant of the fact that exchange members can and will 116 THE MACHINERY buy or sell unlisted securities for their customers to just as good advantage as houses which make a specialty of handling only unlisted securities. When it comes to choosing among different exchange members the personal element enters largely into the situation. The majority of the customers of the long-established brokerage houses are acquainted with some member of the firm or with some employee holding a respon- sible position, with whom they consult from time to time personally or by telephone. Just how much good or harm the consultation does them depends entirely on the judgment of the person consulted. In past there have been many "customers' men" who were not above giving whatever advice they thought the customer would be most likely to act on, and unfortunately there are still a few of them left in spite of the fact that such a short-sighted policy is universally condemned by the better class of houses. A broker who is known to be closely identified with "strong interests" or who has himself ac- cumulated a fortune through operations in the market generally has a "following" of customers who hope to profit by his advice. Such advice is often valuable, but as a general rule not nearly OF WALL STREET 117 so valuable as the customer expects it to be, since even the best judges often go wrong. Moreover, the customer is much more ready to follow advice where it is wrong than when it is right. This is because, in order to make profits it is usually necessary to buy when the market looks weak and sell when it looks strong. Before opening an account with any broker it is well to visit his place of business and form your own opinion as to his character and methods and to get a report on him from an unprejudiced source, such as a financial publication of high standing, or a New York bank or trust company. Stock exchange methods of bookkeeping are not always apparent at a glance to a new cus- tomer who receives his monthly statement of account. Such statements differ in minor details but they are always substantially in the form of the example given herewith. A Broker's Statement The folio number in the upper right hand corner is for the convenience of the broker in referring to his own books. The account is debited with stocks bought and credited with stocks sold, credited with cash deposits and 118 THE MACHINERY debited with withdrawals, and the statement in- cludes a memorandum of securities on hand, whether long or short. In the example shown, we have first a state- ment of the condition of the account March 31. The customer was long 60 shares of various stocks. The customer's deposit with the broker was enough to pay for all these stocks, with the exception of $1,134.20, which was loaned him by the broker and therefore debited to his account. On April 1 two of his stocks paid dividends and the amount of the dividends was duly credited. (Note that this amount is credited when the dividend is actually received by the broker, not when the stocks sell ex-dividend on the ex- change. ) April 17 the customer sold 10 A. R. Ameri- can Smelting for $973.75. From this was de- ducted $1.25* commission and 40 cents taxes, * It would now be $1.50. OF WALL STREET 119 ? as ! If i i II 3 l! I 120 THE MACHINERY and the customer was credited with the remain- der, $972.10. He did not happen to make any purchases during the month. If he had he would have been debited with the amount paid for the stocks, plus commissions. The taxes do not apply on the buying side. Interest is figured on each item from the date of entry to the end of the month. The interest is always first computed and entered in the in- terest columns at the rate of 6 per cent. ; then if a higher or lower rate is charged the neces- sary change is made in the final interest item at the end of the month. Hence on his debit bal- ance of $1,134.20 March 31 the customer was charged 6 per cent, interest for 30 days, to the end of April, or $5.67. On the $30 received as dividends April 1 he was credited interest for 29 days, or 14 cents. On the $972.10 received for the A. R. stock April 17 he was credited interest for 13 days, $2.11. The interest account was balanced by the entry "Bal. Int. $3.42" in the right hand column. This balances the two interest columns and the $3.42 is then debited to the customer. The final result is a debit balance of $135.52 on April 30, which will be carried forward to OF WALL STREET 121 the next monthly statement, and he also has on hand "Collateral as above" that is, 50 shares on various stocks. The abbreviation "E. & O. E." at the lower right hand corner means "Errors and Omissions Excepted." The novice often expects to find on his state- ment the amount of his deposit with the broker plus or minus his profits or losses for the month, but the broker's books are not kept in that way and the customer has to figure out these items for himself. Most active operators keep a memo- randum for that purpose. Unlisted Securities Trading was formerly permitted on the floor of the Stock Exchange in a number of securities which were not regularly listed that is, the com- panies had not furnished to the exchange the information in regard to their business which would warrant the governors in giving the securi- ties official sanction by listing them. Some of these stocks were among the most active, such as Amalgamated Copper, American Smelting & Refining, etc. The exchange was, however, much criticized for permitting the trade in these securities to go 122 THE MACHINERY on and the "unlisted department" as it was called, was abolished in 1910, when most of these com- panies furnished the exchange with the necessary information and were duly listed. The term unlisted securities is now used to apply to those which are not listed or traded on any exchange but are dealt in over the counters of investment houses. The Curb still has both listed and unlisted departments, of which more later. The market for unlisted stocks is naturally not so "close" as that for listed securities. Vari- ous dealers stand ready to buy such stocks at one price and to sell at a somewhat higher price, but the difference between the "bid" price and the "asked" price is generally wider than in the case of listed stocks. The broker who has an order to buy or sell a stock not listed on any exchange has to tele- phone around to the different dealers and find the best price at which his order can be executed. In the case of stocks of companies located in distant cities there is sometimes a better market there than in New York and quotations from that point are obtained over the broker's private wire or over the public wires, as may be necessary. OF WALL STREET 123 In some unlisted stocks a very active business is at times transacted, so that bid and asked quotations may be obtainable a point or even half a point apart, but on other securities it may be impossible to sell within five or ten points of the price at which a purchase could be made. Even if there is a close market at the moment, there is no knowing how long it may be maintained, since that depends very largely on the number of people who may happen to want to buy or sell at any time. For this reason unlisted stocks do not, as a rule, afford a desirable medium for speculation. On the other hand, it is evident that the investor may sometimes get a better bar- gain in such stocks relatively to the normal market price, than he could get in most listed stocks. For example, the owner of an un- listed stock may be willing to sell at 110 or to buy more at 100. If he places an "open" or "G. T. C." good till countermanded or executed order with his broker to buy at 100 or sell at 110, he might eventually see both orders executed, in which case he would have a profit of ten points and would still be just where he started as regards the amount of the stock owned. 124 THE MACHINERY Trading in the unlisted stocks is, therefore, a very different proposition from doing busi- ness in the active listed stocks. An expert in a certain class of securities can often make large yearly profits by buying below the cur- rent market and selling above it. Many un- listed securities of a high investment grade do not fluctuate widely, except as the price swings back and forth between the bid and asked limits, so that trading of this kind may some- times be carried on with only a very moderate risk. Such trading is naturally pretty much con- fined to experts who have had long experience with some particular line of securities. The average investor is merely interested in getting a fair price when he wishes to buy or sell, since he depends mainly on the income yield from such stocks as a warrant for owning them. His broker can be depended on to exe- cute orders at a fair price if he is not hurried too much. Some sacrifice usually has to be made to sell such stocks "at the market." Orders to buy or sell them are generally limited to a fixed price, which has to be low- ered or raised in case it proves impossible to execute at that price. OF WALL STREET 125 In recent years there has been a great in- crease in the number of stocks which are dealt in over the counter. The public seems to im- agine that these stocks are safer to own than the stocks on the exchange in which there is usually a big speculation. That is a false idea. The stock in which there is a big speculation may have more minor fluctuations, but as re- gards the wide movements it adjusts itself to the conditions more accurately than it would if it were unlisted. CHAPTER XI The Curb Market Private Bankers THE Curb Market consists of a rather loose organization of brokers who trans- act business in stocks in a roped-off section of Broad Street just below Exchange Place, a block from the New York Stock Ex- change and about the same distance from the Consolidated Exchange. The Curb in its pres- ent form is over 35 years old; but there has always been trading on the curb ever since stocks began to be actively bought and sold. In fact, the New York Stock Exchange itself was originally a curb market, around the but- tonwood tree at 68 Wall Street. The necessity for a Curb Market in addition to the various stock exchanges is not always understood at a glance by the investor. It would seem as though the exchanges, in con- nection with the trading in unlisted stocks "over the counter," would afford ample oppor- tunity for handling all kinds of business in stocks. 126 THE MACHINERY OF WALL STREET 127 Nevertheless the Curb Market has its legiti- mate place in the machinery of Wall Street, as well as in other great financial centers. Why the Curb Is Needed Suppose, for example, that the investor has subscribed for ten of a new issue of bonds just being brought out by the underwriters, but owing to the fact that the issue was over- subscribed which is nearly always the case he obtained only two of the bonds. He wishes to buy more of the bonds at once, believing that the price will be higher after the bonds have been distributed to buyers, but since the bonds cannot yet be delivered he cannot make the purchase on any exchange or over the counter. This is where the Curb Market steps in. The investor directs his broker to offer a cer- tain price on the Curb for the bonds "when, as and if issued." Many other investors offer to buy or sell in the same way, so that a mar- ket price is established for the bonds some time before they are actually in existence. It occasionally happens that the bonds are not issued after all and in that event all the trans- 128 THE MACHINERY actions that have been made in them have to be cancelled. Trading "when, as and if" is often carried to absurd extremes. A big automobile com- bination was recently proposed and trading in its stocks began on the Curb almost as soon as the idea had germinated in the minds of its sponsors and even before any name had been suggested for the corporation. In that in- stance the combination did not go through owing, it was said, to the opposition of leading bankers and all the trading in the stocks it might have issued had to be undone. Even after the stock certificates of a new cor- poration have been issued they are not usually listed at once on the stock exchanges, because the new company, if an untried venture, cannot present to the exchanges an official statement definite enough to warrant listing. In the meantime there may be a great deal of buying and selling of the stocks, so much that it would be inconvenient and burdensome to handle it all over the counter. The situation is much simplified when all brokers having orders in such a stock gather in the Curb Market to execute them. OF WALL STREET 129 Even though a company may have been in existence a long time, its standing may not for one reason or another be satisfactory to the listing committee of the exchange, so that its stocks continue to be traded in on the Curb. There is no doubt about the usefulness of the Curb Market in such cases. People must have an opportunity to buy and sell all kinds of stocks. The reason why the Curb Market stays on the street instead of housing itself more com- fortably is that the constitution of the New York Stock Exchange prohibits its members from being represented on any other exchange, and at least 75 per cent, of the business on the Curb now originates with Stock Exchange houses. So the Curb stays outdoors and in only a partially organized condition. The Curb Organization. Previous to 1910 the Curb had no organiza- tion, except such as naturally resulted from necessity. Brokers on the Curb could not safely do business with persons whose re- sponsibility was unknown to them, hence the trade was practically all handled by the same 130 THE MACHINERY group of brokers from day to day and their methods naturally fell into a sort of system. In 1909 the Hughes Commission report criti- cized the Curb for obstructing the street, for being unorganized, for the frequency of manipulation there, and for sometimes dealing in securities nearly if not quite fraudulent. Partly as a result of this criticism the New York Curb Association was formed, with about 250 members paying annual dues of $100 each and with rules and regulations similar to those of the New York Stock Exchange. Listing requirements, however, were far from strin- gent, and it was soon found impossible to con- fine the trading to listed stocks, so that the Curb now has listed and unlisted departments as the Stock Exchange did formerly. There is this difference, however, that the Curb Market is theoretically open to all who choose to trade there. But since strangers must be properly identified in order to guar- antee the safety of dealing with them, the result is that the business is practically all done through the regular Curb brokers. The Curb is one of the show places of New York and on an active day the crowd of howl- OF WALL STREET 131 ing, gesticulating brokers in the middle of the street is a novel and interesting sight. Curb brokerage houses rent offices overlooking the street, it possible, and orders are transmitted from the windows to the Curb by systems of signs, or sometimes by a bit of paper lowered by a string from a high window. Window space is naturally at a premium. Issues Traded In The issues traded in on the Curb ere con- stantly changing. The best of them are usually listed on the Stock Exchange after their re- liability has been reasonably demonstrated. Some are finally lodged in the hands of inves- tors who hold them permanently, so that active trading in them dries up. Many of the com- panies represented are wafted away untimely to that bourne from which no traveller re- turns, for the prosaic reason that the enter- prise has failed to pay. These are the issues found in nearly every investor's strong box which are preserved only for sentimental rea- sons, to be taken out and regarded mourn- fully from time to time and then laid tenderly back again. For some reason nobody ever 132 THE MACHINERY throws them away, even though the hole in the ground they represent may be flooded and moss-giown. On the other hand, there are many sound in- vestment securities traded in on the Curb, such as the Standard Oil stocks and numerous good mining and industrial securities. The activity of the Curb Market fluctuates widely in different years. In 1899 Curb busi^ ness became very large, but it fell off in later years until another Curb boom appeared in 1906. After that there was a long period of comparative dullness, but in 1915 and subse- quent years business again rose to record- breaking proportions. On some days the num- ber of shares changing hands was nearly equal to the transactions on the New York Stock Exchange but, of course, their value was much less, since many of them have a low par value and an even lower market value. Manipulation is much easier on the Curb than on the Exchange. It is not very diffi- cult for the interests behind a Curb stock to mark it up or down, within reasonable limits, because the number of resting or "good-till- cancelled" orders may be very small. How- OF WALL STREET 133 ever, this very fact may give the genuine in- vestor, who has a standing order in the market, an opportunity to buy at a low figure or sell at a high one, so that even this evil is not with- out some small compensations. Wall Street has done much less toward com- plying with the recommendations of the Hughes Commission on the Curb than on the New York Stock Exchange. The cynics say that this is because the big Stock Exchange houses want to keep one place where they can carry on their manipulations substantially un- hindered. But this is not a fair statement of the case. If people want to buy and sell stocks' of uncertain value they are going to do it in some way, and indeed they have the right to do it, and it is the character of some of the stocks- traded in on the Curb that makes manipula- tion possible rather than the methods by which the business is handled. If the Curb were to be turned into another exchange, with rigid listing- requirements, the immediate result would be the formation of a new curb market to accommodate the business thus crowded out. 134 THE MACHINERY Private Bankers On most of the Curb stocks the banks and trust companies do not care to lend money. Hence the New York Stock Exchange houses and the more conservative Curb brokers will not buy such stocks for their customers on margin. It is to be regretted that the Curb organization is unable to enforce this rule on all its members, since most of the stocks traded in are unsuited to margin operations. There are, however, a large number of private banking houses which undertake to buy Curb) stocks for their customers on margins. These houses may call themselves "investment bank- ers," or "bankers and brokers," or "stock brok- ers," or by any other name; but since they make a business of lending money on stocks which will not be accepted as collateral by the banks they are in reality private bankers. While it would be difficult to prove it, there can be little doubt that some of these houses do not actually carry all the stocks their cus- tomers are supposed to own. In other words, after buying stocks for a margin customer, the house soon takes a favorable opportunity of selling the same stocks for its own account. OF WALL STREET 135 This leaves the customer long and the house short of the same stocks, and it entirely ob- viates the difficulty which the house might have in getting the money to finance large pur- chases of stocks by its customers. In the meantime the customer is, of course, paying 1 interest on the money he is supposed to be borrowing, which means profits to the house. When the customer sells his stocks the house at the same time or soon after covers its short sale of those stocks. This operation is so near "bucketshopping" that it would be hairsplitting to attempt to discriminate, yet it is very difficult to detect and it would be still more difficult to stop it by legislation. The broker has executed his customer's orders correctly. The customer has received his due profits or suffered his loss as the case may be. What cause of com- plaint has he? If the broker saw fit to enter upon certain short contracts similar to his customer's purchase, that was the broker's affair. He might make or lose by those short sales, but in either case the customer is not affected provided the broker remains solvent. This provision is an important one, how- 136 THE MACHINERY ever, for the mortality among houses of this class is very high. They are the prostitutes of the Street, selling their honor for commis- sions and interest, and they are apt to live the short and hectic life of the prostitute. The in- telligent part of the public avoids them as a pestilence, but there is always a careless and unintelligent public which wants to deal in Curb stocks on margain and is not discrimin- ating in choosing its brokers. The term "private banker" is about the most elastic in the realm of finance. Some private banking houses are nearly as strong as the Bank of England ; others are capitalized solely upon the nerve of some ex-convict or graduate bucketshop man. The great international banking houses are all private bankers such as J. P. Morgan & Co., Kuhn, Loeb & Co., J. & W. Seligman & Co., Speyer & Co., etc. These houses are closely connected with the best investment bankers of other cities and they are frequently the representatives here of the leading firms or even the governments of Europe and other continents. CHAPTER XII The Promoter Underwriting Syndicate WITHOUT doubt the majority of the people of the United States regard the promoter as a "shark." That opinion is not wholly unreasonable, for a great many "sharks'* 5 have posed as promoters, but the business of the honest and legitimate promoter is one of the most useful of all occupations and is of very high value to the community. For that reason it is a rule highly paid. The greatest advances in civilization are al- wavs made by some new combination of ma- terials or resources or both. A new combina- tion of this sort that will really work and pro- duce the desired result is very hard to think up and still harder to put into practical oper- ation. When a new combination of materials re- sults in some great improvement its effects are generally appreciated by the people and what- ever profits the investor may realize are never begrudged him. Every one sees the advantage 137 138 THE MACHINERY of the electric light, for example, and is glad to see Mr. Edison make money out of it. But the immense value to the public of the ability to combine resources, to put capital, labor and materials together in such a way as to do necessary work more economically or to achieve some result previously impossible, is understood by only a few persons out of the multitude. Why the Promoter Is Entitled to Big Profits Suppose, for example, an inventor claims that he has discovered a method of making steel rails that will not break in any weather or under the heaviest loads. Others have money that they would gladly invest in the enterprise of making unbreakable rails. Skilled engineers know how to test the rails and investigate the process. Others own the coal and iron and other materials needed. There are railroads which would gladly buy the rails if satisfied that results were assured, but none, of these people know the others and none of them would believe what any one of the others might claim in regard to the enter- prise. Under such conditions the public is a long OF WALL STREET 139 way from getting the benefit of the unbreak- able rails. The inventor might die a poor and saddened man, the investors might never get more than savings bank interest on their money, the engineer might be out of a job, the coal and iron might continue to lie worthless in the ground, the railroads might continue to suffer from accidents, many passengers might be killed and much property destroyed unless somebody appeared who could combine all the separate elements and make the rails. But suppose a well-known banking house, which by a half century of honest and intelli- gent dealing has gained the confidence of all parties, takes the matter up, brings all the necessary experts together, plans a location where the materials are easy of access, forms the corporation and sells the securities to its clients and to the public, turns out the rails and supplies them to the roads. All parties believe what the bankers say because they know that the bankers' most valuable asset is reliability. It is evident that this banking house has rendered an exceedingly valuable service to the public and a service which very few are in a 140 THE MACHINERY position to perform successfully. It is entitled to a correspondingly liberal remuneration for its services in the promotion. And the same would of course apply to the individual pro- moter. Perhaps mankind may some day evolve a better and more economical way of making these necessary combinations of men, money and materials, which will eliminate the very large profits often gained by those individuals who are in a position to handle such promo- tions ; but until that time comes we shall have to admit that the promoter earns his pay, large though it may sometimes be. And promotion will continue to be the principal function of our greatest private banking houses. This class of bankers also do a genuine bank- ing business. They make all sorts of loans, buy and sell commercial paper and many of them deal in foreign exchange. They often carry the accounts of our greatest corporations, which in many cases they have been influential in establishing. They buy and sell investment securities and underwrite new issues of stocks and bonds, promote industrial companies, handle the reorganization of insolvent rail- roads. OF WALL STREET 141 A fe\\ of the biggest of these private banking houses have enormous financial power and in- fluence. They use it chiefly for the financial benefit of themselves and their associates and clients. Yet since the whole country must stand or fall together, their general attitude toward business must necessarily be construc- tive. In a broad way, they cannot harm the rest of the country without harming them- selves, because their interests are so widely dis- tributed. In times of panic the country has again and again turned to these houses to save the day. They have been sometimes charged with producing panics for their own benefit but the accusation is absurd. They would always profit far more from prosperity than from panic and depression. But there is no magic about the term "pri- vate bankers." It may have everything be- hind it or nothing. Underwriting. The successful distribution of new securities among investors is not an easy matter. Under ordinary conditions it is not easy to sell a man anything. He is cautious and fearful about 142 THE MACHINERY letting go of his money. And when all he TS getting in return for it is a piece of paper carry- ing certain engraved promises of greater or less significance, he becomes still more cau- tious. For this reason the prime necessity in sell- ing securities is the confidence of the public, and in order to sell a large issue of stocks or bonds it is necessary to get in touch with nu- merous banking houses which have the con- fidence of their clients. Each of these houses must of course be paid for its services in some way, and this is usually accomplished through the process of underwriting. For example, a big railroad wishes to sell $100,000,000 bonds to get the money for needed extensions and improvements. One of the leading firms of private bankers which is ac- customed to handle such business for the road takes charge of the financing, charging a com- mission for its services. This firm then forms a syndicate of other bankers, dealers in invest- ments, and brokerage houses. Each member of the syndicate agrees to take a certain num- ber of the bonds and pay for them at, let us say, 97, if necessary that is, if they are not OF WALL STREET 143 sold to investors direct. The bonds are then issued and offered to the public at, perhaps, 99. The bonds are adver- tised in the newspapers and financial publica- tions and the various members of the syndicate send out circulars to their clients describing and recommending the bonds. If conditions are favorable the bonds may all be sold to in- vestors and the syndicate receives its profit of $20 on each $1,000 bond (less expenses) for its services in selling the bonds and also for in- suring the sale of them in advance. If only half the bonds are sold to investors, then the members of the syndicate are called upon to take the rest at the agreed price of 97. They may later be able to sell them at 99 or even higher, but under some conditions they might have to carry the bonds for a consider- able time or even to sell them at less than the syndicate. A number of the leading private banking houses are so strongly intrenched in the con- fidence of the public and of other investment dealers that the success of any offering they consent to undertake is assured from the start. In fact, the smaller investment houses which 144 THE MACHINERY are usually invited to join syndicates being formed by these leaders hardly feel at liberty to decline, even though in some special in- stance they might prefer to stay out ; for if they refuse to join in one syndicate they are very likely to be left out of the others which will certainly follow, and this they cannot afford. There are many issues of securities which leading private bankers do not care to handle, either because the issue is too small to yield enough profit or because its safety does not conform to their high standards. Small is- sues are handled by smaller houses, which may be of equal standing with the great leaders of the Street, only not so widely known. Speculative issues are handled by other houses, each house taking its character and standing from the securities which it sponsdrs. The more doubtful the enterprise the larger the profits it has to promise in order to attract buyers, and as a general rule the greater the promises the greater the risks. Individual Promoters Often these speculative issues are handled by individual promoters, whc may own the en- OF WALL STREET 145 terprisc themselves or may receive a com- mission of 10 or 15 per cent, for selling the securities. The ordinary method is to obtain a list of possible investors and mail out large numbeis of prospectuses describing the future of the enterprise in glowing terms. This is an expensive method of promotion, since most of the circulars go into the waste-baskets of the recipients. Even under favorable condi- tions securities can hardly e\ er be sold in this way at a cost of less than one-fourth of the cash received, and sometimes practically all the receipts are absorbed in expenses and com- missions, resulting in the early death of the company, even though the scheme might have been meritorious enough to succeed if enough money could have been cheaply obtained from the puolic. Very few of these individual promoters start out with the deliberate intention of being swindlers, although they are pretty sure to be called that if for any reason whatever the en- terprise does not succeed. Most of them are the victims of a mistaken enthusiasm but of course that fact does not help the investor who has lost his money through them. 146 THE MACHINERY Some, however, are merly "fakes." They issue attractive prospectuses regardless of the actual prospects of the company in fact the company is nothing but a legal peg on which to hang their glittering rhetoric. Their only anxiety is to get the money of "suckers" by outwitting the law. The difficulties in the way of doing this increase year by year. More and more stringent laws have been passed and they are better enforced than for- merly. But the evil is not entirely extin- guished and perhaps never will be. The Post Office Department of the Federal Government has been active in recent years in checking the operations of fake promoters, since it is almost necessary for them to oper- ate by mail. The Post Office has an almost autocratic power in dealing with suspects of this class, and it has probably made some mis- takes; yet on the whole it has been of very great service in terminating the careers of swindlers. The newspapers have also become much more careful in accepting the advertising of promoters. Some years ago it was purely a case of caveat emptor for the reader of finan- OF WALL STREET 147 cial advertising or perhaps sauve qui peut would be an even more apt expression; but most of the papers now make a sincere effort to shut out financial swindlers from their col- umns, and many of them even exclude all se- curity issues of a highly speculative character. A sort of detective agency is maintained in Wall Street for the benefit of newspapers, financial publications and others who may need "inside information" in regard to the charac- ter of the thousands of people who are doing business in the financial district. Furnishing accurate information of this kind is a very large contract and in the nature of the case it cannot a ways be thorough-going. Mistakes are sometimes made and some injustice doubt- less results lor when once the man who is try- ing to do business in Wall Street gets "a can tied to his tail" he might as well shut up shop or change his name but on the whole the effect has been good. The sale of doubtful securities by promoters depends upon the gambling spirit among their patrons and therefore it is not likely that it can ever be entirely stopped. Perhaps there was a lime when the buyer of such stocks was really 148 THE MACHINERY carried away by the promises of the prospec- tus, but there are few such instances now. The buyer fully realizes that he is taking a "long shot," but he figures that if one out of ten of these enterprises succeeds the profits may be Jarge enough to cover the nine losses* It is doubtless unnecessary to add that this is not so. Not one out of a hundred of these highly "promising" promotions ever "makes good." More than that have merit perhaps half of them have merit, to a greater or less degree but it takes something besides a good idea to make a business success. Insufficient capital and poor management are usually the rocks on which these enterprises founder. CHAPTER XIII Distribution of News and Quotations A MOST important and interesting part of the machinery of Wall Street is that which collects from all over the world the items of news which may affect the mar- kets and distributes them to brokers and in- vestors, and then collects on the floors of the several exchanges the quotations resulting from the orders constantly flowing in and dis- tributes these quotations to the public. The men who have large interests at stake in the markets cannot, of course, wait for the newspapers. They and the 'brokers who serve them make every effort to get each item of news by telephone or telegraph at the earliest possible moment. Happenings on the floors of the exchanges are reported by telephone or sometimes by written memoranda dispatched by messengers. These messages are quickly typed and filed In customers' rooms. When the news is very im- portant it is transmitted by telephone or tele- 149 150 THE MACHINERY graph to the broker's clients who are not at the broker's office. Important news from all over the world is also frequently forwarded by wire or cable, in order to get it to its destination ahead of the regular news channels. Such an event as a decision of the Supreme Court, for example, is likely to be felt on the floor of the Stock Ex- change in five minutes after its purport can be gathered by representatives on the spot. In at least one instance a nervous and over- wrought watcher did not wait long enough to get an understanding of a court decision and forwarded an incorrect message which caused a considerable slump on the Exchange before it could be corrected. The News Agencies It is only in regard to news of special im- portance that private messages are employed. The great bulk of the news which may affect the markets is gathered by the two Wall Street news agencies Dow, Jones & Co. and the New York News Bureau with the aid of the Asso- ciated Press, foreign news agencies, local news organizations in various American cities, and OF WALL STREET 151 special representatives. Very little worthy of note escapes these Argus-eyed organizations. To save the time required to duplicate or print and distribute these items, they are first sent out in condensed form over the "page printer," or news ticker, a complicated little electrically driven machine somewhat similar to the typewriter. These printers are found in nearly all brokerage offices, bond houses, banks, etc., and even in restaurants or saloons which have the sort of patronage to warrant them. All are worked by electrical wires con- nected with a single central operator. Each machine contains a roll of paper about six inches wide on which the messages are printed out with what seems painful slowness to the feverish speculator. As each line is finished the machine automatically shoves up the paper half an inch and begins on a new line. Though very ingenious and usually reliable, they are subject to peculiar diseases of their wn, so that the cry "ticker out" often goes up just at the most exciting moment. The next step of the news agency is to set up and print the news items in a more elabor- form of the "news slips," or sheets of paper 152 THE MACHINERY about the size of the ordinary book. These slips are delivered to subscribers in bunches by boys about every half hour. By the end of the day the amount of reading matter sent out in this way is equal to that contained in the average newspaper.' It is very compre- hensive and contains many items of general in- terest not directly connected with the markets. By these means that part of the public which is interested is kept constantly informed of the development of events and thousands of more or less acute minds are continually digesting the miscellaneous mass and transmitting it into orders to buy or sell this or that security or commodity. Since the first readers of all this news are for the most part speculators, they are most in- terested, not in the final effect of the develop- ments recorded, but in what other speculators will think and do for that will control the immediate movements of prices. It is to this problem that they apply their reasoning powers and the results are sometimes almost ludicrous. For example, the market has a quick break. Speculators rush to the page printers to see OF WALL STREET 153 what caused the decline. After a few minutes the news comes out on the printers. Then the mental acrobatics begin. Some are alarmed by the news and sell some of their stocks. Another reasons: "Ah ! They have sold the market down on this news and have all got short. When they start to cover, prices will rally. Buy a hun- dred Steel !" Still others may say, "This selling is genuine liquidation. Room traders have bought on the break, expecting a rally. They are all long and when they try to close out they will find a poor market on which to sell. The real de- cline hasn't started yet." There is probably no place in the world where so much topsy-turvy reasoning can be observed as in the customers' room of a specu- lative brokerage house. But the operations of these day-to-day specu- lators have but little if any permanent effect on prices. The broader movements of the market are made by that class which is some- times called "speculative investors," who act more deliberately and form their opinions upon a careful study of the whole situation. Any 154 THE MACHINERY one investor is likely to be frequently mis- taken but the combined judgment of all rarely goes far astray. Hence the level of prices, as a rule, pretty closely represents the balance of chances in regard to the various uncertainties which are at any moment overhanging the market. Sending Out Quotations As the thousands of orders which spring directly or indirectly from the accumulation of news flow into the exchange, their effect is re- corded in purchases and sales and in a few minutes the return flow of the quotations fol- lows. The trading at the various posts on the Stock Exchange is constantly watched by re- porters who record the quantities and prices of the transactions and forward them by mes- sengers to the telegraph operators representing the two stock ticker companies, who have sta- tions in the exchange. One of the ticker companies serves Stock Exchange members only, and the other serves any subscribers located where they can be reached by its wires with the proviso that every subscriber must be endorsed by the Stock Exchange Committee having charge of the matter before a ticker can be installed in his OF WALL STREET 155 office. This is for the purpose of preventing the use of the quotations by bucketshops. There is no difference of importance in the ser- vice furnished by the two companies. The stock tickers, like the page printers, are electricallv connected with a central operator. Each ticker emits a narrow ribbon of paper bearing abbreviations representing the various stocks followed by the amount of each sale and the price. For example, "A. 300. 99^" signi- fies that 300 shares of Atchison common have been sold at 99^4, and so on. In addition to the two systems of tickers which carry quotations from the New York Stock Exchange there are tickers for the Con- solidated Stock Exchange, for cotton, for coffee, for grain and provisions (from the Chicago Board of Trade and also from the New York Produce Exchange), for unlisted securities and for bonds. A score of cities out- side New York have ticker services of their own. In quiet markets the ticker often remains motionless for minutes at a time, but in busy times it has hard work to keep up with the market. After choking and sputtering at its best it frequently falls behind five, ten or more minutes. In a wild market this is decidedly 156 THE MACHINERY troublesome, for the operator who places his order to buy when his stock is selling at 90 according to the ticker may find that it was at that moment really selling at 93 on the floor. No complete remedy for this difficulty is in sight, for no mechanical device could keep up with the lightning fluctuations that some- times occur in excited markets. For the convenience of customers, brokers have the prices as they come out on the tickers posted on a blackboard. Formerly a few brokers attempted to post the amount of each sale also, but with the bigger markets of re- cent years it is doubtful if that is now done anywhere. Many facetious nicknames are given by cus- tomers of brokerage houses to the different stocks, and these are often derived from the abbreviation used for the stock. Missouri Pacific is almost invariably known as "Mop," U. S. Steel sinking fund bonds are often called "Sinkers," etc. During the sensational ad- vance in Crucible Steel in 1915 it was called in one office "Cruci-Bull," but in the decline of the next spring this was changed to "Cru- cify." Almost every broker's office in busy times contains some wit whose chief object OF WALL STREET 157 in life seems to be to entertain himself and the other customers. Many watches in the Street are set by the stock ticker. Stock certificates must be de- livered by 2:15 p. m. and this rule is very strictly enforced. A little before 2:15 the tick- er prints "Time" and after a series of prelim- inary dots prints 2:15 p. m. at the exact second. London Methods The Wall Street news and quotation service is superior to any other in the world in the promptness and completeness of its operation. The London stock tickers do not attempt to print the price of each sale nor the quantity sold. They merely give at intervals the "bid and asked" quotations on each stock. The American stock trader in London feels as though he had no information about the mar- ket worth mentioning with only these meager figures to go upon. Moreover, London quotations for American stocks are in dollars at the fixed rate of $5 to the pound sterling, and this has to be corrected by the current rate of exchange before the American visitor knows how his stock is sell- ing in New York. 158 THE MACHINERY The New York page printers and news slips give the London quotations for the principal American stocks each morning, quoting both the London figure and the New York equiva- lent at the current rate of exchange. Although the London Stock Exchange nominally closes at 3 p. m., which is equivalent to 10 a. m. at New York, the hour when the New York exchange opens, trading in Ameri- cans is usually continued in London until 4 and in active markets it may be kept up on the curb there until 8, when the New York exchange closes. New York, however, has to rise early to trade at the London opening. Brokers and their most enthusiastic customers sometimes make the sacrifice on the morning after some very important event, such as the Presidential election of 1896. The London 2 p. m. quotations are posted in New York soon after 9 a. m., so the cus- tomer finds them there when he arrives at the broker's office. Formerly they had consider- able influence on the opening at New York, but with the growth of the New York market and the great extension in the number of securi- ties dealt in, London no longer has any great significance for us in this particular. OF WALL STREET 159 Arbitrage dealers watch London closely, but they get their own quotations by cable. Arbi- trage means buying in one place and selling in another in order to take advantage of a dif- ference in prices. There were formerly some arbitrage operations in stocks between Ameri- can cities, and they still take place between Toronto and the New York Curb ; but the term is almost confined to operations between New York and London, so far as stocks are con- cerned. In grain, arbitrage is constant be- tween New York and Chicago, Chicago and Minneapolis, Chicago and St. Louis, etc., and it is frequent in cotton between New York and New Orleans. | The Wall Street ticker and news service has come to stand for "gambling" in the minds of many people, and there can be no doubt that it does tend to encourage operations in stocks, grain and cotton which are gambling in the sense that the would-be speculator is taking a chance on something he knows little about. As usual in such matters, a certain class of short-sighted reformers think the remedy lies in taking an ax and breaking up the tickers. But the whole question goes deep into our economic and business system. In fact, it 160 THE MACHINERY reaches back to the very foundation of our Government itself. If we still believe it to be a self-evident truth that the right to life, liberty and the pursuit of happiness is really "in- alienable," we can hardly forbid our citizens to operate or read tickers, or to buy and sell any legitimate article that they want to buy and sell. The legal principle that certain acts may be prohibited as "contrary to public policy" has been mightily stretched in recent years, but it hardly covers establishing guardianship over persons, otherwise legally competent, who can- not tell which way the market is going. Our economic system is haphazard enough and the improvement of it is a consummation most devoutly to be wished, but that is not to be safely accomplished by the light-hearted de- struction of methods developed by many years of experience to meet conditions as they now exist. Until we can plan something better to take the place of the ticker and all it repre- sents, we must perforce let it continue to tick. CHAPTER XIV Theory of Speculation Speculative Terms rERE have been numerous theories of speculation, some called "scientific" and some not dignified by that term. The central idea of nearly all these theories is that the market always represents a sort of contest between investors, of whom the most influen- tial are large capitalists, and closely connected with the great banking interests, and specula- tors, including the pools, the big individual plungers and the public. It must be borne in mind that in the stock market it is dollars that count, not individuals ; that is, one man with $1,000,000 to use in the market has just as much effect on prices as 1,000 men with $1,000 each. Hence a few very large capitalists may easily over-balance, under ordinary conditions, all that part of the specu- lative public, which is operating in the market at the moment. Moreover, $1,000 used as a ten-point margin has ten times as much effect 161 162 THE MACHINERY as $1,000 which is used to pay in full for a stock selling at $100. Hence, small investors, even though they may be very numerous, do not usually have much influence of the immediate movements of prices. The main contest is between the big investors who might as well be called specu- lators, except that they can always command money or credit enough to pay for their stocks in full if necessary and the other class of speculators, who will take a loss if the market goes against them far enough. So the market goes through a series of "cycles," or "minor swings," in which the heavyweight interests, which are at the time more or less in control of prices, buy, during .and after a decline, from the lighter speculators who can be scared into selling, and sell at a profit, during and after an advance, to the same or new lightweight speculators, who become enthusiastic enough to buy. These minor swings occur within and sub- ordinate to the broad movements of prices, which are based on investment values. That is, when the investment value of stocks is in- creasing, the upward "leg" of the minor swing will be longer than the downward leg, and OF WALL STREET 163 when investment values are falling the reverse will be true. In this way the "technical situation is cre- ated. The technical situation is strong when most of the floating supply of stocks or of a stock is held by people who will not sell on declines, and it is weak when a large part of the floating supply is in "weak hands," or in the hands of those who will sell on a decline that is "the public," as the term is used in Wall Street parlance. Manipulation The minor swing, which may last anywhere from a week to several months, is attributed by most people to manipulation a term loosely used to mean a movement of prices which has no connection with investment values, and is brought about by the operations of controlling interests. It would be more accurate to say that the minor swing is nearly always accom- panied by manipulation ; for the real cause of the swing is that the speculative public gen- erally buys high and sells low. No amount of manipulation could compel outside speculators to do this. They do it because they are "built that way." 164 THE MACHINERY Manipulation, however, is always going on, within limits, in any active market. When strong interests have bought up the floating supply of a stock which they believe to be rela- tively low, compared with its value, so that very little stock is offered near current prices, it is perfectly natural for them to bid up the price and try to get a following. After they think the stock has advanced as far as it is en- titled to go or farther and they have sold out and perhaps gone short a little, it is quite na- tural for them to offer the price down to see whether the holders of the stock will sell on declines. That is manipulation. It may be car- ried on over a range of one point or in a few instances a hundred points. The principle is the same. The frequenter of speculative brokerage houses is likely to hear something about "wash sales" and "matched orders." Wash or ficti- tious sales are a thing of the past, not now tolerated by any legitimate exchange, though still possible, perhaps, on the Curb. Matched orders are prevented so far as possible, but cannot be entirely suppressed. For example, a big operator gives one broker an order to sell OF WALL STREET 165 S. O. S. stock in specified quantities on a scale up from the current market; then he dis- tributes among other brokers orders to buy S. O. S. The result is an appearance of great activity in S. O. S. at rising prices, although nothing may really be done except what this one operator is doing with himself. His object is to attract other buyers to S. O. S. The brokers who handle the orders may suspect what is going on, but they have no way of proving it, since every broker must, of course, keep secret the source of his orders. Effect of Short Interest The manner of selling stocks short has been previously explained. "Shorts" are proverbi- ally timid. Most of them work for immediate profits and they "run to cover" when prices turn strong. This fact is a great help to manipulators, who are thus in many cases able to get the market higher than they otherwise could, by bidding up the price and "scaring in the shorts." On the other hand, the shorts often support prices by taking their profits after a sharp decline. Stop Orders Another help to the manipulator is the "stop order," which is an order to buy at a certain 166 THE MACHINERY price above the market or to sell at a price belozv the market. This sounds silly to the novice, but the purpose is to prevent a trade from running into a bad loss or to keep a trade from showing any loss at all after it has shown a fair profit. When stop orders are found in the market, any manipulator working on the bear side will naturally try to depress the price enough to reach them. When his customer's margin is in danger of exhaustion, the broker has to put in stop orders in order to protect himself from loss. Puts and Calls "Puts and Calls," or "Privileges" are some- what similar to options in real estate. If Read- ing is selling at 90, Mr. A. pays Mr. B. $100, for example, for a contract to take 100 Read- ing at 85 at any time within 30 days. This is a "put" A buys the put, B sells it. Then if A buys Reading at 87, his loss is strictly limited to two points, even though Reading may drop to 50, for he has a market at 85 at any time within 30 days. On the other side, if B sold to A a contract to sell A 100 Reading at 94 at any time within 30 days, that would be a call. A could call for the 100 Reading at 94 when- OF WALL STREET 167 ever he wanted it within the time limit. So if Reading advanced to 100, A would have six points profit without having invested anything except the cost of the call. These privileges also look absurd to the ordinary observer, because A pays something for the privilege of buying above the market or selling below the market. Nevertheless, there are conditions under which they may be used very profitably by an expert. Buying on Instalments So much has been said against the dangers of margin trading that a substitute has been de- vised and has become very popular; namely, buying stocks on instalments. The buyer enters into an agreement with his broker to pay for his purchase of stock, part down and the balance monthly. The broker buys it and carries it for his customer until paid for in full. So far as New York Stock Exchange houses are concerned, this is really a purchase on mar- gin, for the broker retains the right to close out his customer's account to protect himself if necessary. The only difference is that the 168 THE MACHINERY broker demands a first payment large enough to make that unpleasant possibility exceeding- ly improbable. Houses not members of the Exchange, however, are free to make a con- tract with the customer not to sell the stock even if the price should decline below the point to which it is protected by the first payment, and some of them do make that contract. So far, since this practice came into vogue, they have not been called upon to go through a panic like that of May, 1901, or November, 1907. It is perfectly evident that the strength of the contract depends entirely on the strength of the brokerage house which makes it. It will be noted that the broker, under this instalment contract, does not have to deliver any stock for months to come. In practice, if he is not a member of the Exchange, he can buy the stock whenever he gets ready. This leaves a loop-hole for "bucketing" that is, for not buying the stock at all but since the broker agrees not to sell the stock so long as the customer keeps up his instalment pay- ments, there is little inducement to bucket the order. A more serious danger is that a fraudu- lent broker might silently fade away, taking the customer's money with him. OF WALL STREET 169 Discretionary Accounts Legitimate brokers will rarely if ever accept discretionary orders, and most of them will not accept accounts which are to be managed by any other person, except the principal. This has checked the business of handling accounts for other people which was formerly carried on to a limited extent. The timid novice is sometimes attracted by the idea that some "expert" can handle his account better than he can especially after he has bungled matters for himself but those experts who can really do it are usually busy handling their own accounts. Finding the ex- ception is like looking for a needle in a hay- mow, and much more costly. Market Letters It is a noticeable fact that the higher the standing of a broker the less definite and em- phatic are his market letters. Combining the business of the broker and the market adviser is decidedly difficult. The broker is generally too close to the market to see it in perspective. In a study of the market letters of twenty leading brokerage houses, members of the New York Stock Exchange, I found that over a 170 THE MACHINERY period of several months they averaged a cor- rect judgment of the trend of the market con- siderably more than half of the time. That is all that should be expected, but the novice often expects more and is disappointed. It is in Wall Street that economic laws find their most accurate and responsive expression, and it has been the experience of mankind that tampering with economic law is generally cost- ly. Not that there is anything sacred about economic law. It is simply the best method we have found so far of adjusting the business of life to the circumstances under which it has to be carried on. But the mere fact that this process of adjustment has been going on for centuries makes the wisdom of sudden or sweeping changes very doubtful. The Wall Street of 1950 will undoubtedly be as far ahead of to-day as to-day is ahead of the Wall Street of the Civil War, but the change must come slowly and naturally, by well considered legislation and improvements in banking practice. There is no piece of the machinery which could be taken out and thrown away, because each piece has been fashioned by practice to meet some real de- mand. Otker Publications What an Investor Ought to Know By Frederick Ix>wnhaupt Cloth, 160 pp., $1.06 postpaid Investing For Profit By G. C. Selden Cloth, 179 pp., with diagrams, $1.06 postpaid. Practical Points on Stock Trading By Scribner Browne ^ Cloth, Pocket Size, $2.06 postpaid, 14 Methods of Operating in the Stock Market A Collection of Practical Ideas Leather, $1.06 postpaid. How to Read the Financial Page By Scribner Browne Leather, Pocket Size, Price, $1.06 postpaid. Studies in Tape Reading By Hollo Tape leather, 189 pp., with tables and diagrams, $3.06 postpaid. The MAGAZINE OF WALL STREET 42 Broadway, New York City Opportunities in Bonds The opportunities for profit in the bond market are not generally recognized. They exist, how- ever, for those who are able to anticipate future probabilities. One of the strong points of our Investment Letter Service is the close watch we keep for good op- portunities in bonds as well as in other securities. What the Service Comprises The Investment Letter Service is issued by our Analyti- cal Service Bureau and includes: (1) A regular weekly letter issued every Friday, in- cluding a special analysis of one or more securities, usu- ally those which we consider especially attractive at the time. (2) Special letters issued the day important changes occur. (3) Suggestions in regard to your present holdings. 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