The Stock Exchange from Within. William C. Van Antwerp
the owner of real estate wants to sell in a hurry, what then? There is no large organized market, there is no way by which through competitive bidding, he can place a correct estimate of the importance of current events upon the price of his land. In the urgency of his needs he may easily be misled by “smart” or unscrupulous advisers, and this risk increases in direct proportion to his remoteness from large market centres.
The holder of securities listed on the Stock Exchange is quite differently situated. He is altogether independent. He knows the price of his holdings every hour of the day. He is exposed to no fraud, and at the mercy of no rumor and no unscrupulous dealer. He has positive assurance that in case of necessity, at a moment’s notice, he can obtain at the prevailing price the value in cash of every Stock Exchange security in his box. The ticker gives him instantaneous quotations. All the newspapers publish authorized prices for his benefit, and, as we have just seen, these quotations are not a one-man affair, but the combined judgment of thousands of experts, bulls and bears, bankers and brokers, speculators and investors, all over the world, bidding and offering against each other by cable and telegraph and recording the epitomized result of their bidding in the prices current on the Stock Exchange. Such a man knows, moreover, that the price thus established is not merely the opinion of all these minds as to values to-day, but that it represents a critical look into the future. He knows, indeed, that financiers everywhere have in mind prospective values rather than present values, and so he acquires a double advantage in regulating his own action by the light of the superior knowledge thus freely given him. The importance of this “advance information” cannot be overestimated, and furnishes us with another reason why Stock Exchanges exist.
In 1906, for example, business conditions in this country were the best ever known. Good crops, big earnings, and general optimism prevailed. But Stock Exchange securities did not advance in the last half of the year, because trained financiers began to foresee the first signs of trouble ahead. In the early months of 1907 this knowledge became more general, and a severe decline took place, notwithstanding the fact that the business of the country at large continued to be excellent. “What is the matter with Wall Street?” was the question in the press and on the lips of the uninformed, but Wall Street, or rather the Stock Exchange, was merely fulfilling its function as a barometer and foretelling the coming storm.
At the height of the autumn panic, on the other hand, when the press was filled with dire forebodings and the ignorant layman was frightened out of his wits, securities stopped declining and began to rise because the Stock Exchange mind saw that the worst was over. The brightest financial students in the world then began another process of discounting the future; the barometer plainly foretold the end of the disturbance. And all this information—a fundamental law of price movements which indicated clearly when the trouble was coming and when it had ended—was given gratis to the world in the daily published quotations of Stock Exchange securities.
In another chapter I shall describe the method by which the Stock Exchange protects its patrons, the public. As this is of particular importance in connection with the matters just cited, I call the reader’s attention to the remarks of Prof. S. S. Huebner, PhD., of the University of Pennsylvania.
“Importance must be attached to the protection and safeguards which organized Stock Exchanges give the stock and bond holder, in regulating brokerage transactions and maintaining a standard of commercial honor among brokers. … In this connection it should be remembered that the constitution of nearly every Stock Exchange defines the object of the Exchange as follows: ‘Its object shall be to furnish Exchanges, rooms and other facilities for the convenient transaction of business by its members, as brokers; to maintain high standards of commercial honor and integrity among its members, and to promote and inculcate just and equitable principles of trade and business.’ No person can be elected to membership until he has signed the constitution of the Exchange, and by such signature he obligates himself to abide by the same, and by all subsequent amendments thereto. The value of this organization becomes apparent when we take account of the gigantic frauds perpetrated upon innocent investors through advertising campaigns by persons unaffiliated with any recognized Exchange, or by certain members of unorganized curb markets. …
“All Stock Exchanges provide for the arbitration of disputes which may occur between members, and if both parties are willing, between members and their customers. They also prescribe rules governing the nature of contracts, the making of all offers and bids, the registry and transfer of securities on the transfer books of the corporations, and the conditions upon which securities may be listed upon the Exchange for trading purposes. Practically all stock Exchanges also require that all transactions must be real, and that no fictitious or unreal transactions shall be permitted; that discretionary orders cannot be accepted by brokers; and that every member of the Exchange must keep complete accounts, subject at all times to examination by the governing committee or any standing or special committee of the Exchange, and under penalty of suspension, no member may refuse or neglect to submit such accounts, or wilfully destroy the same. Nor may any member, under pain of suspension (a serious penalty, involving not merely the loss of the rights and privileges of membership, but also the stigma attaching to the member as a factor in the business community), be guilty of ‘any conduct or proceeding inconsistent with just and equitable principles of trade.’ ”12
One of the most important functions of the Stock Exchange is, as we have seen, the almost automatic ease with which it directs reservoirs of capital into channels of usefulness in the world’s industry and commerce. The layman may feel that this use of the Stock Exchange does not affect him as an individual, but it does, and vitally. Every merchant and every manufacturer, great and small, all over the world, is directly benefited by it. One may see, for example, securities of railway equipment companies quoted for weeks at a low level. This shows that the business of these companies is not profitable, and it serves to discourage owners of capital from undertaking new enterprises in that direction, because the securities of such companies cannot be sold. Moreover, it shows investors, as plainly as words can tell, that this is an unsafe and unprofitable form of investment.
Reverse the situation, and lines of industry are revealed where high and advancing prices of securities indicate a rising tide of business, with an outlook for large profits in the future. Capital then takes hold cheerfully; there is a market for the new securities and a proper basis for fresh commercial development, because investors and speculators have learned from the published daily quotations of these Stock Exchange securities that there is good warrant for the flow of capital into such channels, and that a reasonably safe return will follow an investment in them. In commenting upon these functions of the Stock Exchange, Mr. Conant says: “Through the publicity of knowledge and prices, the bringing of a multitude of fallible judgments upon this common ground, to an average, there is afforded to capital throughout the world an almost unfailing index of the course in which new production should be directed.” Through the mechanism of the Stock Exchange, therefore, the public determines the direction in which new capital shall be applied to new undertakings. In this way our great railways were built, our Western country opened to progress, and our vast industrial undertakings made possible.
“The stock market acts as a reservoir and distributor of capital, with something of the same efficiency with which a series of well-regulated locks and dams operates to equalize the irregular current of a river. The hand of man is being stretched out in the valley of the Nile to build great storage basins and locks, and the waters which flow down the great river may be husbanded until they are needed, when they are released in small but sufficient quantities to fertilize the country and tide over the periods of drought. Something of the same service is performed for accumulation of capital by the delicate series of reservoirs, sluice gates, and locks provided by the mechanism of the stock market. The rate of interest measures the rise and fall of the supply of capital, as the locks determine the ebb and flow of the life-giving water. The existence of negotiable securities is in the nature of a great reservoir, obviating the disastrous effects of demands which might drain away the supply of actual coin, and preventing the panic and disaster, which, without such a safeguard, would frequently occur in the market for capital.”13
Some day, no doubt, the United States will become a great creditor nation, as England is, and then the field of these operations will be extended to other countries.