Stock-exchange.

Stock-exchange. The London Stock-exchange as a corporate body only dates from the commencement of the 19th century. Prior to the establishment of the Stock-exchange in 1801 transactions in the funds were conducted in a very slipshod manner by groups of individuals, who till about 1698 used the old Royal Exchange in London as a meeting-place, and then for a century made one of the network of alleys in Cornhill their headquarters, congregating in Change Alley both in the open air and in the Jonathan and Garraway coffee-houses. Dealings in government funds were also conducted in the Rotunda Room in the Bank of England. The founders of the Stock-exchange acquired premises in Capel Court, facing the eastern side of the Bank of England. The original capital subscribed for providing the accommodation was 400 shares of £50 paid. Nothing further was required for upwards of half a century in the way of capital, though very considerable expenditure, especially since 1870, has raised the total outlay for the old building and extensions to over half a million sterling. In the early days of stock-dealing transactions were almost entirely in the different forms of British government funds, lottery bonds, and floating debt; but Change Alley, just as Capel Court in the 19th century, had wild fits of gambling in company schemes, of which the most memorable, the South Sea Scheme (q.v.), culminated in 1720.

At the time the first stone of the Stock-exchange building was laid in 1801 the total national debt of Great Britain was some £550,000,000, and the Stock-exchange list, published bi-weekly, comprised only six securities, chiefly British government stocks. Foreign governments first came to the English market as borrowers in 1820 to 1825, and the bonds of various European and American states, Russian, Portuguese, Neapolitan, Danish, Greek, Colombian, Mexican, Buenos Ayres, Chilean, Peruvian, &c., came to be dealt in. There were also transactions in a few canal, insurance, and industrial companies. Numerous banking corporations were established immediately after 1833. The introduction of railways in the United Kingdom and on the Continent in the period from 1840 to 1846 added largely to the business of the Stock-exchange. The gold-discoveries of 1848-50 brought about the formation of a crowd of mining schemes. The introduction of joint-stock companies after the Act of 1862, the growth of foreign government debts, and the introduction of Indian and colonial borrowings, municipal loans, gas, water, shipping, telegraph, tramway, &c. undertakings, as well as United States, Indian, and South American railroad securities, have so added to the official list of the London Stock-exchange that the nominal amount of stock and securities quoted in the list that appears daily under the authority of the committee was at 31st December 1891 to the amount of £6,347,000,000, or, deducting foreign loans with coupons payable abroad, £4,562,000,000; and this is exclusive of an enormous amount of capital of miscellaneous company issues, which individually have not been of sufficient importance to obtain a quotation in the official list. These latter though not quoted are dealt in.

As regards the United Kingdom, beyond the London Stock-exchange there are various provincial establishments for conducting business in public securities. Manchester, Liverpool, Leeds, Birmingham, Bristol, Glasgow, Edinburgh, Dublin, Belfast, and other important centres of the United Kingdom have their stock-exchanges administered by committees, and having rules and regulations much on the same lines as those of the great London establishment. On the Continent, too, every important city has its stock-exchange or Bourse. New York (about 1100 members in 1891), Philadelphia, Baltimore, Chicago, San Francisco, and some other important American cities have their stock-exchanges; and there are also similar establishments termed Bolsas in leading cities of South American states. Transactions in public funds and securities of joint-stock companies, &c. are also conducted in leading Indian and colonial cities.

At the time when the London Stock-exchange was opened in 1802 there were 551 members and 99 clerks, and in March 1891 the roll of members included upwards of 3000 names, besides an army of clerks having admission. In 1821 each member was required to provide two sureties for the sum of £250 each, who also had to be members, and were held liable in their suretyship for two years. Various alterations have since been made, and the suretyship for new members is now three members responsible for the sum of £500 each for four years. Those persons who have served as clerks for a period of four years are, however, only called upon to provide two sureties of £300 each for four years. Members have to pay an entrance-fee of 500 guineas and an annual subscription of 30 guineas. The entrance-fee for members who have acted as clerks is 150 guineas.

Although the London Stock-exchange is not, as generally is the case on the Continent, in any way controlled by the government, and has not a monopoly, it practically secures the whole of the bond-fide business of buying or selling British government securities. Its members voluntarily place themselves under most stringent rules and regulations, and the slightest irregularity is visited with prompt pains and penalties. The committee is entrusted with the power of investigating complaints between members, or between the public and members, and any departure from orthodox procedure can be visited with penalty of suspension or expulsion. One of the regulations is that no member is allowed to advertise for business. Thirty members are annually balloted for to serve as a committee, and there is no appeal from judicial decisions that may be made by that body.

Members act as brokers and jobbers. The broker transacts business as between members of the Stock-exchange and the public, obtaining his commission from the clients who employ him. He deals in all securities. The jobber or dealer confines his attention to some special group of securities, and generally offers to buy at one price or sell at a higher any of the group stocks or shares he specially may interest himself in. The margin between the buying and selling price he may quote to any broker varies according to the nature of the security, the extent of competition, the state of the market, &c. In some active stocks the margin may be as little as $\backslash frac\{1\}\{2\}$ of 1 per cent.; or if the stock is one that is rarely dealt in the jobber may quote a difference of 5 or even 10, and also say he is a buyer or seller only at a price, and refuse to deal unless what he is prepared to offer is acceptable to the broker.

On some of the continental bourses the conditions of membership are much more stringent than in England. On the Paris Bourse, for instance, there are sixty-five officially recognised agents de change, whose appointment rests with the government. As a body these sixty-five are termed the Parquet. Each member of the Parquet has to deposit on appointment cash or securities to the value of £10,000, and the Parquet as a body guarantees transactions from the fund, to which is added accumulating interest and a payment to the fund by each member of 15 centimes on each bargain. Intermediaries between the Parquet and the public are numerous. Reputable firms also have a guarantee fund of their own. These brokers, as they would be termed in England, are known as the Coulisse.

An enormous amount of business is transacted between international exchanges by means of telegraphic communication. If, for instance, an event occurs that causes sharp changes in prices, it may happen that the price of some special security of an international character is appreciably different on one exchange from what it is on another. Italian government funds may be quoted in Paris at a much higher price than in London, after making allowance for exchange rate, &c. Certain dealers who closely watch the margins in price between markets instantly send telegrams from different markets in which Italian rente is dealt in, say from Paris to buy in London, or from London to sell in Paris. This arbitrage business is conducted between the exchanges of all the world. There is much intricacy in calculations as to what is parity, as, for instance, in London or in Paris the quotation of a security includes the interest or dividend accrued since the last payment, while on the German bourses securities are bought at a price for the principal, and the amount of accrued interest or dividend has to be paid beyond the principal sum. There is only one notable exception on the London Stock-exchange to the price being inclusive of principal and accrued interest. This exception is India rupee paper, where the purchaser buys at the quotation for the principal and pays the vendor of the security the amount of accrued interest.

Stock-exchange securities are of two characters, inscribed or registered, and to bearer. In home government funds and several colonial and municipal 'inscribed' issues the names of stockholders are registered (inscribed) in books kept at the Bank of England, or other banking agents of the government or corporation. When such stock is sold the vendor or his attorney must attend the bank and sign the transfer in the books. Where stock in a railroad or other company that registers the name of the stockholder is sold by the registered proprietor a deed of transfer, subject to stamp-duty, has to be executed, and this deed, with the stock or share certificate, is passed to the purchaser, who directly or through his agent lodges them with the company for registration into his own name. Securities to bearer are those the title to which passes by mere delivery, and the interest or dividends are paid periodically by means of coupons.

Almost all stock-exchange transactions in Great Britain are purchases or sales for what is termed the settlement. There are cash transactions for immediate payment or delivery, but except for consols bargains for cash are exceptional. The settlements are periodical—monthly in the case of home government funds and bi-monthly in other securities. The Consols settlements fall due about the first or second day of the month, sometimes a day or two later. Settlements in foreign and colonial government bonds, railway, and other industrial and miscellaneous securities are fixed to fall in the middle and at the end of each month. In dealing in registered securities it is necessary for the purchaser or seller to furnish the broker entrusted with the business with full particulars. A purchaser should give his full name, address, and occupation. A seller is required to forward to the broker the certificate of title. Where the transaction is in securities to bearer the vendor simply has to hand the securities to his broker, and the transaction is in all respects similar to the exchange of a bank-note for cash.

On the Paris Bourse settlements are arranged each fortnight in foreign government and miscellaneous securities, and monthly in French rentes, City of Paris bonds, Bank of France shares, Credit Foncier securities, and French railway stocks. The 'settlement' (liquidation) occupies five or six days, and except for intervening holidays or Sundays the procedure is as below:

In Berlin the last day of the month is 'pay' day, and five days before is option day. In New York transactions are for cash, with daily settlements.

A very large proportion of the business done in the stock-markets is speculation done in time bargains. A purchaser who imagines that some special security is likely to rise in price buys for the settlement, in the hope of being able to sell at a profit before the date for payment falls due. If a change in price the way he expects is delayed, he renews the transaction from settlement to settlement. It may be the case that a fall in price is expected, and an operator sells in the hope of being able to buy back at a lower price. The purchaser for a higher quotation is in stock-exchange parlance called a bull. The seller who anticipates a fall in prices is termed a bear. If there is a preponderance of bull speculation high terms are asked for the loan of money on the security of stock, termed a rate of contango, which may be expressed as so much per share or per cent. on the nominal hundred pounds of capital, or it may be a rate per cent. upon the actual amount of money to be borrowed. If many persons have formed an adverse opinion as to the course of the market, and there is what is termed an oversold state of the account, it frequently happens that those bears who have sold what they do not possess are called upon by real owners of stock, shares, or bonds to provide a bonus, termed backwardation, to pay the holder of the security for the trouble and risk attendant on lending it to the seller. Sometimes a long-continued speculation for the fall is attended with very high backwardation charges, and not infrequently violent fluctuations in the price of the security. Combinations to resist the adverse effect of sales by speculators for the fall are sometimes entered into in face of really adverse circumstances. A powerful group with command of money finding that 'bear' operations in a security of which the amount is small have been entered into to an excessively imprudent extent, buy all the stock that is offered, and call upon those who have sold what they do not possess to deliver it. This results in what is called a corner, and the operators who have sold have to pay whatever price the operators who have bought like to ask. An instance in point may be quoted. A South American government some years ago came upon the market as a borrower of a million pounds. The government was not one in good credit, and heavy speculative sales of the bonds were made on the expectation that there would be a fall in price of the bonds; but parties interested in bringing out the loan bought more of it than there was in existence, being enabled to do so through the sales of persons who sold what they did not own, and called upon those who had sold bonds to deliver them. For some months they continued raising the price against those who had sold, and at each fortnightly settlement exacted rates of backwardation sometimes as high as the equivalent of about 100 per cent. per annum. The loan was issued to the public at the price of 80 per cent., and was raised to very near £100 in cash for the £100 bond. The purchasers forced those who had sold to buy back, and after the successful coup the views taken by the adverse party were found to be perfectly correct, for eventually the price receded to about £4 for the £100 bond. Corners have been very frequent on the New York and Chicago Stock-exchanges.

A large amount of speculation in stock-exchange securities is conducted on what is known as option business. Options can be of threefold character—the payment of a sum for the right to purchase or to sell at a future date at an agreed price, or the right to sell only, or again the right to buy only. These options are termed respectively (1) the put and call, (2) the put, (3) the call. In America the double option of put and call is termed a straddle. This option business enables any operator to enter into speculative engagements with a known maximum of loss.

See Francis, Chronicles of the Stock Exchange (1849); G. R. Gibson, The Stock Exchanges of London and New York (1889); Burdett's Official Intelligence, issued under the sanction of the London Stock-exchange Committee; the Stock Exchange Year-book, by T. Skinner; besides works on the fluctuations of stocks by Crump (1875), Giffen (1879), Ellis (1879); on the law and usages of the Stock-exchange, works by Paterson, Royle, Melsheimer, Lawrence, Stuttfield (1891); Bagehot's Lombard Street (10th ed. 1892); and American works by Lewis, Biddle, Dos Passos, and Cook; also the article BROKER.