The Banks as Stockbrokers.
Were business on the Stock Exchange solely of an investment nature, it
has been suggested that that institution could dispense with over fifty
per cent. of its members, for, during recent years, a large amount of
the investment business of the country has drifted to the banks, which
place their orders in the hands of a few brokers, with whom they divide
the usual one-eighth per cent. commission. The large banking companies
are outside brokers, and so eager are some of them to attract this
class of business that they offer their clerks half the commission
received from the broker upon all business introduced by them. Seeing
that the average bank clerk is absolutely without experience of the
markets, touts of this variety are a source of danger to the public.
The banker who divides his share of the commission with the clerk who
introduces the business is satisfied with one-thirty-second per cent.
commission; but the broker, who only gets one-sixteenth instead of
one-eighth per cent., is, probably, less eager to make a close bargain
for a customer of the bank than for one of his own. On the other hand,
the volume of investment business which flows through the banks to the
Stock Exchange is so large that those brokers who are favoured with the
banks' custom must earn considerable sums by way of commission. Whether
orders from customers of the banks receive that individual attention
which the brokers give to those from their own clients is, however,
another matter.
Most of the banks have Stock Departments, to which orders are sent by
their country branches. These orders are steadily increasing, and the
tendency seems to be for a large number of the provincial public to do
their investment business through the banks. This class of business is,
therefore, gradually drifting to the banks, and doubtless, as time goes
on, the banking companies will become the recognised channel for the
_bonâ fide_ country investor.
It follows that the non-speculative business is getting into a few
hands, with the result that a large number of brokers on the Stock
Exchange are, so to speak, "starved," and consequently obliged to
turn their attention to the demand created by the more speculatively
disposed members of the public. Yet, strange to say, in spite of
the fact that orders are now diverted to the Stock Departments of
the London banks and that, therefore, fewer brokers are required
to transact the investment business of the country, the members of
the Stock Exchange are increasing numerically. Seeing that the safe
business is drifting through the banks into the hands of a few large
brokers we may well ask how the smaller men obtain a living from their
business?
The ground, year in year out, is being farmed assiduously by the
banks, whose large capital and established credit inspire widespread
confidence; and in the face of such competition the small broker's
chance of success does not seem encouraging. How can he make a
business? The banks, who place their orders with strong brokers,
guarantee those customers who deal through them against the
insolvency of both the broker and the jobber, and such a guarantee is
unquestionably worth having. The small broker, as a rule, possesses
very little capital; whereas the person who instructs his banker
either to buy or to sell is conscious that he is dealing through an
institution whose credit is practically unlimited, and whose resources
amount to many millions. He has not, therefore, to ask himself whether
his broker is safe, and this sense of security, inspired by a bank's
millions, undoubtedly causes many people who would rather do business
direct with a member of the Stock Exchange to deal with the banks.
Moreover, a bank official is quite well aware of this advantage, and
when a customer, who is undecided whether or not to employ a broker,
asks what inducement the bank holds out to him, he quietly replies:
"You have the bank's credit upon which to rely." Such an answer makes
a customer reflect. Further, it seldom fails to effect its purpose,
because, in the first place, it instils a doubt in the client's mind
regarding the means of his broker; and, in the second place, because he
cannot fail to recognise the greater security the bank affords him.
It is evident, then, that the small broker's path is bestrewn with
almost insuperable difficulties, and that it is extremely hard for him
to attract safe business. But the banking companies do not arrest the
flow of speculative orders to his books.
The banks, which have a horror of speculation, confine their attention
to the buying and selling of stocks and shares through their brokers.
Were they to encourage gambling in securities they are fully aware
that the result would be disastrous to the business of banking, for
a certain number of their customers would be sure to neglect their
business in the hope of snatching differences on the Stock Exchange,
and such a policy would end in a crisis that would bring the country to
the verge of ruin. For this reason alone the banks firmly and wisely
refuse to foster speculation among their clients.
Capital, we all know, is the savings of labour; consequently the
greater the profits made in trade during any one year, the larger is
the fund awaiting investment. Now, if the banks were to incite the
gambling fever among their customers, this fund would tend to diminish
each year, and, seeing that the prosperity of the country is entirely
dependent upon its trade, bankers, customers, and stockbrokers would
speedily become involved in common ruin. Small wonder, then, that our
large banking companies, which are responsible to the public for
millions of money--a large proportion of which they must be prepared to
return at any moment--decline to open speculative accounts for their
clients. It would be madness on the part of such institutions to divert
their customers' attention from trade to speculation in securities; and
for this reason the bank clerk as amateur commission agent seems a step
in the wrong direction.
Moreover, in this respect the policy of the banks appears
contradictory. Recognising the temptations to which their clerks are
exposed, it is their practice to instantly dismiss those men who
indulge a passion for betting; yet some of them deliberately encourage
their servants to tout for investment orders, apparently unconscious
of the fact that once their attention is drawn to the markets, some
of the clerks are almost certain to end by gambling for differences
on their own account. Helping themselves to the money of the banks is
probably the next step. Were not the question so serious, the fact
that directors cannot make so palpable a deduction would be positively
humorous, for it is evidently quite as undesirable, from their point of
view, that a clerk should bet upon a stock as upon a horse.
The modern credit system, it will be seen, places a very large part of
the safe or investment business in the hands of a minority of brokers,
who, like the bankers, much prefer to do a good commission business,
and to leave speculation to the smaller brokers, who have less to lose
than they. These favoured brokers have grown accustomed to sleeping
comfortably o' nights, undisturbed by the vision of settling day on
the morrow; and, quite blind to the cause of their enviable freedom
from care, they are disposed to be loud in their abuse of the risky
manner in which some of the smaller brokers conduct their business.
But, seeing that the non-speculative orders flow from the banks to
themselves, it would be interesting if they would attempt to explain
how the army of small brokers can live unless they cater for the wants
of the speculator. As a rule their capital is small, consequently they
cannot afford to wait years while they slowly build up a connection;
so, as the safe business is cornered, they accept the risky. This
they do, not from choice, but from necessity; and the Stock Exchange
Committee, in order to prevent additions to the ranks of these
undesirables, should take steps to reduce the number of members of
the Stock Exchange very considerably. Already the investors of this
country have to support a small army of over four thousand of them.
Of course, after every period of excitement, numerous weak members of
the Stock Exchange are weeded out, and, in a sense, the _bonâ fide_
investor is the pigeon that is plucked by the speculator. The bulls buy
in the fond hope that the investor will come in and relieve them of
their stock; and the bears sell securities which they do not possess,
trusting that investors will also sell, thereby enabling them to buy
at a low figure and to pass on their securities at a profit to those
to whom they have previously sold. The position is therefore often an
artificial one, created by operators for the rise or fall, and the
investor, unless he thoroughly understands the markets, is like a
pigeon among hawks.
The larger the number of members of the House, the greater is the
risk run by the investor who deals with a small broker; and as the
investment business of the country flows largely in a particular
channel, it is more than probable that, unless the Committee decides to
admit new members sparingly, a large number of small brokers will one
day be "hammered" after a period of intense excitement.