HOW BUSINESS IS TRANSACTED
When the broker, armed with his client's order, goes to the market in
which it can be executed, and confronts the jobber with whom he usually
deals because he finds he does his business best, he asks the jobber to
make him a price in the stock concerned. He does not say he wants to buy
it, for that would tempt the jobber to make the price high; he does not
say he wants to sell it, for that would tempt him to make it low. The
jobber would not, of course, give an out-of-the-way quotation, for the
broker knows the market price almost as well as he does, but he might be
tempted to vary the price by a fraction. As it is, the jobber names two
prices, one at which he will sell and one at which he will buy. Suppose
it were the Deferred Stock of the Midland Railway Company, the jobber
might quote 69-70, meaning that he would buy the stock at 69 or sell it
at 70. The broker would probably think that this price was too wide and
might say so, implying that the jobber ought to be prepared to buy at a
higher price and sell at a lower one. There are jobbers standing near
who would like the business and who would make a narrower price. At
last, without much haggling, for there is little of that in the Stock
Exchange, the quotation 69-3/8-69-5/8 may be obtained. The broker need
not have to ask for the price at all, the jobbers may be shouting that
they are willing to buy or sell at a certain price, or that they are
willing to deal either way. At all events, the broker being content with
the quotation 69-3/8-69-5/8, and being commissioned to buy, informs the
jobber that he buys so much stock from him at 69-5/8.
It is possible that the jobber would rather have bought, but once having
made the price, he must, of course, carry out the transaction. When the
broker confronts him, he may say he is only a buyer or only a seller of
Midland Deferred, but of course, in refusing to deal either way he risks
losing the order. Or he may make a price so wide, especially in a stock
in which there is not a free market, as to protect himself amply. For
instance, while the jobber was quoting 69-3/8-69 for Midland Deferred in
the Home Railway Market, another jobber in the Foreign Market may have
been quoting 74-78 for Servian Bonds. He would not buy them from the
broker's client at a higher price than 74, and he would not sell them at
a lower price than 78. Such a quotation provides an ample margin for
what is called the jobber's turn, that is, the profit he expects to make
by buying and selling the same stock, as a merchant. Wide quotations,
which prevail in stocks that are not often dealt in, and even in stocks
that are in times of panic, merely mean that the price the client has to
pay is high, whilst the price he will receive for the same stock is low.
The more enterprising the jobber, the narrower the prices he will make.
Of course, in making a price the jobber does not undertake to deal in
any abnormal amount of stock. There are limits which are understood
where the broker does not state the amount in which his client desires
to deal. In the case of our Midland Deferred Stock, a thousand pounds'
worth is understood when no amount is mentioned.
However, when the broker signifies that he has bought the stock, nothing
in the way of a voucher passes between him and the jobber. The
transaction may be completed with a nod, the bargain is jotted down by
each party in their respective dealing books, and one of them may,
indeed ought, to mark the price at which the business has been done on a
board provided for the purpose, so that it may appear in the next
edition of the Official List issued to the public. It is very seldom,
however, comparatively speaking, that the price is thus recorded.
Indeed, it is said that many members only record it when they feel they
have made a bad bargain, and want to convince the outside client that
the stock has actually been dealt in at that price. Probably, however,
the omission to mark business done merely arises from a desire to save
time and trouble, and it might occur less frequently if arrangements
were made to obviate the necessity of walking a considerable distance to
one of the boards provided. The bargain is not checked until the next
morning, when, in the room below the Stock Exchange, the clerks of the
jobbers and brokers meet for the purpose.
The first official intimation the client receives that his order has
been executed is the receipt from his broker of a contract note. This
contract note bears the date of the transaction, the name and address of
the broker, and the statement that the amount of stock has been bought
at the price named. To the amount payable by the client for the stock is
added the amount of the broker's commission, called brokerage, and an
item comprising the amounts payable for Government stamp duties and for
registration in the books of the company. The Government stamp duties
are: first, the amount payable on the contract--sixpence on all sums
between £5 and £100, 1_s._ from £100 to £500, 2_s._ from £500 to £1000,
and so on, according to a sliding scale, up to £1 for transactions
exceeding £20,000; and secondly, the tax on the conveyance of ownership,
which is at the rate of sixpence for every £5 up to £25; then 2_s._
6_d._ for each additional £25 or part up to £300; 5_s._ for every
additional £50 or part of £50 afterwards. The registration fee is
charged by the company for the trouble of registering the name of the
buyer in its books, and varies somewhat, but is usually half-a-crown.
The contract note also reminds the client that the transaction is
subject to the rules, regulations, customs, and usages of the Stock
Exchange, and it sets forth the date when the money is payable--the date
of the Stock Exchange settlement.
Until the time of settlement arrives, the client enjoys credit. Although
he is not really the holder of the stock until he has paid for it at
settlement time and received the certificate, he could sell it if the
price rose and pocket the profit--by the way, his broker would charge
him only one commission, for both buying and selling, if he sold the
stock, which he had bought, before the settlement day arrived. The
credit might extend over a fortnight if the stock were bought
immediately after a settlement, or it might extend for only a day or two
if bought immediately before a settlement. At all events, the buyer is
in practical possession of the stock for some time before he pays for
it, and that is why a broker requires an introduction with proper
references, and, perhaps, even security, before he will enter into
transactions for an unknown client. Cases have been known of people
buying stock and carrying out the bargain faithfully, provided they can
sell it at a profit before Settlement day arrives, and thus receive a
cheque through the broker; whereas if Settlement day arrives before the
price has risen, the buyer has vanished.
Another reason why a broker requires an introduction and references is
because of the salutary Stock Exchange rule forbidding him to transact
speculative business for any who are not principals without the
knowledge of their employers. He may deal for such if they pay cash
either with the order or when Settlement day arrives and take up the
securities; but he may not aid them in transactions undertaken merely in
the hope of snatching a profit by the sale of stocks and shares before
they have been paid for. He may not carry over bargains for them from
settlement to settlement in a manner which can be explained now that we
have arrived at the question of Stock Exchange settlements.
If the client does not desire to carry over, the end of the transaction
is promptly brought about. When settlement time arrives, the member who
has bought the stock has to pass to the seller, on Ticket or Name day, a
ticket bearing the name of the transferee and stating the name of the
member who pays for the stock. Reference will be made later to the
settlement and its three days. This passing of the ticket is the first
step in the completion of the bargain, enabling the seller to see to
whom he has to look for the money. If he does not receive the ticket by
a certain fixed time--the hour differs in accordance with the nature of
the security being transferred--he can have the stock sold out through a
special official of the Stock Exchange; that is, he can find another
buyer of the stock to replace the one who has not come forward, and the
delinquent buyer has to make good the expenses and any loss arising from
the process of selling out.
However, the ticket having been passed in the ordinary way, our buyer of
Midland Deferred receives from his broker at settlement time a transfer
form signed by the seller of the stock. This form, in which the deed of
transfer is executed, varies according to the regulations of the
particular company whose securities are concerned. But most companies
now adopt what is called the common form. The terms of the form are
quite simple. The transferor agrees, in consideration of a sum
mentioned, to sell to the transferee so much stock or so many shares in
the undertaking named, and the transferee agrees to accept them, subject
to the conditions on which they were held by the transferor. Both
parties have to sign and seal the document. One main object of having
the signature of the transferee is, of course, to place on record his
acceptance of liability for any uncalled capital which may be attached
to the shares. The duty of preparing the transfer form falls upon the
seller or his broker, and it may be pointed out that the consideration
money named in the deed, as paid by a buyer, is by no means necessarily
the price the seller will receive; the stock may have changed hands over
and over again at different prices, and the amount mentioned is that
paid by the ultimate buyer. It is inserted in the deed because the law
requires that the stamp duty shall be assessed on this amount. For the
benefit of the seller who may be unaware of the reason why he is
required to put his signature to what appears incorrect, a note is
usually appended to the ordinary form of transfer explaining this fact.
Having prepared the deed and obtained his client's signature thereto,
the selling broker proceeds to hand it, with the seller's stock or share
certificate, to the broker of the ultimate buyer, and if these documents
are duly delivered on Settling day, or within the ten days' grace
allowed thereafter, the buyer is bound by the rules of the Stock
Exchange to complete his bargain by handing over the agreed purchase
money. But it sometimes happens that a stockholder has a certificate for
a larger holding than the amount he is selling, and may not therefore
care to part with his certificate. Having sold only part, he prefers not
to give up, even temporarily, the whole. In this case, his broker,
before parting with the transfer, will forward it with the certificate
to the secretary of the company, who will then make a note on the
transfer to the effect that a certificate for stock to the amount
mentioned in the transfer has been deposited at the company's office,
and will forward to the seller a certificate for the balance of his
holding. There are, however, some companies which refuse to certify
transfers in this way, in which case the duty will be undertaken by the
Secretary of the Share and Loan Department of the Stock Exchange, if the
original stock certificate is forwarded to the company through him. This
certification of a transfer, either by the secretary of the company or
by the Secretary of the Share and Loan Department, is by the rules of
the Stock Exchange a valid substitute for the certificate itself.
Although, as far as the seller is concerned, the formalities just
mentioned constitute a valid delivery of the stock, the buyer does not
legally possess the stock until his title has been recognised by the
company. Having properly signed and sealed the transfer form, the buyer
sends it through his broker to the office of the company for
registration, with the stock certificate, unless that has already been
forwarded. In due course he will receive from the company, through his
broker, a stock certificate acknowledging that he has been registered in
the books of the company. He is then the holder of the stock he has
bought.