THE SETTLEMENT
Although in some cases Stock Exchange transactions are done for money
and settled by immediate transfer or delivery of securities in exchange
for payment, the vast majority of bargains are made for the current
account and arranged at the next settlement. The Stock Exchange
settlement extends over three days, and at one o'clock on the first of
the three--one o'clock in theory, but earlier in practice--the old
account ends, and business subsequently transacted falls into the new
account. The length of an account is generally about a fortnight, a
settlement occurring about the middle of each month and again at the
end. But British Government securities and India stocks are not dealt
with at the general fortnightly settlement; they have a special
settlement of their own, the Consol settlement, occurring once a month,
about the beginning.
In the course of each settlement there are three distinct operations, to
each of which is devoted one of the three days. The first day is
Contango or Making-up day, the second is Ticket or Name day, and the
third is Settling or Pay day. For shares dealt with in the Mining Market
there is an additional Contango day, on the business day preceding the
commencement of the settlement in other securities, making the mining
settlement actually extend over four days. If the business day should be
a Saturday, then the Friday is the additional Contango day, so that the
mining settlement extends over six days.
Contango day is the day on which members, who wish to postpone
settlement of their bargains, carry them over to the following account.
On the next day, Ticket day or Name day any member who intends taking up
registered securities that he has bought during the account, has to hand
to the member from whom he made the purchase a ticket bearing the amount
and name of the security bought; the name, address, and description of
the transferee, that is, the buying member's client, the price, and the
date and the name of the member to whom the ticket is issued. This
ticket is really a demand for the due delivery of the securities
purchased. Now it often happens that the member to whom this ticket is
handed is not in possession of the securities he has agreed to deliver,
having bought them during the same account from some other member. In
this case he endorses his seller's name on the ticket and passes it on.
The ticket thus gets handed on from seller to seller until it ultimately
reaches the member whose client actually has the securities and intends
to deliver them.
This process of passing tickets is greatly facilitated by the operation
of the Settlement Department or Clearing House. It is not every member
of the Stock Exchange who belongs to the Clearing House, nor is it every
security that enjoys the benefit of its operations. But in cases where
it can be used, this is the process. On Contango day each member
prepares a "clearing sheet" for each security in which he has dealt.
This sheet may, of course, show many sales and many purchases, each to
or from a different member, but all that the member who has prepared the
sheet has to concern himself about--in so far as the securities are
concerned, and it should be noted that the Clearing House only clears
securities, not money--is the delivery or receipt of the difference
between his sales and his purchases; the Clearing House does the rest.
If, for instance, a member's sheet shows that he has bought a total of
£6,000 of a certain stock, no matter in how many different bargains with
different members, and has sold £5,000; then, instead of a separate
ticket having to pass through his hands for each separate bargain, the
Clearing House discovers from the other sheets some member who has sold
£1,000 more than he has bought of the particular stock in question. The
passing of the stock is then adjusted by bringing these two members
together. The way in which all bargains which come within the Clearing
House are cleared off can be easily grasped when it is recognised that
for every bargain there are both a buyer and a seller. But the Clearing
House has nothing to do with the adjustment of the different prices at
which securities are bought and sold. In fact, all bargains dealt with
by the Clearing House are passed through the accounts at a fixed price,
the "making-up price," and the securities have to be paid for at that
price. The settlement of differences has to be arranged in the accounts
between member and member, and this brings us to the business of the
last day of the settlement, Pay day, the real day of settlement.
On this day all differences have to be paid, and all members who have to
deliver securities must be prepared to hand them over in exchange for
payment, although in the case of registered securities a further period
of ten days is allowed for delivery. Now it is laid down as a rule of
the House that all differences must be paid by a cheque on a bank which
is a member of the Bankers' Clearing House. By this rule it is secured
that every member has both to pay and receive differences at the same
time, and the differences which a member receives are directly pledged,
as it were, for payment of those he has to give. No grace is allowed for
payment of differences, and a member who is unable to meet his
engagements is at once declared a defaulter. In the case of the delivery
of securities, ten days' grace is allowed after the settlement, as has
been mentioned. When a seller has not within the ten days delivered the
securities he has sold, the purchaser can have an equal amount of the
same securities bought in by an official of the Stock Exchange. This is
done by open auction in the House at the lowest price at which the
securities are offered. The seller who has failed to complete his
bargain has, of course, to bear any expense incurred, and has to pay the
difference if the buying-in price exceeds the price of the original
bargain. Conversely, as we have seen, when a member who has sold stock
does not receive for some reason or other a name into which to transfer
it within the appointed time, he may resort to the process of selling
out.
This outline of the procedure at a settlement is a general one, and
applies to the bulk of Stock Exchange bargains. It has exceptions,
however. For instance, securities to bearer are dealt in without any
passing of tickets. But the main principles remain the same in all
bargains done for the account; and it needs no further explanation to
demonstrate how greatly the fixed fortnightly settlement facilitates
Stock Exchange transactions. Briefly it means that all sellers of stock
agree to deliver on the same day, upon which the buyers are prepared to
take it up and pay for it; and that when there have been many dealings
between members in the same stock, it is only the balance that has to be
transferred.
Bargains in the scrip and securities of a new loan or company are
consummated at what is called the "special settlement." Members of the
Stock Exchange can buy and sell between themselves and outsiders to
their hearts' content, but although there may be mutual arrangement for
payment of money and delivery of stock, from the point of view of Stock
Exchange law no payment need be made and no shares delivered until the
special settlement. The Stock Exchange Committee appoints the special
Settling day on the application of members interested in bringing about
a completion of the bargains. Before it will fix the day, the company,
the bargains in whose shares have to be settled, has to comply with
certain formalities to the satisfaction of the Committee. The Committee
requires certain documents showing that the company has been
incorporated, on what terms the shares have been issued, how many have
been issued to the public in proportion to the amount of the company's
capital, and so on. It has also to be shown that the share certificates
have been issued, or that they are, at least, ready for issue, for
obviously it would not do to compel the delivery of and payment for
share certificates which have not yet appeared.
The formalities seem simple enough, and yet there is very frequently
considerable delay, giving rise to much protest, in the granting of a
special settlement. In the majority of cases, this delay seems to arise
from the desire of some of those connected with the company to put off
the day of reckoning. They may have been buying the shares heavily in
order to make the company cut an attractive figure in the public eye at
its outset, and may not be over-anxious for the settlement day to arrive
before they have had an opportunity of unloading the shares they have
bought. At all events, the difference between the long time it takes to
obtain a special settlement in the shares of some out-of-the-way mining
company, and the short time it takes to obtain one in the case of some
great Government loan not subjected to manipulation, is often
remarkable. Generally speaking, bargains in the shares of new companies
and loans are done for the special settlement, and if no special
settlement is granted, these bargains are off; but the instances in
which the Stock Exchange Committee refuses a special settlement are very
rare indeed. When once a special settlement has been granted and taken
place, bargains in the securities are settled at the ordinary Stock
Exchange settlements as they occur; in fact, a special settlement is
merely a first settlement.
The special settlement is a necessary preliminary to official quotation,
the formalities in connection with which are explained in a subsequent
chapter. As will be seen, only a small proportion of the securities in
which transactions occur are officially quoted, but no official
quotation is granted until after the special settlement has taken place.