FAILURES
When a member of the Stock Exchange cannot fulfil his engagements, even
if his position is brought about through no fault of his own, but by the
default, say, of an important client, he may command much sympathy from
his fellow-members, but this sympathy must not take practical form.
Sometimes he does receive aid, but if so it is attended with
considerable risk both to himself and to those who aid him, for the
rules of the institution are most strict on the subject. The idea is, of
course, that no member who is insolvent shall be encouraged to struggle
against fate, for such a struggle usually means a plunge into wild
speculation, making the last state of the Lame Duck worse than the
first. When a member of the Stock Exchange finds that a fellow-member,
who is his debtor, cannot meet his engagements, it is his duty, far from
giving him time or any other consideration, to report the fact to a
member of the Committee, and with the utmost celerity inquiry is made
into the truth of the statement, and the insolvent member is immediately
declared a defaulter. The news of insolvency is, as a matter of fact,
very frequently communicated to the Committee by the unfortunate member
himself, so that it does not fall upon his creditors to perform the
unpleasant task.
The process of declaring a defaulter is called "hammering," because the
Stock Exchange waiter, to whom a written announcement is handed, strikes
the desk of his rostrum three times with his hammer to call the
attention of those present to the dread announcement which he then reads
out. As a matter of fact, two waiters perform the ceremony
simultaneously in different parts of the House.
The member who is thus declared a defaulter loses his membership, and
for all practical purposes he becomes in the eye of the Stock Exchange a
bankrupt, his Stock Exchange estate being taken over by the two
functionaries called the Official Assignees. He is by no means a
bankrupt, however, in the ordinary sense of the term. His creditors in
the Stock Exchange never make him a bankrupt legally, preferring, of
course, their own arrangements for dividing the estate. Any outside
creditor might obviously make him a bankrupt in accordance with the law
of the land, but as a member of the Stock Exchange is not allowed to
carry on any other business, his liabilities outside the House are
usually insignificant compared with those within it. On the other hand,
it is possible, although very unusual, for a member to be made bankrupt
by outsiders, quite apart from his Stock Exchange engagements, in which
case he ceases to be a member.
When a member is declared a defaulter, all bargains which he has open
with other members are immediately reversed at the price ruling at the
time of the declaration of the default, which is called the
"hammer-price."
Suppose the defaulter has sold £100 stock to A at 95, and the
hammer-price is 93, A must sell the stock back for £93, and rank as a
creditor to the estate for the difference of £2. Suppose the defaulter
has also bought £100 stock from B at £95, and the hammer-price is 93, B
must buy the stock back for £93, and hand over the difference of £2 to
the estate. In this way all outstanding bargains are cleared out of the
way, and the Official Assignees, in their administration of the estate,
have merely to pay as big a dividend as they can on the differences out
of the debtor's assets.
Supposing the defaulter to be a jobber, and an outsider has sold £100
stock to him, through a broker of course, at 95. As it has fallen to 93
the jobber owes the outsider a difference of £2, and that outsider
should in theory rank as a creditor for the amount. He would not, of
course, lose any part of his stock, which he does not deliver, but his
attempt to sell the stock has been rendered ineffective; and even if he
was operating as a Bear, he has to rank as a mere creditor for the
profit he would have pocketed had the jobber with whom he was dealing
not failed. The outsider trusted his broker rather than the jobber of
whom he knew nothing, and may feel it a hardship that his order has not
been executed, or that he does not receive straight away the profit
which he has made. To his mind the credit of the Stock Exchange and all
connected with it have sunk to a low level. For such reasons as these,
especially if the client is a good one, the broker, in practice, usually
deems it expedient to bear the loss himself, and to hand over the
profit. Outsiders are not often allowed to suffer by reason of failures
of members of the Stock Exchange.
In the case where it is a broker and not a jobber who fails, the clients
stand to be affected still less by the failure. The bargains open are
between the clients on the one hand and the jobbers on the other, the
broker being a mere agent or intermediary. The bargains are completed in
the ordinary way without the further intervention of the broker, or
another broker is selected to complete them. Cases have arisen in which
the client has actually tried to turn the failure of his broker to his
own advantage by declaring, when prices have moved against him, that the
bargain is off altogether, or by claiming that the transaction should be
closed at the hammer-price, when that price happens to be in his favour.
Litigation has arisen over these points and does now arise; in fact, the
state of the law as regards the relationship existing between outside
clients and the Stock Exchange when its members fail cannot be said to
be very clearly defined. One decision has abrogated another, and it can
scarcely be said that any of the many intricate questions that arise
have been settled definitely enough to carry conviction to the minds of
dissatisfied and litigious clients.
The questions which arise between members of the Stock Exchange
themselves are far more easily settled, thanks to the autocratic power
of the Committee, to which members are amenable. A member does not care
to offend the Committee, even if he feels that the treatment he receives
at the hands of its officials constitutes an unjust hardship. The
defaulter, who has to place himself unreservedly in the hands of the
Official Assignees, giving up his books and so on, may feel less
amenable, especially as he has ceased to be a member of the Stock
Exchange, and has little to gain by obedient acquiescence, but
considerations of the possibility of readmission generally assert
themselves. These considerations are naturally important, because they
mean the resumption of his profession. Any refusal to deliver up books,
or any placing of difficulties in the way of the Official Assignees,
means the postponement of readmission, if it does not render it
impossible.
A defaulter may be readmitted upon application, if the small
sub-committee appointed from the Committee to consider the case finds
that he is entitled to readmission. As a result of an examination of his
books showing the kind of accounts he had open, and as a result of an
inquiry into his conduct preceding and subsequent to his failure, they
report as to whether the failure has arisen through his own speculations
or through the failure of his principals, whether he has been guilty of
any bad faith or breach of the rules, whether the amount involved in his
engagements was in reasonable proportion to his means and resources.
Even where the conduct of a defaulter has been marked by indiscretion
and by the absence of reasonable caution, the defaulter may be
readmitted, but the decision of the Committee as to the readmission must
remain posted in the Stock Exchange for thirty days, and the notice may
indicate whether he is of the class of defaulters who have been brought
down by misfortunes beyond their control, or of the class whose failure
is brought about by rash speculation. In any case, no defaulter can be
readmitted unless he has paid his creditors at least 6_s._ 8_d._ in the
pound from his own resources apart from any moneys that may be
receivable from his sureties. Moreover, the Committee expects that he
shall make up any deficiency at the earliest possible moment until he
has paid 20_s._ in the pound. For this reason the Committee periodically
inquires into his position, and if a readmitted member were to become
very prosperous and yet refuse to pay up his creditors in full, when the
time for his annual re-election came round he might find himself left
outside the fold.