THE ROYAL COMMISSION'S VIEW
Perhaps the most important event which ever affected the Stock Exchange
as an institution was the inquiry into its constitution and customs by
the Royal Commission, which was appointed in 1877. Not only was that
event of much historical interest from the Stock Exchange point of view,
but the report issued by the Royal Commission is a document which, even
to-day, possesses interest and importance as throwing light upon the
methods of the institution as seen by an independent body most competent
to examine into its affairs and comment upon them. The report still
possesses importance because the constitution and customs of the Stock
Exchange are, to all intents and purposes, much the same now as they
were then--it brought about no important alteration, for on the whole it
proved to be a vindication of the Stock Exchange as the Royal
Commissioners found it. Some minor recommendations for reform were
adopted by the Stock Exchange itself, or have been adopted since the
report was made; and one or two sweeping recommendations have been
ignored, with the result that the Stock Exchange is now as it was then,
and in that sense the report is quite up to date. In fact, the report
still forms an admirable essay on the constitution of the Stock Exchange
and the conduct of its business.
The Royal Commissioners found that in the main the existence of such an
association and the coercive action of its rules on its members had been
salutary and to the interests of the public. The Commissioners seemed to
incline to the view that the dual control of the institution by the
Managers on the one hand, and the Committee on the other, should be
superseded by the amalgamation of the two bodies. The Commissioners
expressed the idea that matters were tending in that direction--and they
are still so tending, especially since the enactment of the rule making
it obligatory for new members to purchase one or more shares in the
Stock Exchange.
The Committee, it was found, acted uprightly, honestly, and with the
desire to do justice in the administration of the rules. These rules
were capable of affording relief and exercising restraint far more
prompt and often more satisfactory than was the law of the land. A
suggestion had been made that the Committee should be assisted in its
deliberations by an outside assessor or assessors, especially in cases
of important questions involving the personal interests of
fellow-members and others; but the Commissioners preferred the Committee
as it is, on the ground that the members understood the complicated
questions to be decided much better than any outsider would understand
them, and that it was necessary in most cases that the decisions should
be very prompt and complete. Similarly the Commission preferred the
present practice of the Committee in arriving at its decisions to the
proposed subdivision into special panels for special subjects.
The Commissioners reported that they were persuaded that the
apprenticeship served by a clerk who eventually became a member on his
own account carried with it a promise of future success. At that time
such apprenticeship was not compulsory, and the recent alteration in the
rules compelling every would-be member to serve the apprenticeship would
doubtless have given much satisfaction to the Commissioners. As a matter
of fact, the Commission recommended that in the case of the election of
new members there should be a substantial inquiry into their character,
position, and general fitness, and that the inquiry should be real, not
covered by the answers to the formal questions required by the rules. It
thought that such inquiry could better be carried out by a small
sub-committee, in spite of its objection to the general idea of dividing
the Committee into panels. It further recommended that the guarantee of
the sureties should be extended from two years to four years. There is
now a subcommittee for the election of new members, and the guarantee
does now extend over four years.
As to the Stock Exchange principle that members should be entitled to
look to the members with whom they dealt as if they were principals,
quite apart from their engagements with outsiders, the Commission held
that this had the merit of enabling the Committee with its absolute
power to enforce bargains and adjust disputes with speed and facility.
The public were not injured by such a system so long as the legal rights
and liabilities of the member in relation to the principal outside were
not extinguished or affected. No rule of the Stock Exchange ought to be
allowed to qualify or destroy that legal relation.
On the question of the abolition of the jobber, which has frequently
been mooted, the Commission found that his existence was of extreme
value to the public, attributing to the facilities for business which
the system provided the fact that orders given on provincial exchanges
or foreign bourses were constantly sent to London. But in cases of
inactive securities, in which the jobber was unwilling to make a price
in the ordinary way, the Commission recommended that a book should be
kept in which brokers could enter their requirements, with a view to
bringing the brokers of buyers and sellers into immediate contact. As a
matter of fact, a board for such a purpose does now hang in the Home
Railway Market, but it is very little used. In the matter of the
facility with which brokers and jobbers transacted their business, the
Commission paid a special tribute to the machinery of the Clearing
Department, which, it said, appeared to answer its purpose of settling a
whole series of bargains, by bringing the ultimate seller into contact
with the ultimate buyer, exceedingly well. Nowadays the Clearing
Department is sometimes subjected to criticism, and its machinery has
broken down more than once, notably under the exceptional strain of the
South African boom in 1895.
The Commission also paid a compliment to the members in general in the
mention of the fact that the absence of a written contract in the
dealings between them had in practice no evil results, and that out of
the millions of bargains transacted in the Stock Exchange, such a thing
was hardly known as a dispute as to a contract or its terms.
Moreover the Commission exonerated the Stock Exchange from the charge
that it encouraged gambling. It found that the members with whom the
purchases and sales of stocks and shares were effected were, in the
majority of cases, entirely unable at the time of executing the orders
to distinguish between those which were made speculatively and those
which were connected with investment. The Commissioners did not think it
practicable to render gambling business any more illegal than it already
was. Those who indulged in it in the Stock Exchange, the Commission
found, were mainly the younger and more necessitous members, and it
suggested that the Committee should hold a restraining hand over them,
meting out severe punishment where extravagant speculation had been
indulged in or encouraged by a member. Closely connected with this
subject was a recommendation as to the readmission of defaulters. It
appeared that during the decade preceding the Commission's inquiry, 265
members had been in default, 116 had applied for readmission, and 105
had obtained it. The Commission expressed the opinion that such a
proportion of readmissions was excessive, and that the rule of the Stock
Exchange should be against the readmission of a defaulter except in very
special circumstances, unless his default had been brought about by the
conduct of others, and not through his own fault. It was also
recommended that when a member was declared a defaulter, the fact should
be communicated to the outside world, and this is now the invariable
custom, a notice being sent to the Press for publication.
In a half-hearted kind of way the Commission also recommended that the
outside world should be admitted to the Stock Exchange, but this
recommendation has never been carried out. The Commissioners declared
that the public was able to rely upon reasonable speed and certainty in
the transaction of business, and that there was as small a difference
between the buying and the selling price of a security as could be
obtained in any other market; yet they thought that if it were possible
it would be desirable that the House should be open to the public, not
because it would give a client any real control over the deal which his
broker was carrying out for him, but because it might remove certain
jealousy and suspicion which was created in some minds by the privacy of
the House. Even in putting forth the suggestion thus mildly, the
Commission admitted that the building was hardly adequate to the
accommodation of its members, and that business might be impeded if
strangers were admitted.
The question of the commission charged to the public by the brokers was
brought before the Commissioners, but they refused to report in favour
of an official fixed tariff, or against sharing commissions with
runners, or against the practice of taking a double commission on
certain transactions; but they expressed the opinion that where the
commission was so divided, or a double commission was so earned, the
client should be informed of the fact. As has been shown, this question
of double commissions is closely connected with the question of the
distinction between the broker and the jobber, and this distinction met
with entire approval in the Commissioners' report.
On the vexed question of dealings in shares before allotment, the
Commission gave the Stock Exchange Committee the credit of having done
all that could be expected to cope with it. The Commission attributed
the scandals which had arisen, however, to the system under which the
Committee first permitted such dealing to take place, and then, when
unfair advantage was taken of the permission, refused to enforce the
completion of the deals by fixing the special settlement. The Commission
had been informed by the representatives of the Stock Exchange that
although the Committee would persist in enforcing the fulfilment of
bargains in shares before allotment, as debts of honour, even although
such bargains were declared by the law of the land illegal, yet, if they
were so declared, the rules of the Stock Exchange would be made to
conform to the new law. Accordingly the Commission recommended
legislation prohibiting dealings before allotment under sufficient
penalties--a recommendation which it has hitherto been found
impracticable to adopt.
The question of quotation in the Stock Exchange Official List came in
for a good deal of attention at the hands of the Commission. It was not
satisfied with the investigation which the Committee made before giving
securities a place in the list. It was not that the investigation lacked
thoroughness; on the contrary, the Commission seemed to find that the
investigation went too far, with the result that inclusion in the
Official List gave the security in the mind of the public a stamp of
soundness, stability, and genuineness to which it was not entitled. The
Commission was of opinion that the investigation should be only into
mere formalities, and that it should be made abundantly clear to the
public that admission to the list meant nothing more than that the loan
or company had complied with these formalities--that its appearance in
the list had nothing to do with its desirability from the point of view
of the investor. The Commission admitted that the somewhat fuller
investigation which the Committee made was of use, and had in many
instances been the means of detecting fraud; but it held the view that
whilst it was the duty of the Committee to find whether the security was
fit to be quoted in the list and placed in the market, it was not its
duty to give it the stamp of being a desirable investment. The
Commission went so far as to suggest that if any inquiry into the
stability and soundness of a stock were deemed necessary for the public
protection, such inquiry ought to be undertaken by some public
functionary and enforced by law. The Commission also made some
recommendations of minor importance as to the manner in which the prices
were quoted in the Official List, but its suggestion that a public
functionary might be appointed to determine what securities were fit for
public transactions was one of the boldest in its report.
Finally the Commission recommended that the Stock Exchange should be
incorporated! This was quite revolutionary in its boldness, and it was a
distinct recommendation, not a mere suggestion. The Stock Exchange, the
Commission thought, should be incorporated by Royal Charter, in order to
give permanence to the admittedly excellent rules by which the body was
governed. At any election, the Commissioners held, the Committee might
be reorganised by the whim of a majority of members, and its existing
rules, as well as any further reforms that might be wrought, might be
repealed. The Incorporated Stock Exchange, it proposed, should remain
governed as it then was, but subject to the provision that no alteration
in the rules and regulations should become operative until approved by
the President of the Board of Trade or some other competent public
authority. At the same time, this outside interference, it was
recommended, should be exercised with a sparing hand. Any attempt to
reduce the rules to the limits of the ordinary law of the land would, in
the opinion of the Commission, be detrimental. The Commission seemed of
opinion that the Stock Exchange would welcome incorporation, but it
proposed, apparently as a kind of sop, that if it accepted the
recommendation it might well be granted a monopoly of stockbroking--in
other words, it proposed that if the Stock Exchange were incorporated it
should have the exclusive right of licensing people to act as
stockbrokers, which, of course, would do away with the outside broker
altogether. In any case the Commission seemed to deem it very important
that all stockbrokers should be licensed. They used to be so licensed in
the City of London by the Corporation, but by degrees the control of the
Corporation was broken down. In the event of the Stock Exchange refusing
incorporation, the Commission recommended that some public
functionary--it seemed fond of public functionaries--should be appointed
to exercise authority and discretion in granting and withdrawing
stockbrokers' licences, both to members of the Stock Exchange and to
others.
This report of the Commission was by no means unanimously approved by
the dozen Commissioners, of whom four signed it with stated
reservations. One principal point of objection was the proposal to
legislate against dealings before allotment, which it was contended
would stop a vast amount of legitimate business because a few
exceptional cases of abuse had arisen. Another principal objection was
to the proposal to appoint a public functionary to supervise quotations
in the Official List, it being contended that no functionary would be
equal to the task of saying what were sound securities, and that the
Stock Exchange Committee made no attempt so to do in granting a
quotation. Another objection was to the proposal that the Stock Exchange
should be incorporated, it being contended that the Stock Exchange had
flourished, and had performed its functions as a voluntary association
in a manner which had commanded the entire confidence of the public. It
will be observed that the reservations rather than the report itself
have prevailed.