THE BILL-BROKERS
The business of the bill-broker is one that has grown up during the
past century—chiefly during the latter part of it. A bill-broker
acts the part of an intermediary between banker and merchant. At
first glance the need of such an intermediary is not very apparent,
considering the large number of banks now in existence which keenly
compete for business. On looking further into the matter, however,
the importance and utility of the bill-brokers, both to banker and
merchant—that is, to those who wish to buy bills and those who have
them to sell—become apparent.
To undertake the business of discounting bills successfully great
knowledge and discrimination are necessary; knowledge that can only be
obtained by experience, and discrimination by keeping in touch with
the changes occurring in the standing and position of the mercantile
and financial community. As with the rest of the world, merchants
and financiers do not stand still; they progress or they fall back.
Many bills which in 1893 would have been treated as first-class paper
are now, in 1903, looked at askance; while the acceptances of many
firms who were unknown ten years ago are now readily taken. It is the
business of the bill-broker to keep himself thoroughly informed of the
“standing” and “position” of the mercantile community, so that he can
readily discriminate good bills from doubtful ones.
A bill-broker does not confine his operations to what is called “bank
paper”—that is, to bills accepted or endorsed by one of our well-known
banks or leading finance houses—but he is prepared to deal in bills
accepted or endorsed by members of the ordinary mercantile community,
provided he is satisfied as to the position of the parties whose names
appear on the bills. These latter bills are called “trade bills.” The
rate for discounting such bills is always somewhat higher than the rate
for bank paper because of the slightly greater risk.
The bankers of the present day discount a large number of bills for
their customers in the ordinary course of business. Bills obtained
from this source, however, do not meet a banker’s requirements in
several particulars. For one thing, the amount of bills offered
directly to bankers for discount is not sufficient, as a general rule,
to satisfy their demands; and, moreover, a banker has no power of
regulating the supply of bills offered to him in this way. One day he
may be asked to discount bills to a very large amount, when he is not
anxious to increase the amount of his holding of bills; on another day
he may wish to increase his holding, but none may come forward. And
lastly, with bills offered for discount by ordinary customers a banker
has no power of so picking his bills that he can ensure having a large
amount of bills maturing at any given period, when he anticipates that
he will require to increase his cash. But all these conditions can be
met by dealing with the bill-brokers. A banker can obtain bills to any
desired amount from the bill-brokers, he can regulate the supply of the
same according to his wishes, and he can stipulate that the bills sent
in by the bill-brokers are to mature within any given time—thirty days,
sixty days, ninety days, and so on; and he is thus in a position to
provide automatically for an expected demand for cash at certain times,
by the maturing of bills.
Bankers therefore find it easier, and, owing to the broker’s
specialised knowledge of the position of parties, on the whole safer,
to buy bills from the bill-brokers than to try to obtain directly all
that they require. Bills so purchased possess a further advantage, for
not only are they secured by the names on them, but, in addition, they
usually carry the guarantee of the bill-brokers as well; and this, when
dealing with large and wealthy firms, is a distinct advantage. It must
also be remembered that there are a large number of banks—principally
country banks—who are so situated that in the ordinary course of
business they never have what is called “A1 paper” offered to them for
discount, and yet they require to invest a certain amount of their
funds in such bills. These institutions of necessity make use of the
bill-brokers to satisfy their needs.
In consideration of the bill-broker’s guarantee, and of having had the
advantage of his knowledge in selecting and collecting bills, a banker
is content to buy bills from a broker at a slightly lower rate than the
ruling market rate, usually ⅛th or ¹/₁₆th per cent. per annum lower.
For instance, if bank or first-class paper is quoted in the market at
2⅜ths per cent. per annum for bills due in three months’ time, bankers
would buy such bills from the broker at 2¼ per cent. The broker thus
makes a turn of about ¹/₃₂nd per cent. on the deal, but in active times
this “turn” is often divided with the merchant from whom he buys. This
profit may seem small, but when the enormous turnover of a bill-broker
is taken into consideration, it is apparent that the total profits
derivable from this business are very considerable. This is confirmed
by the satisfactory dividends paid by the two or three public companies
conducting discount business.
Looking at the other side of the question, persons who have good bills
to discount find they have a readier market in the bill-brokers than
in the banks, and practically all the first-class bills throughout the
country find their way to the London market for discount.
In order to keep their connection, bill-brokers must be prepared to
do business in good bills at any time, to practically any amount; and
to be in a position to do this, they rely either on borrowing the
necessary funds from the banks, or on selling some of their stock of
bills in hand to the banks. The interest on the call and short-notice
money borrowed from banks is on an average materially lower than the
rates at which bills are discounted, and consequently a profit is made
by the bill-broker (who holds the bills he buys), of the difference
between the two rates; and when bills are sold to the banks a turn is
made on the transaction, as we have already seen. Competition among the
various brokers, however, is always tending to keep down rates, and
consequently the profits of the business.
Bill-brokers also buy very large amounts of trade bills from colonial,
and in some cases foreign banks, which are endorsed by the banks in
question. These bills, when not held by the brokers, are sold to
various banks throughout the country, and of course form a first-class
security. It may be mentioned that it is not the custom now for any
London bank to rediscount bills which they may have discounted for
their customers, and only in very rare instances do country banks adopt
this course, though the names of two or three of such sometimes appear
as endorsers.
Unlike a banker, a bill-broker has to pay interest on all his working
funds, and this makes him anxious always to utilise those funds to
their fullest extent. Unlike a banker also, he has no large reserve
of idle funds to keep for meeting sudden demands. Should such demands
arise, he relies on being able to borrow from banks or elsewhere,
sufficient funds to meet those demands, or, as a last resort, to obtain
assistance from the Bank of England.
As regards the funds with which the bill-brokers conduct their
business, we have already seen that they are largely borrowed from
various banks. The business is very simple, and is marked by an absence
of any kind of red tape. Every morning the representatives of the
brokers call on the banks with which they do business, and ascertain
whether the latter wish to lend any more money, or if any of the money
already borrowed is required to be repaid; at the same time usually
arranging the rate to be paid for money. They also ascertain if the
banks wish to buy any bills, and arrange the rate for such business.
In the case of money being lent to a broker, he simply sends in
security to cover the advance, and draws a cheque on the banker for the
agreed amount. In the case of money being “called in” by a banker, the
broker sends in his cheque on some other banker for the sum called, and
takes away a corresponding amount of security.
The securities deposited by bill-brokers for loans of this class
consist either of first-class bills or what are known as “floaters.”
“Floaters” are bearer securities of the highest class, such as Consol
certificates, the debentures of certain Indian railways, the bonds of
the Corporation of London and the London County Council. They obtain
the name of “floaters” from the fact that they float from bank to bank,
as one bank calls and another lends.
In the case of a banker buying bills from a broker, the broker sends
in a parcel of bills which roughly amount to the agreed figure, and
draws a cheque for the amount less the discount. It is not usual for
brokers to endorse the bills they so sell, but they give the banker a
continuing guarantee in respect of all the bills which he may buy from
them from time to time.
It frequently happens at certain seasons of the year when there is a
pressure for money, or on special occasions—such as on the issue of
a big public loan, when a large amount of bankers’ floating balances
is temporarily withdrawn—that heavy demands are made on brokers to
repay money they have at “call” from the bankers. The brokers are then
placed in the position of having large sums to repay, and as none of
the banks are lenders, they are forced to apply to the Bank of England
for assistance. The brokers are then said to be “in the Bank,” and they
usually try to get out as soon as they can, in order to escape the
higher interest there demanded from them. Formerly the Bank of England
declined to discount any bills for brokers and would only make them
temporary advances. This rule, however, is now relaxed, and the Bank
will either discount approved bills at the “official” rate, or make
temporary advances. The bills discounted with the Bank of England are
not supposed to have more than sixty days to run before maturity, and
must bear the names of at least two British firms, one of which must be
the acceptor.
The advances made by the Bank of England are not at “call,” as with
other banks, but for a fixed number of days, never less than three, and
sometimes for as many as ten. The rate charged varies from Bank Rate to
½ per cent., or even 1 per cent., above that rate.
It follows from this that when brokers have to obtain assistance from
the Bank, the rate for money in the open market at once begins to
stiffen, as demand exceeds supply; and if any considerable amount has
to be borrowed from the Bank, the outside rate will rise until it is on
a level with the Official Rate; or even slightly higher, if the Bank is
charging above the Official Rate for its advances.
Generally speaking, the aggregate amount of money from all sources
available for the use of the market keeps approximately at a level
figure, but a portion of it is not always in the same hands; and it is
this shifting balance of market money which really controls the rates
charged for the use of the whole of the money. If this shifting balance
finds its way into the Bank of England, all rates harden, owing to the
competition among brokers to obtain money without applying to the Bank.
On the other hand, if the shifting balance passes into the coffers of
the bankers, the competition among them to lend their funds will tend
to reduce the rate of interest which can be obtained for the use of the
money.