The stock market

Front matter

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Brigham Young University

Preface

Tuis textbook aims to present, in a comprehensive and nontechnical manner, the numerous services of the organized stock market to the individual investor and to financial and other business enterprises. It also aims to bring together in compact and classified form those facts, principles and practices of the business which enable the student and layman to have a clear understanding of the nature of our organized security markets and the legitimate ways in which they may and should be employed.

To the uninformed, a stock exchange is little more than the spectacular scene that is witnessed from its gallery. This phase, however, by no means represents the real soul of the institution. From our exchanges there radiate numerous, far-reaching influences in the form of enforced regulations, and standardized practices and services, which not only influence vitally every angle of the stock and bond business throughout the nation, but which in their results ‘‘are as broad as the business interests of the country, affect in their most intimate and important business relations all the people thereof, and make our exchanges an integral and inseparable part of the national financial system.’’ The purpose of this volume is to present these regulations, practices and services in their true setting, with a view to clearing away much of the misunderstanding that now exists. It may be added that in 1904 the author inaugurated a course of study at the University of Pennsylvania in ‘‘Organized security and Produce Exchange Markets,’’ probably the

; Vi vi PREFACE first course of this kind to be given in an American | University, and that this volume embodies in large part the conclusions arrived at during seventeen years of teaching of this subject.

The twenty-five chapters of the text are grouped into four distinct parts, dealing respectively with the ‘‘Services of Organized Security Markets,’’ ‘‘The Organization and Operation of the Market,’’ ‘‘Factors Affecting Security Prices,’’ and. ‘‘Legal Principles and Usages Governing the Stock Exchange Business.’’ The first of these parts of the volume is devoted to a discussion of the services rendered by organized stock markets to the business com- _ munity, a subject much misunderstood by the general public. Separate chapters are devoted to the ‘‘Nature and Scope of the Market,’’ ‘‘Nature and Value of a Continuous Market,’’ ‘‘The Discounting Function of the Market,’’ ‘‘The Functions of Short Selling,’’ ‘‘The Regulation of Brokerage Transactions and the Conduct of Brokers,’’ ‘‘The Nature and ete: of Privileges,”’ and “‘ Arbitraging and Its Services.’

Part II of the volume deals with the scientific sacs of organization and operation. Under this heading the several chapters present the essential considerations connected with the legal status of exchanges; the listing of securities; types of dealers, brokers, offers and orders: the quotation service; the technique of a short sale; stock exchange clearing houses; the transfer of securities; the conversion of securities; and the nature and marketing of privileged subscriptions.

Part III of the book relates to an analytical discussion of the fundamental factors which govern prices of securities. The chapters of this portion of the book relate respectively to ‘‘The Money Market in Its Relation to Security Prices,’’ ‘‘Financial Panics and Business Depressions,’’ ‘‘Manipulation,’’ and ‘‘Factors Influencing the

PREFACE Vil

General Level of Prices over Considerable Periods of Time. ’’ 7

The last part of the book is devoted to an analysis of those legal principles and usages governing the stock and bond market with which all who deal with brokers are most apt to come into contact and with which they should be acquainted. Separate chapters are devoted to a discussion of the ‘‘Principles and Usages Pertaining to the Execution of Orders,’’ ‘‘The Legal Nature of a Speculative Purchase,’’ ‘‘Legal Principles Pertaining to the Repledging of Stock En Bloe,’’ ‘‘Extent to which Customers’ Margins and Pledged Securities are Protected,’’ and ‘‘Identification of Securities.”’

Special acknowledgment is due to my departmental colleagues, Professor Robert Riegel, and Assistant Professor H. J. Loman. Professor Riegel very generously assisted me by his constructive criticism and in the assembling of material for certain chapters. Mr. Loman read the entire manuscript and gave the benefit of his valuable criticism. I am also under special obligation to Mr. Loman for his active assistance in the preparation and writing of the chapter on ‘‘Stock Exchange Clearing Houses,’’ a subject to which he has given special study. Many persons connected with the New York Stock Exchange, and other Exchanges, also gave me. valuable assistance throughout the preparation of the volume. To them I desire to express my appreciation for their uniform courtesy and to acknowledge my obligation for the assistance they rendered in explaining practices and in giving other information.

S. S. HuEBNER

PARTS

SERVICES RENDERED BY THE ORGANIZED STOCK MARKET it.

ITT.

LV.

NATURE AND SCOPE OF THE StTocK MARKET ..,

Stocks and bonds contrasted, @2 National wealth represented by securities, 4. Types of markets, 6. Over the counter transactions, 7. Curb markets, 7. Auction markets, 9. General nature of organized stock exchanges, 12. Financial importance of stock exchanges, 16. Volume of listings, 16. Volume of sales, 17. The organized security market a world market, 19.

NATURE AND VALUE OF A CONTINUOUS MARKET . . Meaning of continuous market, 21. Factors producing a continuous market, 21. Benefits derived from a continuous market, 23. Mobility given to property, 23. Constant quotations given for the benefit of security owners and creditors, 23. Reliance of owners of securities for prompt conversion of holdings into cash, 24. Reliance of creditors for prompt liquidation of collateral, 24. Arbitraging made possible, 25. Operations of odd-lot dealers facilitated, 26. Use of stop orders rendered feasible, 27. Favorable influence exerted upon the money market, 28.

THE DISCOUNTING FUNCTION OF EXCHANGE MARKETS

Exchanges as clearing houses of current news, 31. Protects holders of securities and harmonizes quoted prices and actual values, 32. Standardizes values and directs the flow of capital from unprofitable to profitable channels, 34, Discounting of future business conditions, 36.

THE FUNCTIONS OF SHORT SELLING .... .

General nature of the short sale, 40. The stabilizing and discounting functions of short selling, 42. Other functions of short selling, 44. Owners of securities unable to deliver at once, enabled to sell the same and borrow for purposes of delivery, 45. Hedging of dangerous market positions made possible, 46. Opera-

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VII.

ORGANIZATION AND OPERATION OF THE MARKET

VIII.

tions of odd-lot dealers facilitated, 46. Work of specialists facilitated, 48. Arbitraging between different markets made possible, 48. Arbitraging in privileged subscriptions made possible, 49. Owners of ‘‘rights’’ enabled to dispose of the same at once, 50. Arbitraging in convertible securities made possible, 50. Continuous character of the market greatly increased, 51. Functions of short selling in the produce market, 51.

REGULATION OF BROKERAGE TRANSACTIONS AND THE

CONDUCT: OF BROKERS: 57-7 ansehen. ee rae Importance of such regulations, 58. Admission requirements, 59. Rules against fraud and manipulation, 60. Prohibitions against bucket shops and the bucketing of orders, 61. General rules governing practices contrary to just and equitable dealing, 65. Rules governing the conduct of business, 66.

OPTIONS AND THEIR FUNCTIONS. . ROACH. piiclicns Definition, 69. Types of options explained, 70. ‘*Calls,?’) T1. “So Putey ? ef cie ee oeien, 2 72. American and London options contrasted, 73. Uses of options, 74. Attitude of the courts towards options, 80. Factors determining the price of options, 81.

ARBIDRAGING: 29 5) 1. uc uee mi cin: oleae me eee | Definition and general nature, 84. Stock exchange regulations concerning, 85. Description of New York—London arbitraging, 87. Conversion of London into New York prices, 90. Methods of closing transactions, 91. Factors necessary to successful arbitraging, 93. Beaefits resulting from arbitraging, 94. Prices leveled in the various markets, 95. Settlement of international debts facilitated, 96. Markets rendered more continuous, 97.

PART II LEGAL STATUS AND ORGANIZATION OF STOCK Ex

CHANGES el gas outa ja: Me Sse Marae nce Private character of American Stock Exchanges, 101. Importance of this private character explained, 102. Property rights possessed by Exchanges, 103. Control of exchanges over quotations, 103. Nature of a seat on an exchange, 105. Preference of exchange members to the proceeds of defaulting members, 107,

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Legality of such preference, 108. The Government of exchanges, 110. Duties and powers of standing Committees, 111. Suspension and expulsion of members, 113.

LISTING OF SECURITIES . .. iM

Definition and importance of tne, 116. Aresecheen: tions concerning the purpose of listing, 117. <Advantages of listing, 119. Listing requirements of the New York Stock Exchange, 123. As regards organization of the corporation and the nature of its securities, 124. Description of the property, 125. Hngraving of securities, 126. Printed text of securities, 127. Transfer and registry, 129. Papers to be filed with applications, 130. Agreements to be observed by corporations applying to list securities, 131. Listing of securities of re-organized corporations, 132. Listing of additional amounts of listed securities, 133. Modus operandi of listing, 134. Removal or suspension of securities from the list, 137. Progressive development of listing requirements and suggested changes, 139.

. TYPES OF DEALERS AND BROKERS AND THEIR WORK

Types of dealers, 143. Floor traders, 144. Odd-lot dealers, 144. Specialists, 147. Arbitragers, 148. Types of brokers, 148. Commission brokers, 149. Floor brokers, 149. Money brokers, 150. American and London systems compared, 151.

Types of bids and offers classified, 154. itaiera? or sellers’ options, 154. Regulation of bids and offers, 156. Types of orders classified with reference to the price limits used, 158. Nature and use of stop orders, 159.

Definition of short selling, 164, neotaiiia eechera of short selling summarized, 164. Principles governing the short sale in the stock market, 165. Nature of the order to sell short, 166. Nature and terms of the loan transaction, 166. Rights and duties of the broker in conducting a short sale, 170. Customer’s liability to protect the broker, 171. Termination of the transaction by the customer, 172. Detailed operation of the short sale illustrated, 173.

Importance of speed in transmitting MGotet ona) 179. The ticker service, 180. Use of abbreviations, 181.

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XV I.

Other agencies for the distribution of quotations and financial news, 184. News tickers, 184. News bureaus operating a bulletin service, 184. Communication by telegraph, telephone and cable, 185. Newspapers, 186. Trade journals and market reports, 187. Market letters, 188. Stock exchange regulations of quotations, 188. Non-official character of quotations, 189. Legal control of quotations by stock exchanges, 189.

Stock EXCHANGE CLEARING HOUSES ...

Origin of stock exchange clearing houses, 192. General purpose of American stock exchange clearing houses, 193. Legality of clearing houses, 194. Management and organization of the New York Stock Exchange Clearing House, 196. Method of clearing securities explained, 197. Comparison of transactions, 198. The clearing sheet, 201. Use of settlement prices in the delivery and receipt of stock balances, 206. Tickets for delivery or receipt of stock balances, 210. Preparation of ‘‘allotment sheets,’’ 212. Delivery of balances, 214. Clearance of loans, 219. Advantages derived from stock exchange clearing houses, 221. Methods adopted to assure secrecy, 224. New York Stock Exchange Clearing system contrasted with other systems, 226.

Stock exchange rules designed to secure uniformity and to eliminate unnecessary risk, 231. Negotiability of stock certificates, 233. Use of assignment and power-of-attorney executed in blank, 235. Use of detached assignment, 238. Rules relating to the assignment, transfer and registration of stock, 240. Guaranty of signatures by brokers, 243. Transferring of stock illustrated, 244. Method of effecting transfer of stock by corporations, 247. Replacement of new for loss certificates, 248.

CONVERSION OF SECURITIES .

Definition, 250. Principal conditions governing the conversion privilege, 250. Conditions prompting the issuance of convertibles, 251. Price movement of convertibles, 253. Reducing current quotations of bonds and stocks to a common basis, 255. Accumulated dividend tables, 256. Ascertaining the conversion equivalent, 258. Use of conversion tables, 259. Arbitraging in convertibles, 262. Adjustment of fractional shares where issues do not convert evenly, 264.

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XVII.

PRIVILEGED SUBSCRIPTIONS oR ‘‘RIGHTS’’ ...

Definition, reasons for, and importance of, 267.

Meaning of the term ‘‘rights’’ on various exchanges, 268. Computation of the mathematical value of ‘‘rights,’’? 269. Meaning of the terms ‘‘rights on’’ and ‘‘ex-rights,’’ 271. Extent to which privileged subscriptions are discounted by the market, 272. Procedure followed by corporations in offering ‘‘rights,’’?’ 274. Methods which stockholders may adopt in disposing of their ‘‘rights,’’?’ 278. Sale of ‘‘rights’’ at the time of announcement, 278. Sale of original holdings equivalent to the number of new shares obtainable on the ‘‘rights,’’ 279. Sale of the new shares when issued by the corporation, 280. Short selling of outstanding stock, and completing the sale when the new shares are issued, 281. Arbitraging in ‘‘rights,’’ 282. Extent of profits derived from privileged subscriptions in case they are held over a series of years, 284.

PART II

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FACTORS AFFECTING SECURITY PRICES AND VALUES

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XX.

THE MoNEY MARKET IN [TS RELATION TO SECURITY

PRICES tO SU MI ek eee OR ek ee Price movements and price factors classified, 289. Prices of individual securities ultimately controlled by intrinsic earning power, 290. Relation between the security and money markets, 292. The large volume of margin transactions, 292. The practice of overcertification, 293. Arbitraging in interest rates, 294. The large volume of demand loans based on stock and bond collateral, 294. Various bank statements issued, 295. Nature of the New York weekly clearing house statement, 297. Various forms in which the New York weekly statement appears, 298. Interpretation of the most important items of the bank statement, 300.

FINANCIAL PANICS AND BUSINESS DEPRESSIONS The cause of panics and depressions, 306. Effect of panics and depressions on stock market prices, 307. Importance of the ‘‘ factor of safety,’’ 312. Periodicity of business depressions, 313. The trade cycle described, 314. Barometric indices of trade, 321,

MANIPULATION OF SECURITY PRICES ....

Relative importance of the factor, 324. Fraudulent methods of manipulation, 324. Circulation of false

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(4 SITIES

LEGAL

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XXIII.

XXIV.

information, 324. ‘‘Wash sales’’ and ‘‘matched orders,’’ 325. Manipulative campaigns planned with reference to future conditions, 327. Manipulation designed to make a market for new securities, 330. ‘‘Technical position’’ of the market, 331. Corners, 332. Definition and general nature of corners, 332. Illustrations of corners, 334, Corners in produce markets, 339. Illegality of corners, 340.

Factors INFLUENCING THE GENERAL LEVEL OF PRICES

OVER CONSIDERABLE PERIODS OF TIME : Increasing commodity prices, 343. Effect of increasing gold supply, 344. Effect of increasing commodity prices on bonds and preferred stocks, 345. Effect upon the common stocks of railroads and most public service corporations, 347. Effect upon the common stocks of industrial corporations, 348. Crop prospects in their relation to security prices, 349.

Part IV Page

PRINCIPLES GOVERNING THE STOCK EXCHANGE

BUSINESS

LEGAL PRINCIPLES AND USAGES RELATING TO THE EXECUTION OF ORDERS . .

General legal nature of the order, 355. etal: mae pretation of the order, 356. Other important duties of the broker, 361. Usages in the stock brokerage business, 362. Brokers must exercise due care and diligence, 363. Broker’s communications not privileged, 365.

THE LEGAL NATURE OF A SPECULATIVE TRANSACTION

Financial nature of a speculative purchase, 367. Form of the order in a speculative transaction, 368. Rights and duties of brokers and customers in a speculative transaction, 371. Markham vs. Jaudon (41 N. Y. 235), 371. Measure of damages, 377. Dividends, assessments, and interest, 380. Voting power of the pledgor, 381. Safekeeping of the pledge, 381. Circumstances under which a broker may close a speculative transaction, 382.

PRINCIPLES PERTAINING TO THE RE-PLEDGING OF Stock EN B1Loc

Broker’s right to pledge stot urehncad on mare

385. Rights of a bona fide pledgee of a broker, 385.

Broker’s right to pledge stocks en bloc, 386. Con-

sideration of leading court cases, 388. Justification

for commingling stocks en bloc, 389.

XXV. EXTENT TO WHICH CUSTOMERS’ MARGINS AND

PLEDGED SECURITIES ARE PROTECTED—IDENTIFICA- TION OF SECURITIES

Claims of different classes of Petomcrs! in case of the broker’s insolvency, 393. Prohibition of transactions by brokers after insolvency, 399. Liability of broker when codperating with an insolvent broker, 400. Identification of securities, 400. Principles involved in Skiff vs. Stoddard, 63 Conn. 198, 401.

APPENDICES

CLASSIFICATION AND DESCRIPTION OF STOCK CERTIFI- CATES Rh Ue SAMPLE FORM OF ‘Common Sock CERTIFICATE mae 5%

SAMPLE FORM OF PREFERRED STOCK CERTIFICATE

SAMPLE FORM OF BOND CERTIFICATE . . . :

SAMPLE FORM OF A STOCK ALLOTMENT WARRANT

Copy OF ANNOUNCEMENT OF DECLARATION OF RIGHTS

LISTING REQUIREMENTS OF THE NEW YoRK STOCK EXCHANGE

SAMPLE OF A CoRPORATION’ S REPORT AS “Issuep BY THE COMMITTEE ON STocK LIST OF THE NEW YORK Stock EXCHANGE.

TABULAR OUTLINE OF OM apH?? ABBREVIATIONS AND THEIR MEANING (USED IN CONNECTION WITH THE TICKER SERVICE OF THE NEW YorK STOCK EXCHANGE)

COMMISSIONS CHARGED on THE New York Sock EXCHANGE ,

PRICE FLUCTUATIONS OF 20 RAILROAD Socks AND. 20 INDUSTRIAL Stocks DuRING 1905-1918

COMPOSITE PRICE RECORD OF 20 RAILROAD STOCKS

COMPOSITE PRICE REcoRD oF 40 StTocKS x

Bonp PricES IN (1) TERMS OF DOLLARS AND @) TERMS OF COMMODITIES Seeie Se Vaio, ¥ :

LESLILISS YB Ua aS a Pe Nor eee ee

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479 480 481

SERVICES RENDERED BY THE ORGANIZED STOCK MARKET a - - ia ie /~ : :, wi ae (ka Voce A ne "

Chapter I Nature And Scope Of The Stock Market

Stocks and Bonds Contrasted.— With the development of large-scale production and transportation it was only natural that there should be a transition from the system of individual ownership or private partnership to that of corporate organization, depending for its financial existence and support on the sale of stocks and bonds. The several types of markets in which such sales are conducted constitute, collectively speaking, the so-called *‘stock and bond market.’’

The modern corporation has made it possible to combine the small savings of the millions into huge sums for the creation of mammoth enterprises, capable of performing services entirely beyond the reach of an individual. Where the funds merely have been lent to the corporation, the owner is given a certificate, a so-called bond,' to indicate that he is a creditor. Where, however, the funds have been invested permanently in the corporation, with a view to participating as part owner of the enterprise in its success or failure, the investor is given a receipt, a so-called stock certificate,? to indicate the extent of his ownership. Few facts deserve to be impressed more upon the investing public than this fundamental distinction between bonds and stocks. Stocks are inherently specula-

1. For a sample form of bond certificate see Appendix IV.

2 For a sample form of common stock certificate see Appendix IT, and of a preferred stock certificate see Appendix III. For a classification and description of stock certificates see Appendix I.

tive in character. Bonds are credit instruments and, with few exceptions, give a definite promise as to the payment of interest and the return of the principal, although in many instances the promise turns out to be impossible of fulfillment. Stock certificates, on the contrary, promise nothing at all. They merely constitute an evidence of ownership, a certification of the holder’s privilege to share in risk, that is, to participate in the varying fortunes of the business enterprise.

National Wealth Represented by Securities.—Available figures, although necessarily only approximate, clearly indicate the great importance of stocks and bonds in our financial life. Recent estimates*® place the wealth of the , United States at $188,000,000,000. Corporation bonds and stocks, issued against this wealth, aggregate.about $35,- 000,000,000 and $65,000,000,000, respectively, or a total of $100,000,000,000.4 To this total, however, there must be added approximately $25,000,000,000 in bonds issued by the Federal, State, and City governments.*® It would seem, therefore, that stock and bond certificates represent over half of the nation’s wealth. At the close of 1917 the nation’s banks owned approximately $8,500,000,000 in stocks and bonds, a total equal to nearly six times their total cash holdings, while in addition some $10,000,000,000 of their deposits, it was estimated, were loaned against stock and bond collateral.’ The various types of insurance companies also have considerably over half of their enormous assets, totaling between $6,000,000,000 and $7,000,000,000, invested in stocks and bonds.

Exclusive of the numerous holders of Government bonds, there are probably 4,000,000 persons who are shareholders

3 Report of Census Bureau in 1915. ae Martin, The New York Stock Exchange, p. 88.

and bondholders in American corporations. ‘‘Corporations are no longer owned by a few rich men and rich families, but by the small shareholder, the small investor . by a multitude of small, or odd-lot, holders of securities.’’® The United States Steel Corporation and the Pennsylvania Railroad have about 150,000 and 135,000 shareholders, respectively, while the number of corporations having between 10,000 and 25,000 shareholders is very considerable. Various investigations by financial journals from time to time also show that, with respect to our important corporations, the number of stockholders is increasing faster than the number of shares outstanding, that is, the average number of shares in these issues owned per person is decreasing. This is true of both ‘railroads and industrials. Thus in 1906 the average number of shares per stockholder in a representative group of the leading railroads of the United States was placed at 188.5; by 1909, the average holding had declined to 144.2, and by 1913 to 133.2. For a representative group of industrials the average holding for the corresponding years was placed at 125.5, 92.75, and 85.0.7. A somewhat less comprehensive investigation in 1915 placed the average holding per stockholder as regards 36 railroads at 114 shares and for 52 industrials at 83 shares.® The foregoing data with respect to the distribution of American securities becomes all the more important when it is remembered that the number of stockholders does not represent individual holders in all cases, but often includes corporations. One railway company may be the holder of a portion of the stock of another railway cor-

6 Testimony of William C. Van Antwerp before the Committee on Banking and Currency, Hearings on S. 3895, p. 117.

7Thomas Gibson’s Market Letters, 1906 Bs 1909, and the Wall Street Journal, April 4, 1914.

id Philadelphia Public Ledger, January 2, 1916.

poration, and may itself represent many stockholders; or large blocks of securities may be owned or held by trust companies, brokerage offices, life and fire insurance companies, savings banks, and other investment companies which in turn represent the investments or deposits of an enormous number of persons, the great majority belonging to the poorer classes. How far this process of subdivision must be carried in order to determine accurately the extent to which the population of the country is involved in the ownership of its corporate securities is difficult to judge. Suffice it to say that enormous blocks of securities are held in this way and that this indirect form of investment is rapidly increasing.

Until the outbreak of the recent war, there was also a remarkable tendency for investors of foreign countries, especially European, to enter our security market in addition to their own. At that time, for example, 13 per cent of the stockholders of the Pennsylvania Railroad, and 18 per cent of the United States Steel Corporation, were residents in foreign countries, and these were by no means isolated cases. Estimates made at the time placed foreign investments in American securities at from $5,000,000,000 to $6,000,000,000. As has been said, the security market is ‘‘undergoing the same internationalizing as commerce.”’

Types of Markets.—The term, ‘‘the stock market,’’ is very comprehensive and may be regarded in the United States as embracing the purchase and sale of stock certificeates and other corporate securities (1) by salesmen, advertisement, or ‘‘over the counters’’ of offices; (2) at street markets, commonly designated as ‘‘curb markets’”’ ; (3) at public auctions; and (4) on stock exchanges, which operate under strict and comparatively uniform rules. Of these several types of markets the last is by far the most important.

SCOPE OF THE STOCK MARKET a

—§“Over-the-counter’’ transactions.—While the sale of bonds by direct solicitation, that is, through salesmen, advertisements in the press, office circulars, and other similar methods, represents a large and important branch of dealings in securities, this method is used only to a limited degree with respect to high-class and well-known stocks. Investment houses pursue this method in distributing the stocks of numerous comparatively small corporations whose issues are not listed on any regular exchange, and, following the original distribution, undertake to create an over-the-counter market for their clientele. In recent years numerous promoters of oil, mining, motor, and other highly speculative promotions have distributed an enormous vol- “ume of securities to the American public through actual canvass by salesmen or through more or less sensational advertising. Unrestricted by any of the disciplinary rules enforced by our regular exchanges and unhampered in most of our states by adequate supervisory legislation, the operations of many of these promoters have reached the proportions of a national scandal. Too often the unknowing confuse this phase of the stock market with the infinitely more legitimate practices of the exchange markets or of high-grade investment houses, with the result that these are constantly obliged to encounter a great deal of unmerited criticism.

Curb Markets——Curb markets obtain their name from the fact that the brokers composing them conduct their operations in the open street, instead of being housed in a building. While various cities have such markets, usually of a very limited character, the leading market by far of this kind in the United States is the New York Curb Market, which has been in existence for over 40 years, and which affords a market place for such securities as meet the limited listing requirements of this particular market and, at the same time, are not listed on the New York Stock gy THE STOCK MARKET

Exchange.® The importance of this market may be judged from the fact that security issues of 680 different corporations, some of them of great importance, are admitted to trading thereon. Fifty-nine of these corporations have listed in this market some 74,000,000 shares, without a par value, while the shares of other companies listed on the New York curb have a par value of about $1,700,000,000. Some 61 bond issues, in some instances of very large size, are also listed in this market. In the amount of business transacted in the United States the New York Curb is second only to the New York Stock Exchange.

There is real need for this type of market. The New York Curb Market is essentially one for mining, oil, and industrial securities, which either cannot, or will not, com- © ply with the stricter listing requirements of the regular exchanges. As has been stated, this market is ‘‘the great crucible in which are tested the thousand-and-one hasty stock flotations of each new era of expansion in the country.’’ It also affords an opportunity for dealing in securities prior to their being listed on a regular exchange or even before they are issued. In the latter case the contracts go under the name of ‘‘ when, as, and if issued’’ contracts, such contracts becoming due and payable the day after the final payment on them has been made under the terms of the corporation’s circular.

Many stock-exchange houses have regular representatives on the curb, and the Hughes Committee reported that approximately 85 per cent of the orders executed on the eurb come from stock-exchange houses. The close rela-

° Recently the New York Curb Market has moved within a building, and strictly speaking, should be now referred to as an Exchange. The daily press, however, continues to refer to this market, owing to its distinctive character, as the New York Curb Market. According to recent press accounts a certain limited element, formerly connected with the curb market on the street, continues to operate on the street as formerly, ;

tionship between the New York Curb Market and the New York Stock Exchange is indicated also by the fact that the curb market, as expressed in its rules, permits dealing only in securities not listed on the New York Stock Exchange. It is understood that when any security traded in on the curb is listed on the New York Stock Exchange the brokers on the curb shall at once cease to deal therein. The hours of trading of the New York Curb Market as well as all holidays are the same as those of the New York Stock Exchange.

To a considerable degree, curb markets have found it necessary to adopt regulations for the proper conduct of business. Referring to the New York Curb Market, the governing control is vested in a Board of Representatives, and in standing Committees, in a manner and for pur-. poses quite similar to those that will be explained for the regular exchanges. Membership is restricted to persons who meet with the approval of the association. Although such a market is legally ‘‘open to all who choose to trade therein,’’ it is usually agreed among most of the members that ‘‘no one is obliged to accept any contract which is not acceptable.’’ There are also regulations relating to the types of orders for buying and selling, types of bids and offers, the time and method of delivering securities, the transfer of securities, commission charges, and listing requirements. In many of these respects the New York Curb Market has seen fit to imitate the business procedure of the New York Stock Exchange. As a general proposition, however, curb-market regulations, although similar in their general nature, fall far short of maintaining the high standards enforced by the regular exchanges.

Auction Markets—Many unlisted stocks and bonds are sold at public auctions which are organized solely for the marketing of securities, and the quotations for transactions made at such auctions in New York, Boston, and Philadelphia are published regularly in the newspapers and financial journals. An examination of the transactions shows that the stocks sold at these auctions are chiefly those of banks, trust companies, insurance companies, and minor industrial and mining corporations. Frequently, however, stocks listed on the regular exchanges change hands at these auctions. The auction affords a convenient place to market (1) securities that are not listed on any exchange or curb market; and (2) securities that, although listed elsewhere, have been deposited as collateral without the pledgee having reserved the right to sell the same on an exchange. In law, stock exchanges are regarded as places of private sale; therefore, the securities referred to above ean only be sold by the pledgee in satisfaction of the debt at a public sale, in accordance with the law of pledgor and pledgee.’° Stocks listed on exchanges and enjoying an active market thereon usually command a price at these auctions but slightly below the current price on the exchange, partly for the reason that arbitraging™* may be practiced by buying the security at auction and promptly selling it on the exchange, and partly because the purchaser at an auction usually pays no commission.