(A) THE INSTITUTION OF THE JOBBER.
In severalimportantrespectstheLondonStockExchange
differs widely from similar institutions in other centers;
but the mostcharacteristic feature of its organization lies inthe division ofits membersintotwoclasses, brokersand
dealers, the latter being more commonly described as jobbers. The broker, as such, buys or sells securities on behalf of another party, who is called his client and pays hima commission;the dealer orjobberprovidesthemarket
to which the broker applies, the former being prepared to
buy or sell any of a certain number of securities in which hespecializes andtrustingto coverhis bargainsataprofit
by "undoing" them, as it is called, with another broker or jobber.
The broker, of course, is a constant feature on all stock exchanges. He executes the orders of the general public,
buying and selling securities on its behalf, arranging their delivery when the bargains are real, or their financing
when the dealings are speculative, and charging a com- mission for his work. The institution of the jobber is
peculiar to London, and his existence makes the whole aspect and organization of London's business unique in this respect. In other centers the place of the jobber is
supplied, to some extent, by "room traders," by mem-
bers who specializeon certain securities; but as definitely organized into a separate group, the jobber is only to be foundinLondon. TheflooroftheLondonStockExchange
is divided into groups of these jobbers, who are always to 76651—10-
be found in aparticular place. Each group constitutes a marketin aspecial class of securities—British government
stocks, foreign government bonds, American railroad stocks, South African mining shares, etc.—so that any
broker who receives an order to buy or sell any security dealt in in Londoncan walk straight to a certain placein the stock exchange, knowing thathe willtherefind aknot of jobbers prepared to buy or sell it, at a price, and to
name the prices at which they willbuy or sell before they
know which they are to be asked to do. Hence it follows that whenasked tonameadealingquotation, they always give a double price, meaning that they will buy at the lowerorsell at the higher, trustingto cover thebargain at a profit by means of the margin in their favor which the double price gives them.
The extent of this margin varies according to the free-
dom ofthe market in the security thatis dealtin. Inthe caseof securities of average marketabilityin London,such as British and American railway stocks and foreign gov- ernment bonds, the margin usually quoted is one-fourth of I percent. Thusthe quotation for London and North- western Railwaystock would be 12,1/{, 131/4', for Erie shares, 38to 38>^; for Russian fives, 99K, 99K- But in
actual dealing, as willbe shownlater, askillful broker will
probably impel his jobber to come a little closer—that is, to name a rather narrower margin, three-sixteenths or evenone-eighth of i per cent. In the case of a stock like British consols, the market in which is especially free, the usual quotation gives a margin of one-eighth of i per cent—843/^to84>^;and whenitisaquestionof mining and
industrial shares of small denomination, which are quoted
The English Banking S y s t e m
on the basis of so much per share and not in hundreds of stock, the margin is often reduced to 3d, or even less.
For instance, the share of the British South Africa Com- pany willbe quotedat 29s.to 29s. 3d.,becauseit is evident thatasmall marginenables the dealer tomake abigprofit
whenitapplies to eachshareineveryhundredturnedover.
The profit made by the jobber or jobbers by means of thismargin iscalled his "turn," and it obviously averages halfthe margin. Ifajobberknows thatastock ischang- ing hands inthe marketat 99^,he will make his price to a brokerwho comes tohim 993,^^,99^, and having bought
at993/8or soldat99Yz expectstoeven himself at 99>^. In the case of amining sharehis turn may thus onlyamount
to I>2d.; butinthefirstcasehemakesa turnofone-eighth of I per centoneach £100stock; in the second he makes i^d. on eachshare. Thus if hedeals in £1,000 stock he earns ten-eighthsof ipercent, £1, 5s.od.; ifin 200 mining shares his turn willbe30od., £15s. od. again. In the case of securities seldom dealt in, and in which the market is
consequentl}^ not free, the margin between the buying and selling quotation will be i per cent or more, because the chance of the jobber's being able to cover himself quickly and at a profit is obviously lessened by the com- parative rarity of sellers and buyers. And sometimes when the market in securities is especiallynarrow, jobbers do not attemptto "make prices"—that is, to name two
quotations at which theyare preparedto deal outright
—
but negotiate the purchase or sale for the broker (who then has to disclose the nature of his business), and charge a "turn" for their trouble and special knowledge.
Illustrating this peculiarity of London Stock Exchange
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business by a concrete example, we may imagine that a broker receives an order from a client to buy loo shares in the Union Pacific Railroad. He goes to that part of the "house," as the stock exchange calls itself, in which a seething mass of shouting jobbers is gathered who con- stitute the American market. He is promptly accosted
by one of the jobbers and asked if he has anything to do,
and replies that he wants to deal in a few Unions. The
jobber,knowingthat the currentprice of Unions is 198^, intimatesthathewillbuyat 198^ and sell at igS^; this
he does by merely naming the two fractions "an eighth, three-eights," since the figure is supposed to be already
known to the broker. The latter by merely looking ex- pectant, or by showing an inclination to move on to an- other jobber, or by asking his jobber to "come closer,"
generally induces the latter to quote a narrower margin,
"Three-sixteenths, three-eighths," says the jobber, guess- ing him to be probably a buyer. The broker shakes his
head and goes on to another jobber, and finally either succeeds in getting his shares at 1983^, or at least satis- fies himself that 1983/^isthe best that he can do for his client.
Thebroker isthus protectedbythe factthat thejobber does not know, when naming his price, whether he willbe
madeto buy orsell the shares,for, having madetheprice, he is bound to accept the bargain whichever way the broker may declare himself; and, as has been shown, the broker, unless he definitelyasks for a price tobe made on acertain basis, can always go from one jobber to another tryingto getapricemade whichsuits hisclient'sbusiness.
Competition between one jobber and another enables the 114
The English Banking System
brokerto deal onthe narrowestpossiblemargin,andtends continually to reducethe "turns" whichthe jobbers earn.
Itmustbe noted thatwhena jobbermakes apricewith- out the number ofshares or amount of stock beingstated, he is bound to deal, in even sums, up to the amount of either £i,ooo stock orbonds, or the equivalent inforeign currency; loo shares of a market valueof £i or under; 50 sharesofamarketvalueof£i to£15; 10 sharesofamarket valueofover£15; or 100 Americanshares of$100.
If, when the jobber has named his original price, the broker asks him to "come closer," the former is at once released from his obligation to deal at the price originally
named. The capacity of jobbers to deal readily and
freely, andat close prices,isobviouslyincreasedwhenthey are not always anxious to keep their accounts even, and cover every bargain, but are prepared to "run abook" as it is called, taking stockwhenit is offered freely and being ready to carry it for a time, or if the market is the other way, facing the position of being "short. " Their power thustoact asmerchants ratherthanmeredealers hasbeen lessenedbythe great increase thathas takenplaceinrecent years in their number; sincethe consequent diminution in the volumeofbusiness done by each, andthenarrowingof turns, has made them less able to take the greater risk involved by running a book. Those whostill do so, how-
ever, have the advantage ofgettingmore custom from the brokers, andthey arethusbetterabletotellwhat the out- side public is doing in the stocks inwhich they specialize.
Whenacting as a pure dealer, the jobber is always lia-
bletotheriskthat themarket may have goneagainsthim
before he can undo his bargain. If a number of brokers
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National Monetary Commission
are buying or selling simultaneously this may easily hap- pen, andthejobberrequires avery activeand alertintelli-
gencein order tokeep closely intouch with the true state of the market. He is not bound to make a price if he is
asked to do so, and sometimes when the market is alto- gether demoralized it happens that jobbers refuse to deal on thesystemdescribed above. Thisisquite arareoccur- rence, however, and as a rule it is expected of them that they should be prepared toprovide a market andtake the risks of their position. The jobber's business is on the whole aprofitable one, and whenthe marketis activeand
free he makes profits rapidly, the volume of his turnover fully compensating him for the narrowness of the margin on which he works. His office expenses are small when compared with those of the broker, who has to conduct correspondence with clients, and from the nature of his business he has less reason to fear bad debts; for the jobber, as such, deals only with other members of the stock exchange,brokers or other jobbers,andtheyhaveto meet their debts on settling day, or declare themselves defaulters. But the brokerdealsfor outsideclients,and if
they are unableto meettheir speculativelosses thebroker has to pay and take his chance of recovering the debt by meansof legalproceedings.
Thejustification ofthejobberliesinthe easeand freedom which his existence impartsto business in London. Lon- don's business is so diverse, and the number of dift'erent securitiesthere dealtinisso great, thatifevery brokerwho
received an order had to look for another who wanted to
buy whathewanted tosellor vice versa, the work whichis
now donecould never begot through. TheEnglishpublic ii6
The English Banking System
whichonlycomprehendsthesysteminaveryhazy manner, oftenblundersintoa theorythatthejobberisanexpensive luxury, andcan notunderstandwhyit should have topay the jobber'sturnas well as the broker'scommission. But
infactthejobberisan ingeniousexampleofthe division of labor and without him the brokers would have tocharge their clients extra commissions, which would more than
make up for the saving of the jobber's turn, and much of the business thatisnow donereadily andquickly couldnot begot throughat all.
In recent years there has been a tendency toward the blurringofthelinethat dividesthetwoclassesofmembers
of the London Stock Exchange. Certain of the brokers havetakentospecializing invarioussecuritiesand making
prices inthemlikejobbers,tothedetrimentofthe business of the latter, and a practice has also now been developed,
by which brokers with orders to execute, sometimesfind it advisableto do their business with outside firms instead of with the jobbers in the House. This was especially the casewithSouth African shares, large orders in which were frequently transacted with the South African firms, and American bondsinwhichthe Anglo-Americanhouseswere often able to provide dealing facilities on more favorable termsthan the jobbers. And sincethe brokers who dealt outsidetheHousereceivedacommission frombothparties, it was plausibly urged by the jobbers who opposed the system that it led to their soinetimes doing so even when
their clients' interests would have been best served by a bargain with a jobber.
Whilethe brokers were thusencroachingon, orignoring, the jobbers in the transaction of business, the latter were
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at the same time retaliating by opening business connec- tions outside the stock exchange. The most notable exampleof this process was the development of arbitrage businessbetween Wall street and thejobberin theAmeri- canmarket inLondon, andofsimilartransactionsbetween the Englishprovincial stock exchanges and the jobbers in the various markets. Formerly the provincial brokers
when they had an order to execute in London sent the order to a firm of London brokers; but many of them
gradually adopted the plan of opening up direct relations with a firm of jobbers in each of the principal markets in the London Stock Exchange and doing a business with them, similar to arbitrage in securities with a foreign center, butcommonly called "shunting." Theprovincial broker, being kept advised of the state of the market in
London byhis alliedjobber, bought andsold inLiverpool, or wherever else he might be established, and covered his bargains in London, dividing the profits or losses with the jobber. From the nature of these relations it fol-
lowed that the provincial brokers were unable to avail themselvesofone of themost important safeguards which theEnglish systemgives tothe London brokers in dealing for their clients,namely, their powerof going on from-one jobbertoanother,iftheybelievethattheycansogetbetter terms for their clients. The provincial broker was evi- dently in the hands of the jobber with whom he entered into relations, and it was consequently contended that his client's business was not done any more cheaply for the elimination ofthe commission paid to the London broker, whichearnedfor theclient thepower totakeadvantageof the higglingofthemarket.
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Inany case the tendency by which brokers and jobbers wereencroachingon one another's functions and breaking
down the boundary which originally divided the two
classes of members was noted with strong disapproval by a majority of their number, and led in 1908 to a reac- tion which produced an amendm.ent of the rules, by which the functions of the two classes were more clearly defined and brokersand jobberswere expressly forbidden to poach on one another's preserves. No alteration was made in the matter of arbitrage transactions with foreign centers, but "shunting" business with provincial ex- changes was forbidden. Critics of this reform promptly demonstrated its illogical nature, but the English mind
is never afraid of disregarding logic. Jobbers were re- stricted to their original function of making prices for brokers who came to them with business to do, and brokers were forbidden to do business except with job- bers, unless they had first ascertained that they could thereby buy or sell on more favorable terms, and if they found that they could deal to greater advantage outside, they were forbiddento taketwocommissions.
These measures were strongly objected to by an im- portant section of the members of the stock exchange, most of the leading firms opposing them. Since these leading firms had built up or increased their business under the freer conditions previously prevalent, it was natural that they should regard as reactionary and unde- sirable a change which modified these conditions pro- foundly. But the rank and file of the members took the contrary view, being apparently convinced that the in- stitution of the jobber is a useful and indispensable wheel
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in London's machinery, enabling it to conduct an enor- mously diversified business with remarkableeconomy and dispatch, and that a tendency under whichthedistinction
between him and the broker was being gradually elimi- nated had to be checked. And the 1909 election of the committee for general purposes, which is responsible for the framing and interpretation of the rules governing these detailsof business, emphatically indorsed the reform of 1908 by which thedivision ofmembersintobrokers and jobbers was defined more strictly and more rigorously enforced. But it should be added that the majority of the leading firms persistin the view that this "reform" is
a step backward, and since the jobbers constitute a ma-
jority ofthe members, and their existence was threatened by the tendency against which the new rules were di- rected, their emphatic indorsement of them must have been to some extent biased by considerations of personal interest.