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U. S. Steel post, and cry out how much stock he wanted to buy,
and the price he wanted to pay. The other brokers round
about make their offerings, say one at the price of 105J,
another at lOSJ, and so on, and the trade would be arranged.
There are no written contracts exchanged. All that is neces-
sary to close a transaction is a simple word "taken" or "sold."
Whenever a broker makes a sale or a purchase he merely
makes an entry on a small pad, showing the name of the broker

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to whom he sold or from whom he bought the security, along
with the price paid and kind of stock, together with the char-
acter of the bid or offer. An example is given in Fig. 1. The
data as there recorded means, Bought, 900 shares of U. S. Steel
at $149^ a share, from H. I. Smith and Co., and the broker's
initials are signed to show who executed the order.

23. Character of Bids and Offers.^Under the laws
of the New York Stock Exchange, bids and offers may be made
on the following terms :

(a) For Cash: The security to be delivered on the day of
sale and payment made for it.

(&) Regular Way: The security to be delivered on the next
business day and payment received therefor.-

(r) At 3 Days: The security to be delivered on the third
day after making the contract. *

{d) Buyer's or Seller's Options: Security to be deliverable
not sooner than the fourth day after the contract, nor later

B/900 U. S. Steel





Fig. 1

than 60 days. On these transactions written contracts are
exchanged, which draw interest at an agreed rate from the
date of the contract till the date of delivery of the security.
Some do not carry interest, and are known as being "flat."

Under these Buyer's or Seller's Options, the seller has the
right to make a delivery, or the buyer has a right to demand
delivery at any time within the stipulated time by giving one
day's notice.

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24. Fictitious Sales. — ^Under the rules of the Exchange,
a broker who takes part in a fictitious sale on the floor of the
Exchange is punishable by suspension for a period of time up
to one year. Thus, should a broker make a fictitious sale to
another broker, the parties so engaged are punishable. The
Exchange rules that all sales shall be bona fide; that is, in good

25. Teleplioning: Orders From the Office to
Excliangre. — Every firm having a membership on the'
Exchange has a telephone booth on the floor of the Exchange,
these booths being located at one side of the floor.

Orders for purchase or sale of securities are telephoned from
the broker's office to the firm's booth, where they are received
by a clerk in the firm's employ and conveyed to the floor
broker of that firm, who executes them. When an order has
'T)een executed, the floor broker gives the .details to the tele-
phone clerk, who then telephones the result to the broker's

26. Short Sales. — A short sale on the Exchange is a sale
in which the broker's customer, or person selling, sells some-
thing of value which he does not own. For example, suppose
the customer does not own 100 shares of United States Steel,
but gives his order to the broker to sell 100 U. S. Steel ; that
would b^ a short sale by the customer, to the extent of 100
shares of U. S. Steel.

The question now is. Where does the broker get the security
' to make a delivery for the seller ?

The answer is, he borrows that 100 shares of stock from
some other broker. When the seller's broker borrows the
stock he immediately gives the other broker a check for its full
market value, and the broker lending the stock pays to the
seller's broker interest on the amount of the check at an agreed
rate. The reason that the broker who is lending the stock pays
interest on the money paid him by the borrowing broker, is
that the lending broker has the use of increased capital, just
as if he had borrowed it at the bank ; therefore he pays inter-
est for its use. In the long run, the transaction is resolved

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down to a loan of capital by one broker to another on collateral,
and the rule for interest applies. The term collateral means
stocks or bonds deposited as security for loans. Securities so
deposited are said to be hypothecated.

It is readily^seen that by lending stock in the street to another
broker, a broker may obtain the use of more capital than if he
had made a loan at the bank and deposited his stock as col-
lateral, for in the case of loans to other brokers he obtains the
full market value, whereas at the bank he obtains not more
than 80 per cent, of its market value.

Another advantage is that when a broker loans stock to
another broker, he can demand its return at any time after
one day's notice, whereas at the bank he would have to make
a substitution in his collateral or else repay his loan to the

Because of these facts, there are many lenders of stock, for .
by so lending they are able to obtain the use of capital to the
full market value of the security, and at a lower rate of interest
than at the bank.

27. Reason for Short Sales. — ^Ari operator will sell
short when he believes that the market price of a security is
too high and that a decline in price is due. He does this with
the hope that by the time when he must make delivery or return
it to the lending broker he may be able to buy in the security at
a lower price than that for which it was sold ; if his judgment is
correct he will make a profit.

Because selling short indicates a belief on the part of the
seller that the price will decline, operators often sell short to
influence the market and thus bring about a decline by which
they may profit.

28. Handling: of Stock Loans. — Since the lending of
stock includes the delivery of a stock certificate by the lending
broker to the borrowing broker, and the payment of cash by
the borrowing broker to the lending broker, it is readily seen
that this operation has all the elements of a sale. So, under
the rules of the Exchange, stock loans are treated as sales ; the

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necessary comparisons and the delivery of stock and cash are
made just as with any other sale.

29. Arbitragre. — Arbitrage is that operation of buying in
the London stock market and selling short in the New York
market or vice versa, and making a profit. By this operation a
broker, through his agent in London, may buy a security at a
lower price than the price of that security in the New York
market. He then sells that security short in the New York
market and by so doing he has taken a profit from the operation.

30. Reports of Brokers. — ^When a broker has executed
a customer's order on the floor of the Exchange, the broker
telephones the result back to his own office, giving all the data,
and then by means of the Exchange tickets of the Clearing
House system as operating in the "street," his office compares
the data, as recorded, with that of the office of the other broker
who was a party to the transaction. In this way the data are
checked up and error is reduced to the minimum. Thi« method
of comparison only holds good for Clearing House stocks.

With Ex-Clearing House stocks, comparisons are made by
each broker submitting a memorandum of the transaction to
the other broker by means of a clerk called a runner, whose
duty it is to carry these memoranda to the other brokers' offices,
have them verified, and return them to his own office.

in every case these reports are compared by not later than
4:00 p.m.

31. Time of Delivery. — ^Under the rules of the Stock
Exchange it is provided that if a security is sold for cash it
shall be delivered before 2:15 p. m. of the same day. If sold
in the "regular way" then it must be delivered by not later than
2:15 p. M. of the* following day.

32. Failure to Deliver. — If a broker fails to deliver a
security by 2:15 p. m. of the day due, then the buying broker
may close it out "under the rule." To do this, the buying
broker immediately notifies the Chairman of the Exchange,
who will read the notice from the rostrum the following day,
and proceed to buy that security in for the broker. Should the

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price be greater than the original contract price, then the buy-
ing broker has a claim against the seller, under the original
contract, for the difference. For example, should Broker A
fail to deliver 100 shares of stock to Broker B, then Broker B
would notify the Chairman of the Exchange, who would then
proceed to announce the notice from the rostrum, and then
buy in that 100 shares of stock at the best price obtainable. If
it was bought in at $91 per share, and the original contract
price was $90 a share, then Broker B would have a claim
against Broker A for $100, which is the difference.

33. Transfers* — As every stock certificate issued by* a
stock company to a stockholder bears the name of that stock-
holder, it is necessary that when a certificate changes hands it
shall be transferred from the name of the previous owner to
that of the new owner on the records of the stock company
issuing the stock certificate, and that a new certificate be issued
to the new holder.

For this reason the usual certificate of stock has a form on
the back of it which may be filled out to assign it to the new
owner, and then the new owner may take the certificate to the
transfer office and have it transferred to his name.

34. Collection of Dividends. — Since dividends will
only be paid to the recorded holders of stock, as shown on the
stock company's books, it is readily seen that some sales of
securities will be made when the transfer books of the com-
pany are closed. Some of these sales will be ex-dividend,
which means that the new purchaser does not have a claim on
any dividend declared before the stock is transferred oh the
company's books. However, sho\ild the sale carry dividend
the purchaser will receive a due bill from the seller for the

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35, Loans at the Bank. — The money and stock markets
are interrelated in the following manner :

(a) To secure personal loans, Stock Exchange securities are
deposited as collateral.

(b) To obtain working capital, bond houses and stock
brokers engaged in the sale of investment securities make
loans with banking institutions by depositing their unsold hold-
ings as collateral for such loans.

(c) All speculative purchases of Stock Exchange securi-
ties are partly financed by time loans or demand loans arranged
with banking institutions, and secured by these securities as

These statements clearly show the manner of obtaining a
loan from a banking institution by securing that loan with a
collateral deposit.

36. Certification, — Credit is also extended to brokers
by the banks through the operation of a system of certification.
Certification may be defined as that operation whereby a bank,
through the signature of its cashier or paying teller on the face
of the check, guarantees that the -signature of the drawer of
the check is correct as well as that the bank will pay the amount
of the check on its presentation.

By means of certification, credit is extended to the broker
over and above that broker's deposit in the bank. An example
will be here discussed :

Suppose that Broker Jones has on deposit a balance of
$75,000. Broker Jones buys securities for his customers to the
amount of $400,000. It is clearly seen that the broker's avail-
able capital is insufficient tp pay for the securities thus .bought,
so the bank, having previously investigated the broker and
established his line of credit, will certify the broker's checks
for the amount sufficient to p*ay for the securities. This cer-
tifying of a broker's check for more than his bank balance is

I L T 234-^

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known as over certification. From this example it is clearly
seen that the operation of certificatiop is in reality a temporary
loan to the broker by the bank, and upon closer examination it
is readily seen that very little risk is taken in connection with
the operation in connection with Stock Exchange transactions^

In order to have the resulting benefits attached to over cer-
tification or temporary loans, it is necessary for the broker to
enter into a definite agreement with the bank as to the balance
which the broker will maintain at the bank. For example, a
broker may agree to maintain a daily balance of $75,000 at his
bank, and on that balance the bank may agree to certify his
checks up to the amount of, say, $1,000,000. It will be readily
seen that should the fiank certify the broker's check for the
amount of $200,000, then the bank will be over certifying to
the amount of $125,000, that is, they would make a temporary
loan of that amount to the broker. From the discussion thus
far, it will be plainly seen that a broker's credit is a most
important factor. It may be well to state now that the broker
is not expected to use the limit of his credit very often.

So far, we have seen how a temporary loan is made through
the operation of certification. And now it is necessary to go
into some detail regarding a broker's deposits at the bank in the
repayment of this temporary loan.

By the agreement with the bank, the broker is required and
expected to make his deposits to his account, as he receives the
checks from the sale of other securities than those for which
he has paid through the medium of the tempprary loan from
the bank. Thus, should the broker deliver securities, for which
he would receive other certified checks, then under his agree-
ment with the bank he would be expected to deposit them to
his account at the bank.

When the broker has received his stock, for which he has
paid through the certification of his checks at the bank, he
proceeds to arrange for his loans of cash on them as explained
in paragraph (c) pf Art. 35.

37. Morning: Loans at tlie Bank. — It has become
customary of late for some of the banks to make what are

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called morning loans to a broker for an amount sufficient to
cover the probable amount of certification necessary for that
day. This custom has come about through the desire to do
away with the seeming violation of the National Banking Law,
which stipulates that it shall be unlawful for a national bank-
ing institution, or its representative, to certify a check for an
amount in excess of the amount on deposit to the credit of the

38. Lioans Made in the Excliangre. — As has been pre-
viously explained, there is a place in the Exchange Board
Room where money loans are arranged, and each loan so
arranged is secured by securities deposited as collateral.

At this place the money brokers arrange to lend money to
the brokers who may need it. These loans are usually call
loans and carry interest at the call rate, which fluctuates from
day to day, sometimes higher, sometimes lower. These money
brokers, who make it their business to lend money, are mem-
bers of the Exchange, and among them are representatives of
the banks.

39. Interest Rates on Loans. — A time loan is a loan
that is made to extend over a specified length of time, as, for
example, 30, 60, or 90 days, and carries interest at an agreed

A demand, or call, loan is a loan that is made with the under-
standing that it is subject to call at any time, usually the fol-
lowing day, and that it shall carry interest at an agreed rate.

The interest rates on demand loans vary from as low a rate
as 2 per cent, to as high as (on July 9, 1919) 17 per cent, for
capital loaned on industrial stocks and 15 per cent, for capital
loaned on mixed collateral.


40. Requirements. — ^As has been stated, when a loan is
made to a broker, that broker deposits collateral, which may be
made up of stocks and bonds, or stocks or bonds alone. When
the collateral is deposited, the bank examines it carefully to find

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out if each security deposited is readily salable, and if each
has a constant market. To a large extent, the most desirable
securities for this purpose are government bonds or stock and
bonds of railroad companies, which are listed as of high stand-
ing on the exchange. Very often a bank will refuse to make a
loan that is secured only by industrial stocks as collateral unless
an -increased rate of interest be charged, and more often they
require a certain amount of railroad securities to be included
in the collateral.

When government bonds are deposited as collateral, banks
will loan to the market value of the bonds, whereas with loans .
that have other collateral the bank will loan only about 80 per
cent, of the market value of such collateral, thus giving the
J)ank a margin of 20 per cent, on mixed collateral, and 25 per
cent, is required on industrial collateral.

Naturally, should the market value of the collateral decline,
then the bank will issue a call for more collateral to maintain
the required margin.

41. Substitutions. — To make a substitution in collateral
for a loan means to withdraw one security and in its place sub-
stitute another block of securities of equal value or more.

Thus, if a broker deposits as collateral for a -loan 100 shares
of Mexican Petroleum at 60 and 300 shares of Erie at 40 and
later finds that he needs the 300 shares of Erie to make a
delivery, ha would arrange with the bank to withdraw the 300
shares of Erie and substitute fn its place, say, 200 shares of
New Haven at 62. Thus it is seen that the margin on the loan
at the bank remains practically the same as before.

42. Legality of Hypothecation of Customer*s
Securities. — No doubt the reader is wondering whether it is
lawful for a broker to hypothecate the securities of a customer
when they are held on margin.

As has been seen, the customer only has an equity in the
securities held for his account to the amount of his credit bal-
ance as shown by his account. Therefore, if the broker still
retains securities for that customer in his office to the extent
of that customer's equity, then the broker is within the law.

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This is the plan followed in the street by many firms operating
as brokers.

On the other hand many firms have an agreement with their
customers to the effect that the securities held for any customer
may be used as collateral for a loan at the bank or elsewhere.


43. Grouping:. — The stocks of corporations may be said
to be in either one of the classes enumerated below.

(a) Railroads: Stocks of railroad corporations.

(b) Mining: Stocks of mining corporations.

(c) Industrials: Stocks of industrial corporations.

44. Stock Certificates. — Certificates of stock are piedes
of tough paper on which is engraved the name of the corpora-
tion, kind of stock, and number of shares the certificate rep-
resents, and they are signed by the president and the treasurer
of the corporation. It is specified on each certificate that the
person whose name appears on its face is the owner of that cer-
tificate ; also that the shares are transferable only on the books
of the corporation. On the back is a printed blank form for
indorsement to a new owner, in the case of a sale, giving the
new owner power of attorney for the transfer of the stock to
his name.

45. Kinds of Stocks. — In the organization of a corpora-
tion, stock may be issued under the name of preferred stock
and common stock, and each has the following rights.

Preferred stock is stock that bears a fixed rate of dividend,
which must be paid before any dividend is payable on the com-
mon stock. The dividend may be cumulative or non-cumula-
tive. Should it be cumulative, then whatever dividend is not
paid this year must be paid out of future profits before the
common-stock holders will have any claim for dividend. At
all times this guaranteed dividend will be accumulating till
paid. From this it will be seen that the preferred stock is the
investment stock held for revenue from dividends, while the
common stock is the speculative stock.

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46. Bonds* — ^There are many forms of bonds issued, but
in every case a bond represents a lien, or mortgage, on some
part or all the property of the company that issues the bonds.
Some of these bonds are known as consolidated bonds, which
are bonds issued, after a reorganization, in place of previous
bond issues. When a consolidated-bond issue is made it con-
solidates the previous bond issues imder one bond issue, which
covers all previous ones.

There may be convertible bonds issued, and they usually are
bonds which are convertible into stock.

Then again, should one corporation biiy control of another,
a series of bonds might be issued, called collateral bonds. In
this case they would be secured by the bonds of that corpora-
tion controlled.

Further, should a corporation issue bonds and record the
names of the holders of them, then these bonds would be
known as registered bonds.

Another form of bond is called a coupon bond. This is a
bond with coupons attached on which the interest due at cer-
tain dates is stated, and, as these coupons come due, interest is
collected by clipping off the coupon due and presenting it for
collection. A good example is the Liberty coupon bond.

In every case it is to be remembered that a bond constitutes
a mortgage, or lien.


47. Tlie Ticker, — On entering a broker's office, practi-
cally the first thing to be noticed is the ticker as it is called.
This is an instrument that automatically prints on a tape (a


136 2.ll3i I02|.8.I03 IIOj 87

Fig. 2

long roll of paper about f inch wide) the prices at which
blocks of securities were sold on the Exchange.

The data regarding the sales on the Exchange are gathered
by reporters for the New York Quotation Company, who

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report this information to their office, and it is then sent out
over the vi'nes to the places where these tickers, or stock indi-
cators, are set up, and the machine automatically prints the
data in the form shown in Fig. 2. The data as there printed,
read from left to right, mean : .

100 Crucible Steel was sold at a price of $136 per share ;

2 shares Studebaker was sold at $113 J per share;

100 Bethlehem Steel "B" was sold at $102J and 8 shares
at $103 ;

100 Central Leather was sold at $1 lOf per share ;

100 Smelters was sold at $87 per share.
It should be understood that every stock listed on the
Exchange has an abbreviation, and for the purpose of illustra-
tion a few of them are here given.


Name of Stock


Alaska Gold Mines


American Smelting and Refining Co.,

or "Smelters"

B. S. B.

Bethlehem Steel, Series "B"


Anaconda Copper


Brooklyn Rapid Transit


Mexican Petroleum


American Cotton Oil


Republic Steel


Pennsylvania R. R.

Pr. means preferred

stock; X means ex-dividend; U. R.

means under the rule.

48. Clearing: House Price as Shown on the Ticker.

Every day, just as soon as the last sale is recorded, the Clearing
House prices are made up and sent out over the tape to the
offices of the brokers. That price is the nearest whole number
to the last sale price. For example, should Anaconda Copper's
latest sale price be 79f , then the Clearing House price would
be 80, because 79f is nearest the whole number 80, so that
price of 80 stands as the Clearing House price.

However, the official Clearing House prices are compiled by
a clerk who goes from the Clearing House to the board room

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and compiles them. He then checks his prices as made up
with those as appearing on the ticker tape. Should a difference
in the prices be noted, then the brokers are notified of the
error appearing on the tape. A further discussion of the use
of the Clearing House prices wilh be given later.

49. Telephones. — Next to the ticker, the most important

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