S. A. (Samuel Armstrong) Nelson.

The Consolidated stock exchange of New York, its history, organization, machinery and methods online

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divided into two classes, the sole function of the first of
which consists in clearing notes, drafts, checks, bills of
exchange, and whatever else may be agreed upon ; and the
second of which, in addition to exercising the functions of
the class just mentioned, prescribes rules and regulations
for the control of its members in various matters, such as
the fixing of imif orm rates of exchange, interest charges,
collections, etc.

" Clearing houses may also be divided into two classes
with reference to the funds used in the settlement of
balances: First, those clearing houses which make their
settlements entirely on a cash basis, or as stated in the
decision of the Supreme Court above referred to, ' by such
form of acknowledgment or certificate as the associated
banks may agree to use in their dealings with each other



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48 THE C0N80LIDATBD STOCK EXCHANGE OF NEW YORK

as the equivalent or representative of cash;' and, second,
those clearing houses which make their settlement by
checks or drafts on large financial centers."

It is now easy to understand that the Consolidated
Stock Exchange clearing house is an adaptation of the bank
clearing house, and it is utilized for the adjustment and
settlement of contracts for stock securities and grain.
The idea of a stock exchange clearing house was first
adopted by the London Stock Exchange. In that in-
stitution it is the custom to trade for what is designated
as "the accoimt," with a fortnightly adjustment of bal-
ances.

In this country the distinction of first having adopted
the clearing-house idea lies between the Philadelphia
Stock Exchange and the Consolidated Stock Exchange of
New York. The London idea was adopted with modi-
fications in 1886, the Consolidated Stock Exchange deter-
mining upon a weekly settlement and subsequently chang-
ing it to a semi-weekly settlement. In 1892 the New
York Stock Exchange investigated the clearing-house
question and organized a clearing house which is con-
ducted upon the basis of a daily settlement.

The Consolidated Stock Exchange Clearing House
Association (incorporated) is managed by a Board of
Directors, all of whom are members of the Exchange.
Monetary balances are settled daily; stock balances
are delivered semi-weekly.

Members of the Exchange are admitted to clear in their
own names. A trader can buy and sell 1000 shares of
stock for the remarkably small clearing-house charge of



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THE EXCHANGE CLEARING HOUSE 49-

60 cents — a fact worthy of consideration by professional
traders. The clearing house supplies without charge
clearing-house sheets, comparison tickets and drafts which
comprise the official stationery.

The clearing-house sheet of a broker is a record of
stocks bought and sold; to be received or delivered on a
single day. Each transaction is compared with " receive'*"
and "deliver" tickets or comparison slips. These com-
parisons must be made before 9:45 o'clock on the day
following the transaction. As each sheet contains in all
probability a considerable number of separate transactions,
the transactions in each stock are grouped together.
All the purchases having been entered in the "To receive"
column and all the sales in the "To deliver" column, and
the totals carried out, the columns are footed up and the
balance struck. If the clearing-house sheet as made up
shows a credit balance to the owner of the sheet, a draft
for the correct amount is drawn on the clearing house.
Before 3 o'clock the draft is certified and is paid to him
by the clearing house. If on the other hand there is a
debit balance, the difference is entered as " balance check"
and the owner sends his check for the correct amoimt with
his sheet to the clearing house in settlement, before 10.30

A.M.

Upon one occasion an investigation was made of the
clearing-house plan as compared with the obsolete method
of receiving and delivering every separate transaction
of all stocks bought and sold. The day's work of a single
brokerage firm was summarized. Under the old system
the total amount of shares received and delivered was



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50 THE CONSOLIDATED STOCK EXCHANGE OP NEW YORK

18,700; the amount of checks issued was $649,741, and
the amount of checks received $607,456.66. Under
the clearing system the total number of shares received
and delivered on balance for the same business was 1700;
the amount of checks issued was $67,700, and the amount
of checks received was $25,415.66.

A sheet which was even in stocks made a still more
striking contrast in favor of the clearing house. Under
the old system 7900 shares were received and delivered;
21 checks for a total of $672,912.50 were issued and
18 checks for $671,075 were received. Under the clear-
ing plan one check only for $1837.50 was issued and the
day's work was balanced.

It is plain, therefore, that the system of clearing, by
largely reducing the volume of checks and deliveries,
relieves both banking institutions and brokers of much
of the monetary demand, to say nothing of risk, confusion,
and labor. Without the clearing house the Stock Ex-
changes of the country from 1899 to date would have
been imable to carry on .their business successfully.
With a system of daily deliveries the machinery of busi-
ness would have broken down under the strain of increased
work to which it has been subjected. In anoth^^ series
of transactions, in which the obsolete and the clearing-
house systems were compared, it was demonstrated that
there was a saving of more than 75 per cent in the ampunt
of money which a broker requires to use in his day's
settlements.

A specimen clearing sheet in which a broker is even
follows : —



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THE EXCHANGE CLEARING HOUSE 51

A SPECIMEN CLEARING SHEET IN WHICH A
BROKER IS EVEN





Price


Am*t


Delivered to


Price


Am't


A. J.
A. AT,
J. So Son
N.AjCo.
L.B.4G0.


100
500
100
200
100


0,SoO,
C.AO.

N.lr.c.

N. T. 0.
U. S. steel


801
801

186

185|
48


$8,060
40,186
18,600
8T,100
4,800


S.S.A;Ck>.
J. P. A Co.
B.Bro.

Bal.oh*k.


000
800
100


0. A 0.
N. Y. C.
V. S. Steel


79
184
471


$47,400
40,200
4,760

1,225




$W,676


$98,675



It will be observed that 1000 shares are to be received
and 1000 shares to be delivered, and the transactions in
each stock also balanced. Now if it were obligatory on
the part of the broker to receive and deliver the 1000
shares, it would be necessary for him to check out $93,575
from his bank account, while his sales would entitle him
to checks iot $92,350 which he would deposit to his
credit in the bank. It would be necessary for him to
draw five separate checks and receive three, and the
aggregate amount of banking power involved would be
$185,925. Under the clearing-house system the whole
day's transactions are adjusted by payment of a single
check for the balance of $1225.

A very ingenious and scientific system of clearing-
house bookkeeping enables brokers to adjust their ac-
coimts when the sheets do not balance each day. If a bal-
ance in stock is to be received . or delivered, the account
is carried open until such time as the contract is finally
adjusted, when the balance is adjusted by payment of
cash and the delivery of stock or bond certificates.



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52 THE CONSOLIDATED STOCK EXCHANGE OP NEW YORK

Assume that the transactions in the several stocks do
not balance. The following sheet is an illustration : —





Beceiyad from


Price


Am*t


Deliyered to


Price


Am't


A.B.AbCo.


900


St Paul


80


$72,000


B. So Bro.


600


St. Paul


801


$40,260


M.AiL.


100


St. Paul


80|


8,076


Q.ASon


1000


N. West


118


118,000


D. B. A F.


1000


N. West


119


119,000


M.SoO.


400


Mo. Pac.


60


88,000


A. Bros.


1000


K&W.


48


48,000












T. AjW.


200


Mo. Pac.


68


11,600












Bal. del.










Bal.rec.










D'l price


200


Mo. Pac.


67


11,400


D*l price


600


St. Paul


80


40,000


Bal. d*fb








776


Dn price


1000


N. AjW.


49


49,000




$270,860


$270,860



In a magazine article explanatory of the clearing-house
system, Mr. Alexander Dana Noyes said of the above
sheet : " On this sheet it will be observed that the transac-
tions in Northwestern stock comprised 1000 shares bought
and 1000 shares sold. Under the clearing-house system,
therefore, there will be neither receipts nor deliveries of
this stock by the broker presenting the sheet. But with
the other stocks traded in the case is different. Of St.
Paul stock 1000 shares in all were bought and only 500
sold. There is left in this stock, therefore, after the
clearing-house operations, a balance of 600 shares to be
received. Similarly in the case of N. & W., of which 1000
shares were bought and none sold, the broker must receive
1000 shares. In Missouri Pacific stock, on the other
hand, 200 shares were bought against 400 sold; so that
the broker concerned has left a balance of 200 Missouri
Pacific to deliver. These balances are duly entered, as



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THE EXCHANGE CLEABINO HOUSE 53

the specimen sheet indicates, on their respective sides of
the account.

"Two further points in the clearing-house arrange-
ments must here be noticed. One is that the brokers
between whom given amounts of stock are to be actually
exchanged are named arbitrarily by the clearing-house
manager. Any broker having 500 shares of St. Paul to
deliver may be directed to deliver it to the broker present-
ing the above sheet. He may have had no personal
transaction with the broker assigned to him; that is a
matter of no concern. The clearing-house deals with
exchanges; not with bargains — with balances, not with
persons; and so long as the entire list of deliveries due
is assigned in correct proportion to the items in the list
of receipts due, the clearing-house books balance and
every broker will have received the stock to which he is
entitled.

" The other point is, that in assigning balances of stock
for receipt or delivery, the clearing-house authorities
reckon the value by use of an arbitrary price. The cus-
tom is to take the even price nearest the quotation of the
day's last sale in the stock concerned, and these prices
are made public immediately after the close of the Ex-
change.

" The ^ delivery price' is not necessarily, and, indeed, not
usually, the actual price at which the sales were made.
In the specimen sheet above, for example, the three
actual transactions in St. Paul were made, respectively,
at 80, SOJ, and 80i; the arbitrary ' delivery price' was 80,
which is not even an average price. This fact, however,



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54 THE CONSOLIDATED STOCK EXCHANGE OP NEW YORK

can make no difference in the accuracy of the final result,
because the amoimt of the clearing-house check or draft
assigned to balance the sheet is larger or smaller, accord-
ing as the arbitrary clearing-house values for delivery
vary from the actual values. A moment's study of the
sheet will prove this. Suppose, for example, that, all
the transactions in St. Paul had been made at 80, both
those in Northwestern at 119, that in N. & W. at 48, and
those in Missouri Pacific at 57, and that these figures had
also been selected fpr the * delivery prices.' It is clear
that when the 'deliver balance' of 200 Missouri Pacific
and the ' receive balance ' of 500 St. Paul and 1000 N. & W.
had been added to their respective sides of the account,
the sheet would then have balanced, and that no draft
would have been required. For the 'receive' and 'de-
liver' balances checks must, of course, pass through the
brokers assigned for the exchange of stocks, precisely as
was done on a far larger scale under the old system.
The ' balance draft,' or ' balance check,' as the case may
be, merely offsets the natural discrepancy arising from
the use of an arbitrary price in calculating the money
value of stock balances.

"This ingenious bookkeeping device extends to the
process of money exchanges all the economical advan-
tages earlier secured in the exchange of stocks. The
shares bought and sold in this sheet do not offset one
another, but the amount of deliveries made necessary
by the recorded transactions is reduced from 5100 shares,
under the old system, to 1700 under the new. The ex-
Qhan^e of checks, meantime, is economized in similar:



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THE EXCHANGE CLEARING HOUSE 55

measure. The old system would have required the issue
of checks for $258,675 and the receipt of checks for
$181,850 — a draft upon money balances amounting in
all to $440,525. Under the system of clearings, checks
for only $89,000 need be issued by this broker and checks
for t)nly $12,175 received — a total of $101,175."

There is not in the United States an exchange clearing
house that is conducted with greater economy, speed,
accuracy,' and efficiency than that of the Consolidated
Stock Exchange of New York.



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CHAPTER XII
Consolidated Stock Exchange Principles

Upon one occasion a president of the Consolidated
Stock Exchange defined its, principles and the busi-
ness relations existing between its members and their
clients.

He said: Among the positive requirements to which
each and every member of the Exchange is subject are
the following: —

(1) Every transaction must be real. No fictitious or
unreal trade or transaction is permitted or tolerated.

(2) No discretionary business is permitted. A broker
must not, under pain of expulsion, accept orders to be
filled or not in his discretion or in the discretion of any
one in his connection or employment.

(3) Every member of the Exchange is obliged to keep
complete books of account; and these books of account
are always subject to examination by the authorities of
the Exchange.

(4) The evidence of each separate transaction for a
client must be given to the client by his broker, with
full particulars thereof.

(5) Any member failing to comply with the law, to
which reference has been made, is subject to suspension
or expulsion.

66



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CONSOLIDATED STOCK EXCHANGE PRINCIPLES 57

THE RULE IN THE CASE

In this connection, Section 6 of Article III, of the by-
laws, general rules of the Exchange, provides as follows : —

" Section 6. — Any member of this Exchange who
shall be employed to purchase or sell any security or
commodity (listed or traded in on this Exchange) shall
keep a record of each transaction in a purchase-and-sales
book kept for that purpose, showing the date, number
of shares or quantity, name of security or commodity,
price, the broker from whom bought or to whom sold,
and for whom bought or for whom sold, and shall during
the day of the execution of said order furnish to the cus-
tomer for whom said order was executed, the name of the
broker from whom the said security or commodity was
bought or to whom sold as the case may be; and any
member failing to comply with any or all of the require-
ments of this paragraph shall be deemed guilty of acts
detrimental to the interest and welfare of the Exchange,
or of obvious fraud or false pretence, and the Board of
Governors, after investigating the facts of the case, may
in its discretion suspend such member for such time as it
may deem proper, or may inflict the penalty provided
for in Article XIII of the constitution."

(6) Members of the exchange who undertake to carry
stocks for their clients (for example, on a margin of cash
or securities deposited) must carry these stocks in good
faith, or be subject to suspension or expulsion as the
penalty. No member of the Exchange is permitted to
sell out and go short of his customers' stocks. This is



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58 THE CONSOLIDATED STOCK EXCHANGE OF NEW YORK

a rule strictly insisted upon. Section 5 of Article III of
the by-laws, general rules, provides as follows : —

"Sections. — Any member of this Exchange who
shall be employed to purchase or sell any security or
commodity, listed or traded in on this Exchange, who shall
buy or sell (as the case may be) such security or com-
modity for his own account, thereby nullifying the effect
of his client's order, and, under cover of two opposite
executions, taking the transaction to his own account,
shall be deemed guilty of acts detrimental to the interests
and welfare of the Exchange, or of obvious fraud or false
pretence; and the Board of Governors, after investigat-
ing the facts of the case, may in its discretion suspend
such member for such time as it may think proper, or
may inflict the penalty provided for in Article XIII of
the constitution."

(7) Each applicant for membership, at the close of his
examination by the Membership Committee, is handed a
card upon which are printed for his particular informa-
tion Sections 5 and 6 of Article III of the by-laws, general
rules, as above set forth.

THE ARTICLES OF FAITH

(8) Each applicant for membership, in appearing be-
fore the Membership Committee for examination, is
asked, among other questions, the following questions in
particular : —

" In case you are elected a member of this Exchange,
do you promise not to engage in any 'bucket shop'
businefes 7



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CONSOLIDATED STOCK EXCHANGE PRINCIPLES 59

*'Do you promise not to connect yourself with any
person engaged in the ' bucket-shop' business?"

Unless he can satisfy the Membership Committee of his
sincere purpose to avoid "bucket shopping" or "bucket-
shop" methods and persons, he is not admitted to mem-
bership. He is also asked the following question, and,
can only be admitted upon a satisfactory reply thereto.

" In case of your election as a member, do you promise
and agree that you will comply with all the laws and
rules of the Exchange, and will, to the best of your ability,
assist in maintaining good order and fair dealing in the
Exchange?"

(9) The greatest care is taken in admitting new mem-
bers. Many applicants are rejected. The character
and record of each applicant is submitted to the most
thorough investigation; and in order to be admitted
he must prove that he has an adequate financial equip-
ment. He must exhibit and prove his bank account and
his possessions whether in real estate or personal property
or both.

(10) The Consolidated Stock and Petroleum Exchange
(popularly called the Consolidated Stock Exchange of
New York) has been in existence about twenty-five
years. It has about thirteen hundred members, nearly
half of whom are active on the floor of the Exchange.
The character of its membership will compare favorably
with that of any institution in the country. Its Board
of Governors is made up of high-toned, able men chosen
from the Exchange by reason of their experience and
fitness. They are and have been absolutely and unani-



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60 THE CONSOLIDATED STOCK EXCHANGE OF NEW YORK

mously in earnest in endeavoring to suppress "bucket
shopping" and protect the community from illicit deal-
ings in stocks and commodities. The business of the
Exchange is much the largest of any exchange in the
country save one. Its transactions are probably more
numerous than that of any other exchange in America.
These transactions, as a rule, go on from month to month
without complaint or occasion for complaint. Com-
plaints, as on every exchange, occasionally arise. The
president is always ready to take up any matter brought
before him. The Complaint Committee and the Ways
and Means Committee (which last is the committee of
discipline) are always ready to receive statements from
persons claiming to be wronged or injured. The rules of
the Exchange are earnestly and severely enforced.

(11) The Consolidated Stock Exchange of New York
is a strong and purposeful institution. It owns property.
It has a Gratuity Fund of $400,000. It has struggled for
many years to establish high standards. It proposes to
live up to those standards. It will oppose illicit trading
and illicit practices wherever it finds them. It is in a
stronger and better position to-day than ever before;
and its aim will be to perfect and enforce the best
business methods and principles of the highest integrity.

AS TO STOCK CLEARING

(12) In the public mind a perplexity has arisen re-
garding the clearing-house system as applied to stocks.
All great commercial centers and many important lines
of business now operate by clearances. The immense



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CONSOLIDATED STOCK EXCHANGE PKINCIPLES 61

growth and prosperity of commerce could not have been
achieved without these clearance devices. They are
among the important tools of modem civilization.

The stock clearance system was originally employed
in this country on the floor of the Consolidated Stock
Exchange. Its conditions, as improved and perfected,
now constitute a most important and necessary facility
in the settlement of business on the great exchanges of
the country. The clearing-house introduces no fictitious
elements into business. On the contrary it furnishes a
plan and medium for doing large business on exact prin-
ciples of business integrity. Each member of the Ex-
change is entitled to have a clearing-house sheet. Under
orders of his many customers he is likely to both buy and
sell various amounts of the same stock for their account.
Under the old system it was often impossible to make,
within the required hours, the numerous individual cash
settlements. Under the clearing-house system adjust-
ments are made, and the broker takes up the stocks
and pays the money required, or receives the balance
due him, as shown by the clearing-house results of the
day.

Take a simple illustration. A has executed for five
different customers, viz. : B, C, D, E, and F, an order, in
each case to buy 100 shares of "-Copper." He has exe-
cuted for G an order to sell 200 shares short. In the
clearing-house returns he must pay for the net purchase
of 300 shares of "Copper" as a part of his entire transac-
tions for the day. He has the care and responsibility
to his six customers in respect of 700 shares, 500 shares



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62 THE CJONSOLIDATED STOCK EXCHANGE OF NEW YORK

long and 200 shares short. The stock that he must take
up and pay for in one way or another costs him interest
to carry. He either furnishes the cash to carry stocks
out of his own capital; or he borrows money from a bank
for that purpose, or, in the way of Ibaning stocks on the
floor, he borrows money from his co-members of the
Exchange. As to the identical and particular stocks
bought, they necessarily go into the common and general
use for the convenience and requirements of the busi-
ness.

THE broker's UABILrrY

The stocks bought are always available in an honest
and careful broker's hands, for the client for whom they
were bought. But in no exchange is a specially num-
bered stock certificate put down opposite the name of
any purchase. If a broker is carrying for five customers
100 shares each of a certain stock, he must be prepared to
deliver at any time 100 shares of the stock to each one
of the clients for whom he is carr3dng. But it is not of
necessity any one particular certificate of 100 shares.
In connection with bank loans and floor loans, the changes
of the money market, etc., the stocks in charge of brokers
for their customers are shifting position from day to day,
but the liability of the Exchange member does not shift,
and he must always be ready to meet the legitimate
requirements of his clients, and to deliver stock and to
sell stock and make returns thereon when required. This
is honest, legitimate, stock brokerage business the world
over. It is the same ou the New York Stock Exchange



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CONSOLIDATED STOCK EXCHANGE PRINCIPLES 63

and on the Consolidated. There is no difference. On the
Consolidated, any defect or deficiency on the part of a
member is met instantly with suitable discipline by the
authorities of the Exchange.

Take a further example. The associated banks of
New York could not to-day live and do business without
their clearing house. For a simple and obscure illustra-
tion we will suppose that H., a retail merchant, finds
himself in the office of his friend, a jobber, whom we will
call J., with $2000 of bank bills received on small store
sales. He says to the jobber: "I don't want to carry
these bills about with me. I turn them over to you. I


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Online LibraryS. A. (Samuel Armstrong) NelsonThe Consolidated stock exchange of New York, its history, organization, machinery and methods → online text (page 4 of 8)