Part 37

=6.= The percentage or commission due to the broker is included in the amount deposited to protect the deal, which is called a margin. If there should be a decline in price of either stock or grain, sufficient to cause the broker to feel insecure, he always reserves the right to call upon the customer for an additional deposit, even though the time of delivery has not yet arrived. In case the customer fails to make such additional deposit, the broker can sell the securities, grain, or other purchase, at once, in order to protect himself; the amount primarily deposited by the customer is thereby forfeited.

All orders for the purchase and sale of any article are received and executed with the distinct understanding that actual delivery is contemplated and that the party giving the order so understands and agrees.

SECURITIES

=7.= It is understood and agreed between the broker and his client, that all securities carried in his account, or deposited to secure the same, may be carried in the broker's general loans, and may be bought or sold at public or private sale without notice, when such sale or purchase is deemed necessary by the broker for his protection.

It is also understood and agreed that the right is reserved by the broker to close transactions on all accounts without notice, when protection is exhausted, or when, in his judgment, it is near enough exhausted as to endanger the account, and the broker reserves the right to settle contracts with his client, in accordance with the rules and customs of the exchange where the order is executed.

BUCKET SHOPS

=8.= The class of brokerage concerns termed bucket shops are those which do not actually carry out the orders of their customers, who neither buy nor sell anything, but who expect quick deals, frequent changes and, speaking plainly, merely gamble with their clients, allowing them to take whichever side they prefer. The large margin which this fraternity receives is a commission on deals whether they win or lose.

In order to maintain at least a pretense of legality, there must be an actual transfer of all stocks and commodities speculated in. The broker must acquire nominal possession of something which represents stocks, grain, cotton, or other commodities. To do this he must borrow money from the bank, or borrow stock or warehouse receipts from those who have them to lend. In either instance he charges interest to his speculative customers.

It is estimated that the brokers in New York City who are members of the various exchanges, have an average amount in call loans outstanding of about $600,000,000.00, all of which vast sum is used to finance the orders of the brokers' customers. In dull times the minimum falls as low as $350,000,000.00, but there have been periods of speculative activity when $1,100,000,000.00 have been thus employed. The interest rate charged brokers constantly varies, but those who have had dealings with them state that their accounts rarely show less than five per cent interest. The broker charges the customer six per cent, thus averaging one per cent profit upon all money borrowed.

The New York Stock Exchange was founded for a high and honorable purpose, the same being true of the New York Produce Exchange, The Chicago Board of Trade, and other institutions for coöperative trading and the determination of values, in accordance with the recognized codes of business, and in conformity with the laws of supply and demand. Such exchanges serve admirably the producer and the merchant. They have a valid function to the investor in railroad and corporation securities, and are indispensable in facilitating the massing and distribution of capital required by large commercial enterprises.

LEGITIMATE DEALERS

=9.= Every legitimate brokerage concern has its representative or representatives on the board of trade in the city wherein it is located, and they are members in good standing of the board. When an order is given by a customer, either through the wicket or by wire, it is immediately transferred to the floor man and he proceeds to buy or sell as the instructions are given. In an active market the client must take the chances of slight fluctuations, which are just as likely to be in his favor as against him. The floor man reports the sales or purchases as soon as made, with the price paid and from whom purchased. The entries are immediately made to the customer's account.

CLEARING HOUSE

=10.= The boards of trade in different cities maintain a clearing house somewhat similar to that used by the banks, to settle the deals of each member of the board each day. The deals consummated during the day's session are reported to the clearing house and the amounts due from and payable to each firm or individual member are computed. If the brokerage firm has purchased ten thousand dollars more than it has sold, a check is given to the board for ten thousand dollars, as there must be some other firm or firms who have sold more than they have purchased to whom this ten thousand dollars is due, and to whom it is paid. Deliveries of stock are made at the time the balance is paid.

RING SETTLEMENT

=11.= At the close of the day, settlements for grain purchases are made between brokers at an agreed settlement price. If brokers have bought and sold to each other in varying amounts, only the difference in the price is adjusted with each other. What are called ring settlements save considerable time, money, and labor. The ring settlement is a settlement between three or more parties without the necessity of margining and may be illustrated in this manner:

A has bought 50,000 bushels of wheat of B, and has sold 50,000 bushels to C. By inquiry, it is found that C has sold 50,000 bushels to B. It is ascertained that the transactions between A, B, and C offset each other, and instead of each party being obliged to put up margins upon each transaction, a settlement may be effected by paying the difference in price, as the sale from C to B may be at a different price from the sale made by B to A, and the sale made by A to C, may have been at a still different price. By the adjustment between the different parties of the difference in price, the necessity of margining by A, B, or C is rendered unnecessary.

ILLUSTRATION

A bought 50,000 bushels of wheat of B at $1.23; A sold 50,000 bushels of wheat to C at $1.23½. By making up the ring it was found that C has sold to B 50,000 bushels at $1.22½. In making the settlement it is found that C is indebted to B ½ cent per bushel for the amount sold, as B sold at ½ cent advance; C is also indebted to A ½ cent per bushel as he purchased of A at a ½ cent advance on the price A bought from B. The settlement of this deal would be made by C giving his check for the amount due to B and to A, and there would be no necessity for any one of the three brokers putting up a margin on the deals. The amount of grain is offset one by the other, and the difference in price has been adjusted by payment of cash.

COMMODITIES HANDLED

=12.= The commodities that are handled upon the board and by brokers in general—food stuffs—are wheat, corn, oats, pork, lard, and short ribs. The various listed stocks are also bought and sold, a considerable business is done in bonds, and in some exchanges mining properties are listed, bought, and sold; although the latter is not common in the larger and more important exchanges. Cotton is a very important factor in some exchanges, and tobacco in others.

CORNERING THE MARKET

=13.= To corner the market is to offer to buy and be prepared to carry out your offer, for an amount more than is offered for sale, thus causing the price to advance. Sometimes this is done by large operators to their advantage and sometimes, in spite of their large purchases, which encourage a rising market, the prices fall before their deals are consummated, and they are left high and dry with a considerable loss instead of a large profit. The bull who tries to run a corner has a strong foretaste of what it means to advance sensationally, a staple article of consumption. Stocks and bonds may be hoisted ever so high; real estate may be boomed to far beyond its intrinsic or even potential worth—the public has no objection; the process is, in fact, rather pleasing to it. A lift in cereals or cotton above the normal lines encounters many protests and the higher the lift, the more savage the protest. This of course does not include the farmer or planter, unless he has disposed of his output; then he willingly enough joins the chorus of protestation.

VALUE OF THE WIRE

=14.= The telegraph is a very important factor to the grain and stock broker, as a large majority of their business is done by wire. Many of their clients are distributed through the country and keep close watch of the fluctuations of the market, sending their orders by wire, at what they consider an opportune time.

Most brokerage firms have a number of customers outside of the city, and these customers as well as those in the city who are large buyers, keep a considerable deposit on hand with the broker at all times. This deposit is frequently augmented by advantageous sales or decreased by losses, commissions, and interest charges. Reports of the condition of customers' accounts are made with frequency and any customer who finds that he has more money in the hands of the broker than is considered necessary, can secure part of the same by asking, or if he desires to close all transactions, the total amount due him is paid over at once. All amounts thus deposited are credited to customers' accounts and properly taken care of through the bookkeeping department.

SETTLEMENT OF CONTRACTS BY OFFSET

=15.= To quote from the rules of the Chicago Board of Trade: