In the preceding chapters the Stock Exchange has been considered as an institution complete in itself, rather than as an important element in the world's business. We have obtained some idea of its constitution as it affects its proprietors and members rather than as it affects the outside public. The market-place and its frequenters are there, but we have not yet seen them at work, as we shall now proceed to do.

The members of the Stock Exchange are divided into two sections: the jobbers who are ever ready to buy from or sell to the public the wares in which they deal, and the brokers ever ready to act as agents for the public in their transactions with these jobbers. These brokers and jobbers—there are twice as many jobbers as brokers—are equal in all respects as members of the Stock Exchange; they pay the same fees and subscriptions, and they are governed by the same code of rules, although, of course, some of these rules are specially applicable to the one class and some to the other. At the outset a member of the Stock Exchange has to declare whether he proposes to act as a broker or a jobber. He may not act as both, or what would practically amount to the same thing, no partnership may exist between a broker and a jobber.

The system, the advantages of which are often called in question, is peculiar to the London Stock Exchange. It does not exist in New York, or in Paris, or in the other principal business centres of the world. It is obvious, however, that it acts as something of a check in the interest of the public unversed in the methods of the market. Were an outside buyer or seller to deal direct with a market professional, he would be entirely at his mercy, whereas by employing another market professional to deal for him he brings into play the principle of diamond cut diamond. It is quite easy to bid on one's own behalf in an auction room, but it is usually found more profitable to pay a commission to someone who knows the ropes; and the intricacies of auction buying are not to be compared with those of transactions in stocks and shares. That, of course, is not the only advantage of employing a broker as agent to deal with a jobber who is a merchant. The wares of the Stock Exchange are numerous and varied; more than four thousand separate securities are quoted in the Official Price List of the market, and the number of stocks and shares dealt in which are not quoted in this list is legion. One might wander about the Stock Exchange all day, and frequent hundreds of brokers' offices which surround it, without being able to find a seller of the certain stock one wants to buy, or a buyer of the certain stock one wants to sell. In the existence of the jobbers there is organisation. They stand in their own markets waiting either to buy or sell the few special securities in which they are always prepared to deal. In cases where there is intimate connection between a company and a jobber whom it employs to retail its securities, that jobber is called "the shop" in such securities. Jobbers are often called dealers; the broker, of course, deals in a sense, and so does the outside investor or speculator, but the term dealer is frequently used, to the confusion of the uninitiated, in the limited sense of being synonymous with the term jobber.

By making a speciality of a limited number of securities, the jobber is able to keep his finger on the pulse of the market, and to gauge accurately at any moment its supply and demand. He must do this in his own interest, for he must ever be ready to buy and sell at the demand of the broker whom the public sends to him. This is compulsory under the law of competition, for, of course although the jobber confines his attention to comparatively few stocks, he has no monopoly; there are other jobbers in the same market anxious to secure the orders which the brokers bring in. The jobber obtains his supply generally by purchase in the market, always endeavouring to charge a slightly higher price for it than that at which he has bought it or thinks he can buy it.

Thus he is to all intents and purposes a merchant, while the broker is an agent and an agent only, the agent of the outside public. The outsider buys from or sells to the jobber through the medium of the broker. The broker, except in special cases, may not do business direct with his client, although the rule is sometimes honoured in the breach; it is the custom of many a broker to inform the client of the name of the jobber from whom he has bought the stock, and it is within the right of the client even to examine the jobber's book to see that the transaction has been properly carried through. There are, however, special circumstances in which it is to the interest of both broker and client that they should deal with each other direct. For instance, if a broker, as not infrequently happens in the case of an active security, simultaneously receives an order to sell certain stock for one client and to buy it for another, it would obviously mean delay and expense, to the detriment of both clients, if the broker had to go into the market to sell the stock and to go into the market again to buy it. It is better for all concerned that the business should be carried out as a cross-transaction, even if in the process the broker receives a commission from both clients, as he would if he went into the market. He is allowed to arrange the cross-transaction, with the important provisions that he must distinctly inform the clients of the circumstances of the case and that he must not take commission from both parties.

The distinction between jobber and broker was for years a source of discussion often acrimonious in the Stock Exchange, and the long-suffering Committee was frequently called upon to decide delicate points arising out of the matter. The jobbers charged the brokers with acting as jobbers, and thus competing with them in their business. You have bought your mining shares, they said, not from us, but from a big mining house outside the Stock Exchange. The brokers countercharged the jobbers with acting as brokers, and thus competing with them in their business. You receive orders direct, they said, from certain provincial brokers who are not members of the Stock Exchange, whose business ought to come to us. But the grounds for these recriminations have now been removed by rules more clearly defining and separating the functions of jobber and broker respectively. The jobber is strictly forbidden to receive orders direct from the public or provincial brokers, and the broker must not receive a commission from more than one party on one transaction, and he must not execute an order with any non-member unless he can thereby deal to greater advantage than with a member.

The existence of the brokers as part of the system prevailing in the Stock Exchange is justified, not only by the fact that they are experienced in making the best terms with the jobbers, and by the fact that they are able to go direct to the market and the man who will at once buy or sell any one of the thousands of securities ranging from Consols down to Klondyke mining shares, but also by the fact that they perform many services of a somewhat intricate and technical nature connected with the buying and the selling. Transfers of inscribed stock have to be explained, and the client has to be identified at the bank, share certificates have to be obtained and delivered, arrangements have to be made for carrying over shares when a client does not desire to pay for them at the time of settlement, other detailed duties of the kind have to be performed, and, above all, the broker is frequently called upon to give expert advice as to investments and speculations, and to keep the client informed as to when to buy or sell. It may take days of watchfulness and inquiry to execute a single order when the client fixes a limit, that is, when he gives an order to purchase not above a certain price, or to sell not below a certain price.

For all this the broker receives a commission which must not be less than a scale laid down by the Committee. In the case of British and India Government securities, the scale is 2s. 6d. per cent. on the nominal value of stock bought or sold; for Bank of England and Bank of Ireland stock it is 5s. per cent. on the actual money paid or received; for British and other Corporation stocks and Colonial Government securities and for American and foreign railroad bonds, 5s. per cent. on the nominal value; for foreign Government bonds the rate is 2s. 6d. on the nominal value; for railway ordinary and deferred ordinary stocks the rate varies from 1/16 per cent. on the nominal value when the price is under £25 to 1 per cent. on the nominal value when the price is over £200; for other registered stocks the rate is 1/2 per cent. on the money. In the case of shares, the commission varies from 1-1/2d. to 2s. 6d. per share, according to the nominal value of each share, when the value is less than £25; for shares of the nominal value of £25 each or over, the rate is 10s. per cent. on the actual money. In the case of transactions over £1,000 the broker may charge half these rates. All these, of course, are minimum rates. There is nothing to prevent the broker charging more, if he can get it, but in practice the minimum has become the recognised scale.

Strictly speaking, the broker lives on these commissions, though, of course, his intimate knowledge of the market affords him special facilities for speculating and investing on his own account. He must not, however, it may be repeated, deal with his own clients; directly he buys or sells for himself he becomes a principal, and is not in that connection a broker at all. Moreover, he must not arrange with the jobber to whom he takes the business for part of the profit which the jobber makes. In the eye of the Stock Exchange, such collusion between broker and jobber would be regarded as dishonesty of the grossest nature, and would probably result in the instant expulsion of both the parties concerned. As a matter of fact, however, the broker frequently divides the commissions with an outside runner or with a member of his staff who introduces the business, although he is strictly forbidden to enter into partnership with one who is not a member of the Stock Exchange.

An adventitious source of income which the broker enjoys arises from the formation of new companies and the flotation of loans, especially large loans issued by the Government and municipal bodies. The broker is called upon to circulate the prospectuses amongst his clients; he stamps his name upon each application form, and the issuing house pays him a commission upon all allotments made to his clients. He may even underwrite loans or share issues—that is, undertake to subscribe for a certain amount, should the public refuse to come in. This he does in return for a commission, or some other consideration, which is paid whether he is called upon to take up his proportion of the issue or not. It is to the interest of the loan issuers and the company promoters to make sure, in this way, that their capital shall be all taken up. Some promoters boast in their prospectuses that the issue they are making has not been underwritten, implying, of course, that the issue is so attractive that they are sure the public will take it up. But in these cases the truth sometimes is that the issue is not underwritten simply because nobody can be induced to underwrite it.

Although the broker may, by the circulation of prospectuses, give a gentle hint to his clients that there is business afoot; although, indeed, he may, and in many cases does, send them circulars, and price lists, and newspapers every night; it is only amongst his own clients that he is allowed to advertise in this or any other way. He usually keeps this rule most rigidly, in the spirit as well as in the letter, and he is aided in so doing by the watchfulness of the Committee. For this reason, some members of the Stock Exchange—for the rule against advertising applies to the jobber as well as to the broker, although the jobber has naturally less temptation to advertise—show much repugnance even to their names appearing in the newspapers in any connection whatever, though it may be quite apart from business, and some are even chary of announcing a mere change of partnership, or a removal of offices, lest it might be construed as an advertisement.

Meantime, brokers who are not members of the Stock Exchange—outside brokers, they are called—flood the newspapers with advertisements of a description so flaring as to rival or surpass those of the patent medicine vendors; and partly to counteract the competition thus arising, the Committee of the Stock Exchange has a standing advertisement in all the principal papers announcing that members of the Stock Exchange are not allowed to advertise, that those who do advertise are not members of the Stock Exchange, and that lists of those members who are brokers—it is no use furnishing the public with the names of the jobbers—may be obtained from the Secretary on application. A list may also be seen at one of the entrances of the Bank of England—a relic, perhaps, of the time, when the Rotunda of the Bank of England was practically a Stock Exchange. There are a few firms of outside brokers of the highest standing, possessing businesses superior in magnitude and status to those of the great majority of Stock Exchange firms. Such firms as these in former years brought a considerable volume of business to the Stock Exchange itself, obtaining orders from their clients by more enterprising methods than the members themselves were permitted to employ under their rules, and passing the business on to brokers who were members. In its stringent rules regarding brokers' commissions, however, the Stock Exchange Committee has now practically abolished this practice by specifically penalising outside brokers.

All outside brokers, of course, are unchecked by the healthful restraining control of the Stock Exchange Committee; they are responsible to none but themselves. Their ranks unfortunately contain a large number of rogues and vagabonds. As they deal direct with their clients instead of for them, their clients' losses are their own gains; often they do not deal at all, but only bet with their clients on the rise or fall of prices. When they lose they refuse to pay, and on being taken into Court plead the Gambling Acts to relieve them of their liability. Cases are constantly occurring in which they show less honesty even than this; they simply make off with any money with which people may have entrusted them. As a rule, the advertising outside broker is to be avoided.