Perhaps the most important event which ever affected the Stock Exchange as an institution was the inquiry into its constitution and customs by the Royal Commission, which was appointed in 1877. Not only was that event of much historical interest from the Stock Exchange point of view, but the report issued by the Royal Commission is a document which, even to-day, possesses interest and importance as throwing light upon the methods of the institution as seen by an independent body most competent to examine into its affairs and comment upon them. The report still possesses importance because the constitution and customs of the Stock Exchange are, to all intents and purposes, much the same now as they were then—it brought about no important alteration, for on the whole it proved to be a vindication of the Stock Exchange as the Royal Commissioners found it. Some minor recommendations for reform were adopted by the Stock Exchange itself, or have been adopted since the report was made; and one or two sweeping recommendations have been ignored, with the result that the Stock Exchange is now as it was then, and in that sense the report is quite up to date. In fact, the report still forms an admirable essay on the constitution of the Stock Exchange and the conduct of its business.

The Royal Commissioners found that in the main the existence of such an association and the coercive action of its rules on its members had been salutary and to the interests of the public. The Commissioners seemed to incline to the view that the dual control of the institution by the Managers on the one hand, and the Committee on the other, should be superseded by the amalgamation of the two bodies. The Commissioners expressed the idea that matters were tending in that direction—and they are still so tending, especially since the enactment of the rule making it obligatory for new members to purchase one or more shares in the Stock Exchange.

The Committee, it was found, acted uprightly, honestly, and with the desire to do justice in the administration of the rules. These rules were capable of affording relief and exercising restraint far more prompt and often more satisfactory than was the law of the land. A suggestion had been made that the Committee should be assisted in its deliberations by an outside assessor or assessors, especially in cases of important questions involving the personal interests of fellow-members and others; but the Commissioners preferred the Committee as it is, on the ground that the members understood the complicated questions to be decided much better than any outsider would understand them, and that it was necessary in most cases that the decisions should be very prompt and complete. Similarly the Commission preferred the present practice of the Committee in arriving at its decisions to the proposed subdivision into special panels for special subjects.

The Commissioners reported that they were persuaded that the apprenticeship served by a clerk who eventually became a member on his own account carried with it a promise of future success. At that time such apprenticeship was not compulsory, and the recent alteration in the rules compelling every would-be member to serve the apprenticeship would doubtless have given much satisfaction to the Commissioners. As a matter of fact, the Commission recommended that in the case of the election of new members there should be a substantial inquiry into their character, position, and general fitness, and that the inquiry should be real, not covered by the answers to the formal questions required by the rules. It thought that such inquiry could better be carried out by a small sub-committee, in spite of its objection to the general idea of dividing the Committee into panels. It further recommended that the guarantee of the sureties should be extended from two years to four years. There is now a subcommittee for the election of new members, and the guarantee does now extend over four years.

As to the Stock Exchange principle that members should be entitled to look to the members with whom they dealt as if they were principals, quite apart from their engagements with outsiders, the Commission held that this had the merit of enabling the Committee with its absolute power to enforce bargains and adjust disputes with speed and facility. The public were not injured by such a system so long as the legal rights and liabilities of the member in relation to the principal outside were not extinguished or affected. No rule of the Stock Exchange ought to be allowed to qualify or destroy that legal relation.

On the question of the abolition of the jobber, which has frequently been mooted, the Commission found that his existence was of extreme value to the public, attributing to the facilities for business which the system provided the fact that orders given on provincial exchanges or foreign bourses were constantly sent to London. But in cases of inactive securities, in which the jobber was unwilling to make a price in the ordinary way, the Commission recommended that a book should be kept in which brokers could enter their requirements, with a view to bringing the brokers of buyers and sellers into immediate contact. As a matter of fact, a board for such a purpose does now hang in the Home Railway Market, but it is very little used. In the matter of the facility with which brokers and jobbers transacted their business, the Commission paid a special tribute to the machinery of the Clearing Department, which, it said, appeared to answer its purpose of settling a whole series of bargains, by bringing the ultimate seller into contact with the ultimate buyer, exceedingly well. Nowadays the Clearing Department is sometimes subjected to criticism, and its machinery has broken down more than once, notably under the exceptional strain of the South African boom in 1895.

The Commission also paid a compliment to the members in general in the mention of the fact that the absence of a written contract in the dealings between them had in practice no evil results, and that out of the millions of bargains transacted in the Stock Exchange, such a thing was hardly known as a dispute as to a contract or its terms.

Moreover the Commission exonerated the Stock Exchange from the charge that it encouraged gambling. It found that the members with whom the purchases and sales of stocks and shares were effected were, in the majority of cases, entirely unable at the time of executing the orders to distinguish between those which were made speculatively and those which were connected with investment. The Commissioners did not think it practicable to render gambling business any more illegal than it already was. Those who indulged in it in the Stock Exchange, the Commission found, were mainly the younger and more necessitous members, and it suggested that the Committee should hold a restraining hand over them, meting out severe punishment where extravagant speculation had been indulged in or encouraged by a member. Closely connected with this subject was a recommendation as to the readmission of defaulters. It appeared that during the decade preceding the Commission's inquiry, 265 members had been in default, 116 had applied for readmission, and 105 had obtained it. The Commission expressed the opinion that such a proportion of readmissions was excessive, and that the rule of the Stock Exchange should be against the readmission of a defaulter except in very special circumstances, unless his default had been brought about by the conduct of others, and not through his own fault. It was also recommended that when a member was declared a defaulter, the fact should be communicated to the outside world, and this is now the invariable custom, a notice being sent to the Press for publication.

In a half-hearted kind of way the Commission also recommended that the outside world should be admitted to the Stock Exchange, but this recommendation has never been carried out. The Commissioners declared that the public was able to rely upon reasonable speed and certainty in the transaction of business, and that there was as small a difference between the buying and the selling price of a security as could be obtained in any other market; yet they thought that if it were possible it would be desirable that the House should be open to the public, not because it would give a client any real control over the deal which his broker was carrying out for him, but because it might remove certain jealousy and suspicion which was created in some minds by the privacy of the House. Even in putting forth the suggestion thus mildly, the Commission admitted that the building was hardly adequate to the accommodation of its members, and that business might be impeded if strangers were admitted.

The question of the commission charged to the public by the brokers was brought before the Commissioners, but they refused to report in favour of an official fixed tariff, or against sharing commissions with runners, or against the practice of taking a double commission on certain transactions; but they expressed the opinion that where the commission was so divided, or a double commission was so earned, the client should be informed of the fact. As has been shown, this question of double commissions is closely connected with the question of the distinction between the broker and the jobber, and this distinction met with entire approval in the Commissioners' report.

On the vexed question of dealings in shares before allotment, the Commission gave the Stock Exchange Committee the credit of having done all that could be expected to cope with it. The Commission attributed the scandals which had arisen, however, to the system under which the Committee first permitted such dealing to take place, and then, when unfair advantage was taken of the permission, refused to enforce the completion of the deals by fixing the special settlement. The Commission had been informed by the representatives of the Stock Exchange that although the Committee would persist in enforcing the fulfilment of bargains in shares before allotment, as debts of honour, even although such bargains were declared by the law of the land illegal, yet, if they were so declared, the rules of the Stock Exchange would be made to conform to the new law. Accordingly the Commission recommended legislation prohibiting dealings before allotment under sufficient penalties—a recommendation which it has hitherto been found impracticable to adopt.

The question of quotation in the Stock Exchange Official List came in for a good deal of attention at the hands of the Commission. It was not satisfied with the investigation which the Committee made before giving securities a place in the list. It was not that the investigation lacked thoroughness; on the contrary, the Commission seemed to find that the investigation went too far, with the result that inclusion in the Official List gave the security in the mind of the public a stamp of soundness, stability, and genuineness to which it was not entitled. The Commission was of opinion that the investigation should be only into mere formalities, and that it should be made abundantly clear to the public that admission to the list meant nothing more than that the loan or company had complied with these formalities—that its appearance in the list had nothing to do with its desirability from the point of view of the investor. The Commission admitted that the somewhat fuller investigation which the Committee made was of use, and had in many instances been the means of detecting fraud; but it held the view that whilst it was the duty of the Committee to find whether the security was fit to be quoted in the list and placed in the market, it was not its duty to give it the stamp of being a desirable investment. The Commission went so far as to suggest that if any inquiry into the stability and soundness of a stock were deemed necessary for the public protection, such inquiry ought to be undertaken by some public functionary and enforced by law. The Commission also made some recommendations of minor importance as to the manner in which the prices were quoted in the Official List, but its suggestion that a public functionary might be appointed to determine what securities were fit for public transactions was one of the boldest in its report.

Finally the Commission recommended that the Stock Exchange should be incorporated! This was quite revolutionary in its boldness, and it was a distinct recommendation, not a mere suggestion. The Stock Exchange, the Commission thought, should be incorporated by Royal Charter, in order to give permanence to the admittedly excellent rules by which the body was governed. At any election, the Commissioners held, the Committee might be reorganised by the whim of a majority of members, and its existing rules, as well as any further reforms that might be wrought, might be repealed. The Incorporated Stock Exchange, it proposed, should remain governed as it then was, but subject to the provision that no alteration in the rules and regulations should become operative until approved by the President of the Board of Trade or some other competent public authority. At the same time, this outside interference, it was recommended, should be exercised with a sparing hand. Any attempt to reduce the rules to the limits of the ordinary law of the land would, in the opinion of the Commission, be detrimental. The Commission seemed of opinion that the Stock Exchange would welcome incorporation, but it proposed, apparently as a kind of sop, that if it accepted the recommendation it might well be granted a monopoly of stockbroking—in other words, it proposed that if the Stock Exchange were incorporated it should have the exclusive right of licensing people to act as stockbrokers, which, of course, would do away with the outside broker altogether. In any case the Commission seemed to deem it very important that all stockbrokers should be licensed. They used to be so licensed in the City of London by the Corporation, but by degrees the control of the Corporation was broken down. In the event of the Stock Exchange refusing incorporation, the Commission recommended that some public functionary—it seemed fond of public functionaries—should be appointed to exercise authority and discretion in granting and withdrawing stockbrokers' licences, both to members of the Stock Exchange and to others.

This report of the Commission was by no means unanimously approved by the dozen Commissioners, of whom four signed it with stated reservations. One principal point of objection was the proposal to legislate against dealings before allotment, which it was contended would stop a vast amount of legitimate business because a few exceptional cases of abuse had arisen. Another principal objection was to the proposal to appoint a public functionary to supervise quotations in the Official List, it being contended that no functionary would be equal to the task of saying what were sound securities, and that the Stock Exchange Committee made no attempt so to do in granting a quotation. Another objection was to the proposal that the Stock Exchange should be incorporated, it being contended that the Stock Exchange had flourished, and had performed its functions as a voluntary association in a manner which had commanded the entire confidence of the public. It will be observed that the reservations rather than the report itself have prevailed.