The Banks as Stockbrokers.

Were business on the Stock Exchange solely of an investment nature, it has been suggested that that institution could dispense with over fifty per cent. of its members, for, during recent years, a large amount of the investment business of the country has drifted to the banks, which place their orders in the hands of a few brokers, with whom they divide the usual one-eighth per cent. commission. The large banking companies are outside brokers, and so eager are some of them to attract this class of business that they offer their clerks half the commission received from the broker upon all business introduced by them. Seeing that the average bank clerk is absolutely without experience of the markets, touts of this variety are a source of danger to the public.

The banker who divides his share of the commission with the clerk who introduces the business is satisfied with one-thirty-second per cent. commission; but the broker, who only gets one-sixteenth instead of one-eighth per cent., is, probably, less eager to make a close bargain for a customer of the bank than for one of his own. On the other hand, the volume of investment business which flows through the banks to the Stock Exchange is so large that those brokers who are favoured with the banks' custom must earn considerable sums by way of commission. Whether orders from customers of the banks receive that individual attention which the brokers give to those from their own clients is, however, another matter.

Most of the banks have Stock Departments, to which orders are sent by their country branches. These orders are steadily increasing, and the tendency seems to be for a large number of the provincial public to do their investment business through the banks. This class of business is, therefore, gradually drifting to the banks, and doubtless, as time goes on, the banking companies will become the recognised channel for the bon fide country investor.

It follows that the non-speculative business is getting into a few hands, with the result that a large number of brokers on the Stock Exchange are, so to speak, "starved," and consequently obliged to turn their attention to the demand created by the more speculatively disposed members of the public. Yet, strange to say, in spite of the fact that orders are now diverted to the Stock Departments of the London banks and that, therefore, fewer brokers are required to transact the investment business of the country, the members of the Stock Exchange are increasing numerically. Seeing that the safe business is drifting through the banks into the hands of a few large brokers we may well ask how the smaller men obtain a living from their business?

The ground, year in year out, is being farmed assiduously by the banks, whose large capital and established credit inspire widespread confidence; and in the face of such competition the small broker's chance of success does not seem encouraging. How can he make a business? The banks, who place their orders with strong brokers, guarantee those customers who deal through them against the insolvency of both the broker and the jobber, and such a guarantee is unquestionably worth having. The small broker, as a rule, possesses very little capital; whereas the person who instructs his banker either to buy or to sell is conscious that he is dealing through an institution whose credit is practically unlimited, and whose resources amount to many millions. He has not, therefore, to ask himself whether his broker is safe, and this sense of security, inspired by a bank's millions, undoubtedly causes many people who would rather do business direct with a member of the Stock Exchange to deal with the banks. Moreover, a bank official is quite well aware of this advantage, and when a customer, who is undecided whether or not to employ a broker, asks what inducement the bank holds out to him, he quietly replies: "You have the bank's credit upon which to rely." Such an answer makes a customer reflect. Further, it seldom fails to effect its purpose, because, in the first place, it instils a doubt in the client's mind regarding the means of his broker; and, in the second place, because he cannot fail to recognise the greater security the bank affords him.

It is evident, then, that the small broker's path is bestrewn with almost insuperable difficulties, and that it is extremely hard for him to attract safe business. But the banking companies do not arrest the flow of speculative orders to his books.

The banks, which have a horror of speculation, confine their attention to the buying and selling of stocks and shares through their brokers. Were they to encourage gambling in securities they are fully aware that the result would be disastrous to the business of banking, for a certain number of their customers would be sure to neglect their business in the hope of snatching differences on the Stock Exchange, and such a policy would end in a crisis that would bring the country to the verge of ruin. For this reason alone the banks firmly and wisely refuse to foster speculation among their clients.

Capital, we all know, is the savings of labour; consequently the greater the profits made in trade during any one year, the larger is the fund awaiting investment. Now, if the banks were to incite the gambling fever among their customers, this fund would tend to diminish each year, and, seeing that the prosperity of the country is entirely dependent upon its trade, bankers, customers, and stockbrokers would speedily become involved in common ruin. Small wonder, then, that our large banking companies, which are responsible to the public for millions of money—a large proportion of which they must be prepared to return at any moment—decline to open speculative accounts for their clients. It would be madness on the part of such institutions to divert their customers' attention from trade to speculation in securities; and for this reason the bank clerk as amateur commission agent seems a step in the wrong direction.

Moreover, in this respect the policy of the banks appears contradictory. Recognising the temptations to which their clerks are exposed, it is their practice to instantly dismiss those men who indulge a passion for betting; yet some of them deliberately encourage their servants to tout for investment orders, apparently unconscious of the fact that once their attention is drawn to the markets, some of the clerks are almost certain to end by gambling for differences on their own account. Helping themselves to the money of the banks is probably the next step. Were not the question so serious, the fact that directors cannot make so palpable a deduction would be positively humorous, for it is evidently quite as undesirable, from their point of view, that a clerk should bet upon a stock as upon a horse.

The modern credit system, it will be seen, places a very large part of the safe or investment business in the hands of a minority of brokers, who, like the bankers, much prefer to do a good commission business, and to leave speculation to the smaller brokers, who have less to lose than they. These favoured brokers have grown accustomed to sleeping comfortably o' nights, undisturbed by the vision of settling day on the morrow; and, quite blind to the cause of their enviable freedom from care, they are disposed to be loud in their abuse of the risky manner in which some of the smaller brokers conduct their business. But, seeing that the non-speculative orders flow from the banks to themselves, it would be interesting if they would attempt to explain how the army of small brokers can live unless they cater for the wants of the speculator. As a rule their capital is small, consequently they cannot afford to wait years while they slowly build up a connection; so, as the safe business is cornered, they accept the risky. This they do, not from choice, but from necessity; and the Stock Exchange Committee, in order to prevent additions to the ranks of these undesirables, should take steps to reduce the number of members of the Stock Exchange very considerably. Already the investors of this country have to support a small army of over four thousand of them.

Of course, after every period of excitement, numerous weak members of the Stock Exchange are weeded out, and, in a sense, the bon fide investor is the pigeon that is plucked by the speculator. The bulls buy in the fond hope that the investor will come in and relieve them of their stock; and the bears sell securities which they do not possess, trusting that investors will also sell, thereby enabling them to buy at a low figure and to pass on their securities at a profit to those to whom they have previously sold. The position is therefore often an artificial one, created by operators for the rise or fall, and the investor, unless he thoroughly understands the markets, is like a pigeon among hawks.

The larger the number of members of the House, the greater is the risk run by the investor who deals with a small broker; and as the investment business of the country flows largely in a particular channel, it is more than probable that, unless the Committee decides to admit new members sparingly, a large number of small brokers will one day be "hammered" after a period of intense excitement.