From The Stock Market Barometer by William P. Hamilton, published in 1922

Stock Brokers and Market Specialists

Continued from...Mechanics of the Market


It is obvious then that the floor trader, snatching a turn of a point or so, has an advantage. If the customer tried to do it he would have the broker's commissions of a legal eighth per cent each way against him, with the market turn of a quarter per cent; so that, as a mere gamble, he would be betting heavy odds on an even-money chance. A "bucket shop" would encourage him to do that, because the keeper of such an establishment works on the theory of new customers all the time, fleecing them as thoroughly as possible while he has the chance. None of his orders is really executed in the stock market; so that he himself pockets this extortionate dealer's chance. But we are considering the Stock Exchange itself, and its speculative market as a trade barometer. Bucketing is no part of the Stock Exchange's business, and the police can stop it elsewhere - if they choose.

Old and Satisfied Customers

Commission both ways and the market turn do not amount to much if the customer is buying on values, with ample margin, or with the ability to pay for his stock outright, together with the tested belief that the stock he has bought bids fair to look attractive at much higher figures. He is the sort of customer the Stock Exchange houses strive to serve. A house which was in continuous business since 1870 has recently changed its name. It had at least one customer who had been on the books for fifty years, and many for twenty years and longer. This does not look as if the outsider always lost money in Wall Street, or as if the conditions of business made losses inevitable.

A brokerage house, like any other business, works to get new clients all the time, exactly as a paper or magazine works to get new subscribers. But the experienced broker will tell you that while advertising methods will bring the customers, nothing but disinterested service will keep them. I have often noticed that the really successful man in Wall Street is curiously inarticulate. Experience has taught him to keep his tongue between his teeth, and he is not at all communicative. The unsuccessful seem to be unable to keep their losses to themselves, in most cases, and it is usually found that they are thus articulate from a radical defect in character. They habitually do too much talking and too little thinking.

No Apology Offered or Required

This is not an apology for the stock market. Our old friend, our unwilling stepfather, George III, was not renowned for his wit. But when he was offered the dedication of Bishop Watson's celebrated Apology for the Bible he asked if the Bible needed an apology?  Let us, therefore, content ourselves with merely explaining that part of the mechanism of the stock market which should be understood for a full comprehension of the nature and usefulness of the barometer of the country's business.

"Specialists" in particular stocks, corresponding in a way to the "jobber;" or more nearly the "dealer" in the London Stock Exchange, the brokers on the floor who limit their transactions to one or two active issues and are entrusted with orders in those issues by other brokerage houses, are little understood and much vilified. It is falsely assumed that they habitually, or at least occasionally, abuse their confidential position. The specialist has "stop-loss" selling orders in a number of stocks at a point or so below the market price, from brokers instructed to limit their customers' losses in the event of an unexpected decline. It is suggested that the specialist, for his own advantage, brings about that decline. The answer is that even the suspicion of such dealing would cost him his business and his reputation. It recently cost a member his seat on the Exchange, the only instance I recall.

Transactions on the floor are by word of mouth, without the passage of a written contract or even the presence of witnesses. The honor of the parties is absolute, and I can hardly recall a case where it was called in question. There must necessarily be occasional misunderstandings, but these are referred for adjustment in the usual way. The specialist could not stay in business if he did not have the interests of the brokers who employ him as much at heart as any other agent in a like position. His very living and standing in business depend upon it.

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From The Stock Market Barometer by William P. Hamilton, published in 1922

More in this chapter:
Mechanics of the Market Stock Brokers and Specialists
The Effect of Short Selling and Traders Reform and Protection in the Stock Market

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