STATEMENT OF WOODLIEF THOMAS, DIVISION IF RESEARCH, LE STATISTICS, FEDERAL RESERVE BOARD, WASHINGTON. 1Resumed

The CHARMAN. Mr. Thomas. you have been before e before. I think Mr. Redmond desires to ask you to damne what on the London situation.

Mr. RenwoND. Mr. Thomas, when you appearsi kire the st mittee the other day you described very brief me Bensa the fortnightly settlement, and you mentioned the tem. Would you deserine that a little more in temi et contracts are carried over from one settlement pertoi a de dez Mr. THOMAS. That, I think. is a practice in Lendon. It so many experts from that in New York that it is almost leg at least mention some other differences before one can ver Je describe or indicate the matter of the carry-over system. or. per the reasons why such a system can work better or would firs ferently there than it would here, for example. I think I s to know which is cause and which is effect: so I should like smy first, to enumerate some of the important diferences betwe London market and the New York market in ways which are cerned with the carry-over system.

The first is the relationship between the client and the be ker the manner in which a client may arrange his acer unts.

I think it is more customary in England for a client of a chaser of stock who wishes to carry it on credit to go through a cli than it is to go through a broker. They have an elaborate syste of branch banking, so that outside of London one can simply an his bank and have the transaction carried through.

Mr. REDMOND. Is not that also influenced by the fact that th London Stock Exchange does not allow its members to have offices except in the city of London, ie, in the financial distret London proper?

Mr. THOMAS. Yes: I should think it would be influenced by thi I was not aware of that ruling.

Mr. REDMOND. There was a combination, then, of the branch t ing system, which covers the whole of England, plus the restric of the London Stock Exchange on its own members having brande outside of London, which results in concentrating a large measure of security transactions that normally reach the market through the banks!

Mr. THOMAS. Yes: I think that would be correct. Brokers are also not permitted, under the rules of the London Stock Exchange to advertise or solicit business. The members of the exchange are rot. There are some outside brokers who are not members of the

xchange that do that, but nothing like the extent to which it is done In this country.

Also the brokers are somewhat more careful about the selection of their clients. They demand references in regard to character and redit ratings, and they are not permitted to deal with anyone except principal, as it is called; that is, someone who has in his official capacity the right to sign his own name.

The CHAIRMAN. What is the reason for prohibiting brokers from advertising and soliciting business?

Mr. THOMAS. I can think of several of them. I do not know what reason they would give you in London. It is probably a matter of professional ethics and custom.

Senator KEAN. I think that is it. It is just like a doctor.
The CHAIRMAN. Or a lawyer.

Mr. THOMAS. They consider themselves rather professional.

Then, the institution of the jobber is very important in connection with the various systems of settlement that exercise in London. At least, I think it is a very direct relationship. Brokers deal with the public, and are not permitted to trade for their own account, while jobbers, who are also called "dealers", can deal only with members of the exchange. Jobbers do not deal with the public. Individual jobbers specialize in individual securities or groups of securities.

Quoting from a book by Charles Duguid on The Stock Exchange [reading]:

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 nonmember unless he can thereby deal to greater advantage than with a member.

Senator KEAN. What is the title of that book?

Mr. THOMAS. It is called "The Stock Exchange, London."

Mr. REDMOND. Is it also true that brokers having orders to execute must, in the first instance, deal with jobbers?

Mr. THOMAS. Yes; I think that is true. That is my understanding.

Mr. REDMOND. And that is the great difference between the specialist system in this country and the jobber system, in that the jobber who is solely a dealer has a monopoly, so to speak, and other brokers cannot make transactions between themselves; they must deal through a jobber?

Mr. THOMAS. Yes; that is my understanding.

Senator KEAN. In other words, if you wanted to buy 10,000 shares of stock at the market or near the market, you would have to go to the jobbers in that stock and ask them what they would sell it to you for?

Mr. THOMAS. Yes.

Senator GORE. I thought you went to a broker.

Senator KEAN. You would go to a broker, and the broker goes to a jobber, and the jobber makes a price on 10,000 shares.

Senator GORE. And the brokers themselves do not deal direct on the exchange?

Mr. THOMAS. That is my understanding. They do not deal with

each other.

Mr. REDMOND. If one customer gave his broker an order to bar a hundred shares of stock and another member of the public gare another broker a like order to buy, those two brokers would come to the jobber and one of them would have to buy at the price st which he was offering the securities and the other to sell at the price at which the jobber was buying, and the two brokers could not make a direct transaction between themselves?

Mr. THOMAS. In dealing the broker will ask the jobber for quotations on a given stock, and the jobber will reply with two quotations. the lower for buying and the higher for selling. Usually jobbers stand ready to fill all orders of reasonable size, whether for buying or selling. In order to keep their books in balance, that is, to avoid taking too active a position, either for a rise or a fall, jobbers adjust their prices in accordance with the relative volume of buying and selling orders, and they make their profit on the turn, as they call it; that is, on the range between their buying and selling quotations. Jobbers do, however, at times take definite positions, either from choice or necessity. and they thus serve in the capacity of professional speculators. That is, they provide a market always.

The institution of the jobber, in such an official and limited capacity, is peucliar to the London Stock Exchange. It is generally considered that jobbers assure an open market for stocks and operate toward stability of prices by standing prepared to fill all demanis and also by opposing movements in individual stocks unjustified by their intrinsic merits. It is considered an advantage that brokers. representing the public, and jobbers, supplying, and taking stocks. are separate and distinct. Jobbers cannot, ofcourse, prevent fluctustions and at times they may even intesify them. It is always necessary, however, for jobbers eventually to reverse their positions in order to balance their books. Jobbers also have a distinctive task in connection with carrying and financing the floating supply of

stocks.

The CHAIRMAN. Are jobbers members of the exchange?

Mr. THOMAS. Yes, sir. There are about 4,000 members of the exchange, both brokers and jobbers, and in addition there are about 2,000 clerks who are authorized to deal on the floor; so that altogether there is a much larger exchange. You have more of a market on the floor.

Senator GORE. What is the proportion of jobbers to brokers? Mr. THOMAS. I do not know. I have never been able to find that out. Do you know, Mr. Redmond?

Mr. REDMOND. I think it is fairly evenly divided, depending upon the period of activity. In an active period, I think, there are apt to be more jobbers than brokers.

Mr. THOMAS. I have a statement here that there are more jobbers than brokers. I do not know where I got it. I have a note, but I have not been able to check it up.

Senator GORE. They turn in the order to buy or sell to a jobber? Mr. THOMAS. He deals with the jobber. The broker does not turn in his order to the jobber. He goes to the jobber to bargain, as it is called

Senator GORE. That is what I understand.

Mг. THOMAS. And the jobber tries to balance his books so that he will have as many buying as selling orders; but if he gets more buying orders than he gets selling orders he lowers his price.

Senator GORE. He is an intermediary between the selling broker and the buying broker?

Mr. THOMAS. Yes, sir.

Senator KEAN. And he makes the difference?

Mr. THOMAS. He does that himself. He does not bring them together.

The CHAIRMAN. He buys at one price and sells at the other? Senator GORE. That is a little different from the specialist, is it not?

Mr. REDMOND. Entirely different; and the size of the differential depends, does it not, upon the activity of the stock?

Mr. THOMAS. Yes: and the nature of the market. I am not sure about this, but I think the jobber is always required to quote the price.

Mr. REDMOND. He is always required to make a market in the securities in which he specializes.

Mr. THOMAS. And sometimes when the market is in very bad condition you will find all the jobbers out to lunch.

Mr. REDMOND. They have informal ways of avoiding rules.

It is also common, is it not, for brokers with large contracts, with contracts at a fixed price away from the market, to leave those orders with the jobber just the way orders are left with the American specialist?

Mr. THOMAS. I was not aware of that. I think it is quite possible. Mr. REDMOND. I understand that was the system where you had a large order away from the market, and the jobber filled it as his position permitted him to do so, but he was not under any agency duty about that. He did it whenever he wished, because he was the dealer.

Mr. THOMAS. That brings us up to the question of term settlements. Most of these transactions

Senator GORE. Let me ask another question, if I may. Suppose one broker has an order to sell a given stock at 50. Another turns in an order to buy at 51. What would the jobber do in that case?

Mr. THOMAS. I do not know what they do with orders at fixed prices. Perhaps Mr. Redmond knows.

Mr. REDMOND. Is it not true. Mr. Thomas, as your memorandum stated, that it is the duty of the jobber to quote a market?

Mr. THOMAS. He will quote a market.

Mr. REDMOND. Therefore the broker in the example you use. Senator, would go to the jobber and say. What is the market?" and the jobber would quote the market, say, 50, or 5012, and if the man had a selling order at 50 he would sell it at 50. whereas the man who wished to buy would have to pay 5012, and the jobber would make the half point profit.

Mr. THOMAS. I suppose if they had an order at a price and the market was not at that price, the broker would have to wait until the market came at that price. Or could he leave it with the jobber to transact?

Mr. REDMOND. He could leave it if it is above or below the market, but the example Senator Gore gave was where the man had an

order to buy at 51 and to sell at 50. That automatically wo have to create a market, would it not?

Mr. THOMAS. Yes; that is true.

Mr. REDMOND. But if you take a case the reverse of that, and that a man wished to buy at 50 and sell at 51, the jobber could quote a market in between those two, just the way the specialist does, and continue trading with other persons.

Mr. THOMAS. Most of the transactions that are made on the Lo don Stock Exchange are made on a term basis, and deliveries and payments are not effected until the end of the term. There are terms in the year. Twenty of them are 2 weeks' duration, and 4 of them are of 3 weeks' duration, mostly fortnightly. That is the reason we have the term "fortnightly settlements."

A trader dealing through a broker may buy or sell any number of times within the course of an account, as they call it. But at the end of the account these transactions are, in theory, all settled Sellers deliver the stocks and receive payment, and buyers ta delivery and pay the purchase prices, and many clients who w to take up the stock purchased, or dispose of stock previously hel will settle their deals in this manner and have the stocks transferre either in their own names or to the names of the new purchasers But speculative traders who may not wish to pay for their stock yet can cover by selling before the end of the term, so that the conmitments balance; that is, commitments for stocks balance. The prices may differ that is, they may have sold for more than they bought the stock for-so that they will have a cash balance coming w them, or they may have a loss. So that in this manner you can ge a large volume of transactions effected within the 2 weeks' perio without having to make any transfers of money or of stocks at all. because they are balanced out before the end of the period. That permits quite a lot of trading without any transfers.

The CHAIRMAN. Does the jobber have to have considerable capital?

Mr. THOMAS. Yes, sir. I am coming to that later. A client may however, not have sold out. He may have entered into a contract to purchase a stock and not have sold it at the end of the term but he does not wish to take it up and have it transferred in his name and pay for it. He can then carry over, as it is called. That is, he can carry it over to another term.

Senator KEAN. That is, another 14 days.

Mr. THOMAS. Another 14 days. In principle, this transaction involves a new and double bargain. That is, a buyer, for example, wishing to carry over will arrange for his broker to cover his previous purchase by a sale for current account, and at the same time buy again for the next settlement account.

Senator GORE. It is like transferring from one month to another, cotton or wheat?

Mr. THOMAS. Exactly the same type of transaction.

Mr. REDMOND. That is the closest analogy, I think, Senator Gore. to American practice.

Mr. THOMAS. In effect, of course, those purchases and sales are not actually made. The broker will go to a jobber and will say "I want to arrange a carry-over" and the jobber, having already