A great deal of the speculation on the New York Stock Exchange is artificial. By this I mean that it fails to reflect the actual transaction in securities by the trading public. Such artificial speculation aims to incite, through a display of activity, a buying or selling movement in certain securities, and then leaves the attainment of its purpose to the impetus such efforts have started.

A number of brokers will often organize what we call a pool, to exploit certain stocks. Many such pools are constantly operating in the stock market, especially when the trading is active. They work with great cleverness. They pull their strings behind the scenes and only the shrewdest market observers can trace their operations.

Only when some cog in their plans slips, as occurred in the case of the Columbus & Hocking Coal & Iron pool, does the public get any inkling how pools operate, and then when their operations become known, the revelations do not always reflect credit upon the stock exchange.

What happened to the Columbus & Hocking Coal & Iron pool was this: The members of this pool, after they had succeeded in rigging the price of the company's stock to over $90 a share, began to suspect that the public could not be induced to buy their stock at fancy prices. They grew apprehensive about getting rid of their holdings, and to get out whole they started to betray one another in their selfish desire to protect themselves. When this treachery became known, there was a sudden rush to sell, and within a few minutes the pool was smashed. The stock, which only an hour before had been quoted around $90, declined rapidly and did not stop until it touched a price of about $10 a share. Two stock exchange firms which were financing the pool failed, while James E. Keene, the pool's manager and manipulator, lost not only a big slice of his fortune, but a goodly part of his reputation likewise.

To be successful, a pool must sell its accumulated holdings to the public at a profit, but in this it does not always succeed, since the public is at times too wary to be caught.

An amusing instance showing what strange effects can sometimes be brought about by a slight mishap in orders given by a pool, occurred in 1910 in the preferred shares of the Rock Island Company. It seemed that on the night before this incident happened, a leading operator in this stock, who was managing this pool, placed large buying orders in the stock with different stock exchange members, but forgot at the same time to give enough selling orders to balance the fluctuations in the stock so as to make them appear normal and not arouse any suspicions. What took place was startling. The simultaneous appearance of these large buying orders without any offerings of the stock, resulted in a sky-rocket advance of $30 a share in the price in less than fifteen minutes, and when it became known that a serious blunder had been made in the distribution of the orders, there was a foot-ball rush to sell, the stock sliding back quickly to the price from which it had started but a quarter of an hour previously. The error ever after put the stock under suspicion. The public would have none of it, and for months afterwards Rock Island shares were carefully shunned by speculators.

Operations Of Pools

The way in which pools operate is interesting. A group of stock exchange members will agree to form a pool, which in some instances they call a syndicate to provide a more dignified tone to their scheme. Pools are not always formed by members; they may be organized by speculators who in no way are affiliated with the stock exchange. Each member of the pool agrees to handle a certain amount of the stock in which the pool is interested, and these orders are distributed at scale prices over a certain period of time. In this manner efforts are made to induce activity in whichever direction, up or down, the pool plans. If the pool's plans are successful and it has succeeded in distributing at a profit what stock was purchased, or has covered what stock was sold short at a profit, a distribution is made among the members.

Sometimes a pool makes enormous profits, and the losses are equally great where a pool's plans meet with defeat. A powerful pool was organized in United States Steel common stock in 1907, in the midst of the panic. This pool, fortified with millions of capital and aided, as some authorities claim, by the Steel Corporation itself, which through its charter is empowered to deal in its own securities, persistently bought all the stock coming upon the market. This buying kept United States Steel common stock like a rock, notwithstanding all pressure, around $20 a share throughout those parlous days. The firmness in the price of the stock had the desired influence when confidence and reason again returned. The strength of United States Steel common stock was a topic that was on everyone's lips and firmly implanted in the public's mind. The stock became the popular speculative medium and steadily advanced in market value until it touched a price near $95 a share. In the interval, the rise in the stock was assisted by a number of increases in its dividend. The millions the pool had to use to support the stock were multiplied a number of times by the advance in its value which followed.

In some financial quarters pools and their purposes are justified by the claim that the public will not notice a security, irrespective of what merit it possesses, unless there is some leadership, and it is such leadership that they aim to supply.

Probably there is some logic in their contention. Yet not all pools are organized on such a praiseworthy plan. Quite often they are formed to tempt the trading public with securities at prices wholly out of proportion to their intrinsic values. Most of the criticism involving the New York Stock Exchange in recent years may be directly traced to operations of this character.