Evils Of Pools

Pools are largely responsible for the manipulation in stocks, about which so much is written and which is so frequently mentioned in the financial reviews in the daily press. The weight of their orders makes a stock rise or fall and often to such an extent as to frighten real holders to throw their shares upon the market or cause a scurrying to buy in anticipation of a good advance. Pools work upon the avarice and credulity of the public or on its fears.

Before Governor Hughes of New York State appointed a committee of citizens to investigate the operation on the stock exchange with the purpose of recommending reforms for the protection of the public, pools were allowed to carry on their manipulations with almost no restraint whatever. While "wash" sales and "matched" orders were not openly tolerated, they were secretly connived at and permitted.

But this sort of deception is now largely a thing of the past as a result of the investigation made by Governor Hughes's committee. Another practice, now forbidden, is the one by which a member was allowed to bid for or offer a certain price for a large block of stock, but did not have to execute the order unless exactly the amount of stock his order called for was offered, or taken, at his price. This practice allowed a member to bid $160 for a block of 10,000 shares, all or none, when the price was only $150, very well knowing beforehand that no member could fill his order. Orders like this were mere bluffs made ostentatiously to impress the public. Now a member, whenever he makes a bid, must take stock in whatever blocks it is offered and this, of course, negatives the sort of manipulation just described, which is designed to deceive the public.

All manipulation, however, does not spring from pool operations. Some of it is caused by large underwriting bankers who in issuing a new lot of securities listed on the stock exchange, bring about an advance in the price of the already outstanding securities in order to create a good impression for their prospective financing and secure for it a successful reception on the part of the public, which is more likely to be keen for anything indicating a likelihood of a quick profit.

On the floor of the stock exchange are arranged rows of posts, around each of which gather the traders who trade in a certain security. To facilitate the trading, each member selects some 'stock of which he wishes to make a specialty and makes his headquarters while on the floor at the post allotted to his security. Thus one member acts as specialist in Beading Railroad stock, another in Union Pacific shares and so on. For the more active shares there may be a number of specialists to each. They execute orders in their specialties for a commission of $2 for each one hundred shares when the orders are from fellow-members. In this way members are saved a good deal of running about on the floor of the exchange and also much of their time.

But the specialists in the more inactive shares are often subjected to severe criticism. They are in a position to make a good deal of money if not over-scrupulous. They are in a position to execute an order of their own before that of a customer. For example, a customer gives a market order to sell 100 shares of an inactive stock. The specialist can, if he is so inclined, break the price three or four points and buy in the stock his customer sold. To the next buyer who came along he could sell this very same stock at an advance of two or three points, making not only his commission from both seller and buyer but also the difference in price. I don't say that this is done, but contend that it can be done, and believe that among the much-needed reforms is a more stringent supervision over the specialists in the more inactive securities.

Pitfalls Of Speculation

I cannot attempt to elaborate upon the many different pitfalls dug by crafty schemers to catch unwary and ignorant speculators. On this one subject alone a book might be written. The bucket-shops have proved the principal menace to the public, but fortunately they no longer exist to the great extent they once did, now that the Government has gone after them with a big stick. A bucket-shop, as already described, is nothing but a gambling room. Bucket-shops can carry on a prosperous business only by misleading their patrons. This they do by inducing them to take on stocks likely to decline or sell stocks more liable to go up.

It is always best for a person who wishes to deal in stocks or commodities to carry on his transactions through a member of a regular exchange, as such transactions thus come under the supervision of the members, who are compelled actually to execute all their orders. For a member to be caught "bucketing" orders means his expulsion from any reputable exchange. In dealing with members a patron is also dealing with persons of more or less financial responsibility whose commission is sufficient compensation for the services they perform. Moreover, it is possible for a customer, when transacting his business through a member, to check his orders from the official records.

"Tips" on the market are the bane of speculators. They prove the ruin of a great many. A speculator will hear from someone about whom he knows nothing and with whom he has scraped up a passing acquaintance in some brokerage office, that such and such a stock is either going up or about to have a big break. He hurries to get in on the "good thing." In most instances such tips are mere guesses. On such flimsy foundations many speculators will sometimes stake a small fortune. Is it then any wonder that they soon lose all their money? Other speculators will pay a weekly or monthly stipend to some advertising tipster for inside information. The value of such advice is plainly apparent when it is known that if these self-criers of their ability to forecast prices were correct about only a small part of their prognostications, they could retire in a short while with great fortunes. Yet these financial charlatans month after month catch a new crop of suckers; otherwise they could not continue in the game as long as they do.