Stock Exchange Information Prior to 1901 (8)

Stock Exchange Clearing House

In recent years the system of "clearing" stock exchange transactions, on the plan of the bank clearing-house, has been generally adopted by stock exchanges. As introduced on the New York Exchange in 1892, the system provides for the offsetting of securities which a broker has contracted to deliver by an equivalent amount of the same securities which he may have contracted to receive. Thus, if broker A has sold 1000 New York Central shares to B and bought 1000 of the same shares from C, the two transactions are settled by the delivery of 1000 shares by C to B. The price may be different in the two transactions, but such differences are adjusted by the clearing house, to which the broker is "debtor" or "creditor" on his daily sheet.

The same principle is followed even where the amounts bought and sold do not agree. Thus A, in the above case, may have sold only 500 shares to B and bought 1000 from C. In that case C delivers 500 shares to A and 500 to B, and payment is made accordingly. The economy consists in the lessening of the number of individual checks which must be drawn for settlement, and against which bank balances must be maintained. Supposing the price of New York Central, in the transactions last described, to have been 100, the old plan of individual deliveries would have necessitated drawing of checks, for settlement, in the total mount of $150,000. The clearing-house plan requires only $100,000. The aggregate saving in checks drawn during an ordinary year, has exceeded $500,000,000.

The plan was adopted by the Frankfort Stock Exchange in 1867, at Berlin in 1869, at Hamburg in 1870, at Vienna in 1873, at London in 1876, and by various American stock exchanges between 1880 and 1887.

Stock Exchange Terms

The stock exchange has a dialect or slang of its own, many of the terms in which had their origin at the time of the South Sea speculation in 1720. A "bull" is a buyer of stocks which he hopes to sell at higher prices. He may buy altogether with his own capital; but if he is merely a stock exchange speculator, he borrows most of the requisite funds, depositing the purchased stock as security. He can usually borrow 80 per cent. of the cost value of his shares the difference, 20 per cent., being his "margin". If the price falls, the lender calls on him to "make good his margin." If he fails to do so, and the margin continues "impaired," he is "closed out" by the sale of his collateral.

A "boom" is a successful upward movement of prices; this term is of American origin. The opposite of a "boom," in stock exchange phraseology, is a "slump." The "bear" is a seller of stocks which he hopes to obtain, later on, at lower prices. He may be selling his own holdings and delivering them to the purchaser. But if a speculator, he may borrow stocks as the "bull" borrows money. Generally he obtains the stocks by lending their equivalent in money to the owner. He is said to be "short" of stocks, where the bull is "long." The bull 'realizes' when he sells to take his profits; similarly, the bear 'covers' when he buys on the market the stock in which he has been speculating, and returns the shares which he has borrowed. Stocks are said to be "carried" when they are accepted as security from a bull speculator.

A "manipulated" market is one in which speculators have caused an artificial appearance of real buying or selling. A "rigged" market is much the same thing, though in a more intensified form. "Puts" are contracts sold at a fixed percentage by capitalists to bull speculators, whereby the capitalist undertakes to pay a set price for a given number of shares within a stipulated time. This insures the speculator against more than a certain amount of loss if he buys stocks.

"Calls" are contracts similarly sold by capitalists, who agree within a given time, and at a set price, to deliver the shares agreed upon to the speculator. This is a guarantee against losses on a falling market. Both sorts of contracts are classified as "privileges." "Wash sales" are transactions in which buyer and seller are employed by the same person, with a view to creating a semblance of activity. They are prohibited under severe penalties by the stock exchanges, but are rarely detected and are very frequently utilized.

Source of Information: The New International Encyclopedia Publisher: Dodd, Mead and Company-New York Copyright: 1902-1905 21 volumes

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