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Stock Exchanges

An essential part of the machinery of investment banking is the stock
exchange. This is a place where the buyers and sellers of securities
or their agents regularly meet for the transaction of business. It may
be a portion of a street or a market place or a room in a building. A
fully equipped modern exchange contains a large room equipped with
telegraphic and telephonic communication with the most important parts
of the country in which it is located and of the world, with apparatus
for registering prices and easily communicating information to its
members, and with the offices needed for the accommodation of the
clerks and other employees required. Either by posts or in some other
manner the precise places in it in which each security or group of
securities is to be dealt in is also usually indicated.

The purpose of the stock exchange is to facilitate and to regulate
dealings in securities. It facilitates such dealings by providing as
nearly perfect means as is possible for putting buyers and sellers
into communication with each other, and for collecting and making
available to them the information they need. To this end they provide
for daily meetings at fixed hours; they make and publish lists of the
securities dealt in; they speedily record and, through the telegraph
and the telephone, communicate to all quarters of the globe the prices
at which securities change hands; and through the meeting room
equipped as before described they make it possible for buyers and
sellers, no matter where located, to communicate with each other in a
very short period to time. They regulate such dealings by establishing
and rigidly enforcing rules and regulations for listing, transferring,
clearing, and paying for securities and for other matters pertaining
to the conduct of their members.

These institutions serve investment banks as well as private
investors, constituting the machinery which connects them all. They
thus enlarge the area and scope of the markets for securities, and
greatly increase the mobility of capital. Without them the surplus
savings of one locality would only very slowly and with difficulty
find their way to other localities where they are needed, with the
result that capital would lie idle or be very inefficiently employed
in some places while in others natural and human resources would be
undeveloped or very inefficiently developed.

Existing stock exchanges differ considerably in the manner in which
they are organized and managed, in methods of doing business, and in
the scope of their operations. Some of them are incorporated and
others unincorporated; some restrict their membership to a prescribed
number, others admit as many as are able and willing to comply with
the conditions imposed; some are local in their scope, some national,
and others international. In this country all the exchanges deal in
local securities chiefly, except the one in New York City, which is
national in its scope. The London exchange does a larger business in
international securities than any other, but the Paris and Berlin
exchanges, as well as those located at the other important European
capitals, and the one at New York share in it to a greater or less

Stock exchanges have suffered in reputation, and their real functions
and merits have been obscured by the abuses to which they have been
subjected. Connected with their legitimate business of facilitating
the investment of capital, various forms of speculation have
developed which in some cases have degenerated into gambling pure and
simple. The better managed ones have striven to rid themselves of
these abuses, and in some countries, notably in Germany, legislative
bodies have taken a hand. The results, however, have proved only
partially successful.

Some forms of speculation are not only legitimate but necessary in
modern business life, and these shade into the illegitimate,
unnecessary, and positively harmful forms by such short and easy steps
as to render it difficult, and perhaps impossible, to draw a line
between the two which can serve as a guide for regulations of an
administrative or legislative kind.

Next: Some Defects In Our Investment Banking Machinery

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