EXCHANGE

EXCHANGE, An, may be described briefly as a localized merchants’ traders’ or dealers’ market. Those who do not make buying and selling their occupation do not, for the most part, have direct dealings in any exchange market. As a rule, producers of such articles as are bought and sold on the exchanges sell to dealers who have more or less intimate relations with those markets; and consumers, on the other hand buy of dealers, and do not deal in person “on change.” Hence an exchange is almost wholly a traders’ market, or a market in which the buying and selling is done by those who make trading their business. It is a great intermediary market, receiving products from producers and advancing them on their way to consumers. It is also a localized market. In every considerable commercial centre are many markets which are not localized. All who make a practice of buying any article that is from time to time offered for sale, and who are accessible to the body of sellers, constitute the market for that article, though their places of business may be remote from one another, and though they may never deal in that article among themselves. An exchange differs from such a market as this in that is localized. The body of dealers find it convenient, not to say necessary, to have a place where they may meet to transact business among themselves. It is this localization which, as much as any other one thing, goes to make an exchange as near an approach as possible to a perfect market. It affords an opportunity to put the entire trading body in possession of the latest intelligence from all kindred markets, and from all other sources, touching the conditions of supply and demand, and it affords the most free scope for the prompt actions of all the forces of competition.

—An exchange may be organized for the purpose of facilitating dealings in any one commodity, or any number of commodities. We have cotton exchanges, sugar exchanges, coffee exchanges, and others, in each of which only one product or commodity is the subject of dealings; and we have produce exchanges where nearly all staple farm products are bought and sold, and stock exchanges where government bonds, railway shares, and stocks of all kinds that have secured recognition in market, are dealt in. Only such commodities as are the considerable commercial importance are made the subject of dealings on change. The number of such commodities is continually increasing as commerce is extended, and the dealings throughout the list come to be so numerous and large as to demand more exclusive attention, and give employment to an increased aggregate of capital. Hence there is a tendency here, as in other fields of human activity to differentiate functions. What began as a produce exchange may become divided into a breadstuffs exchange, a butchers’ exchange and a number of other separate organizations. And where there may be no formal dissolutions of the original exchange and no organization of new ones occupying more restricted fields, individuals will confine themselves more and more to selected branches, with the result that a number of really distinct markets will come to exist under one roof and one name, the dealers in each being different from those in any other And this may, in some fields be preferable to the lopping off of branches from the original organization and establishment of separate exchanges. The most signal example of this multiplication of markets in a single exchange is afforded by the London stock exchange. Here there are many groups, in each of which only a limited number of securities are bought and sold and the dealers in any group confine their attention to that one exclusively as a rule and when any one of them removes to another group, it is with the intention of making the removal permanent. Where securities in such great numbers, representing credits, properties and enterprises in all parts of the world, are dealt in this subdivision of one great market into many markets become necessary. No man can become so familiar with all securities as to be deal in all with the requisite intelligence and promptitude. And even if every man could do this, there would still remain the necessity of localizing markets for the different kinds of securities, so that a person wishing to buy or sell a particular stock could know just where to find others wishing to deal in the same stock. The broker may, and generally does, deal in a considerable number of securities, but he does not himself operate on the exchange. When he wishes to buy or sell shares of any particular kind he goes at once to the group in which these shares are embraced, and concludes his bargain with a “jobber.” or “dealer,” in that group, who has no business relations at all with the public, but only with brokers and other dealers. As a rule, the broker asks the price without saying whether he wishes to but or sell. Accordingly the jobber states his buying price and
his selling price, and about half the difference is his margin for profit. So sharp is the competition among jobbers that, if the shares concerned have a pretty firm footing in the market, the difference named is small, affording a margin, usually, of not more than one-sixteenth of 1 percent for profit. Thus the broker may enter any group and, for a moderate compensation, secure the services of a jobber thoroughly familiar with that group, and always at the very heart of the market, ready for action.

—The economic advantages of this differentiation of functions have perhaps, been sufficiently suggested already Dealers or jobbers, on the one hand, can perfect themselves in their several specialties, each having a limited range. Brokers, on the other hand, whose dealings necessarily extend over a broader range, have always at their command the services of trained specialties. What is even more important, perhaps, the formation and localization of special groups enables an investor or vendor to reach, through his broker, the very heart of the market, for any particular security he may with to buy or sell. Demand and supply are thus promptly focalized, and prices as promptly adjusted. So great is the advantage resulting from this arrangement that a comparatively small number of brokers and jobbers transact with case a business which could not otherwise be transacted at all. Exchanges in general afford like economic advantages in their relations to the producing and consuming public. Trained dealers, skilled in estimating supplies and their relations to demand, are brought into direct and sharp competition. Some of these dealers are either agents for the producers of the commodities offered for sale on the exchange—agents compensated by commissions—or speculators who have bought with a view to selling at an advance. These dealers seek to obtain the highest prices possible, and are known in the language of the market as “bulls” Other dealers are agents for consumers, or speculators on the consumers’ side of the market, and therefore seek to buy at the lowest prices, and are known as “bears.” These opposing forces are always present on every exchange. They bring to the contests in which they engage, superior and highly trained faculties, and the advantage of the earliest intelligence, secured for the most part through the instrumentality of the exchanges themselves, from all the leading markets of the same kind in the world. The result is that prices are promptly adjusted to existing conditions of supply and demand, the wide fluctuations which are especially injurious to original producers and final consumers are in a great measure prevented, and those differences in the price of a commodity at the same time and in the same neighborhood, which indicate the existence of a very imperfect market, become impossible. Their great function is to receive and diffuse with the greatest celerity all those complex influences affecting prices of stable commodities, and thus not only maintain equable markets, but also supply producers with timely and trustworthy evidence of either general excess or deficiency in the supply of any product, so that they may apply the needed corrective in either direction. This function may be, and no doubt it, sometimes perverted. Speculators may produce artificial scarcity and force prices above the level which would be reached under the influence of the ordinary forces of competition alone. But it does not follow because this sometimes happens that exchanges are, on the whole, economically injurious: that they make prices to producers lower and to consumers higher than they would otherwise be: that they afford special facilities for gambling in the necessaries of life, and or levying tribute upon both producers and consumers for which no just equivalent is rendered. It would be as reasonable to infer that railroads are on the whole, economically injurious because those who control them sometimes practice extortion. It would probably be quite as easy to monopolize or “corner” wheat, or corn, or pork, if there were no such thing as a produce exchange. The exchanges, so far from encouraging such operations, afford every possible opportunity to thwart them by giving them early publicity. “Cornering,” under the name of engrossing or forestalling, was practiced long before there was a regularly organized produce exchange. The worst that can be said of the exchanges in this regard is, that so long as they perform their legitimate function of supplying the best facilities for buying and selling, they must necessarily afford the best facilities for monopolizing any commodity for which they afford a market. But let that be granted, and it does not follow that exchanges are to be condemned as injurious. A sufficient proof that they are useful institutions is to be found in the fact of their survival and multiplication. Old ones would not survive and new one would not be organized if they were economically more injurious than beneficial, any more than steam engines would be used in greater and greater numbers if there was found to be an economic balance against their use—Exchanges may be incorporated bodies, sometimes under their proper name, and sometimes under the name of chamber of commerce, or board of trade. They are not, however, incorporated for the purpose of enabling them to discharge their chief functions. They do not deal in produce, stocks, etc., in their corporate capacity. Their individual members deal with one another, and for this purpose no charter is necessary. The act of incorporation is serviceable to them only in that it enables them in their collective capacity to own and buy and sell the real and personal property required by the members in the transaction of business, such as grounds and buildings, and to sue and
be sued, to the end that they may collect by lawful process the means requisite to the maintenance of their organic character and the discharge of their limited organic functions, and that they may be liable at law for any obligations incurred by them.

—There is no reason to believe that markets answering more or less completely to the description of exchanges have existed wherever any considerable commercial progress has been made. The modern institution, however, involving the deliberate appropriation of a locality or building to the use of an exchange, is believed to have originated about the beginning of the sixteenth century, under the name of “bourse.” This name, which is still applied on the continent of Europe to bill and security exchanges, originated, according to one tradition, in the belief that the first gathering of the kind took place in the house of a man named Van der Bourse at Bruges, Flanders. According to another tradition it originated in the belief that the first exchange assembled in a house in Amsterdam, which had three purses hewn in stone over the door. One of the oldest exchange buildings was erected in Antwerp, and was selected by Sir Thomas Gresham as the model of the building in London which, on Jan. 3, 1570, was proclaimed by Queen Elizabeth “The Royal Exchange.” This latter exchange has been twice destroyed by fire and rebuilt. The present Royal exchange was opened by Queen Victoria Oct. 29, 1944. It is the most important theatre of bill and security transactions in the world. The most celebrated of the exchanges of continental Europe is the Paris bourse, which was established in 1824. There are now fine exchange buildings in Amsterdam, St. Petersburg, and other European cities. The Merchants’ exchange in New York was founded in 1817. Its first building was destroyed in the great fire of 1835. The second was sold to the government of the United States for a custom house. The third is still in use by the exchange. At the present time exchange markets of different kinds of exist in all the important commercial centres of the world.

HAYDN SMITH.