Pied Pipers of the Stock Market

IN a club circle in New York at the height of the post-election spurt I heard a story which, though told only for the sake of its humor, was somewhat wryly received. ‘This morning,’ said a business man, ‘I had an experience that threw me back with a start to 1929. On stepping into my office, the telephone rang, and I found the customers’ man at my broker’s speaking. He was as peremptory as the telephone, and much more excited. “You’ve got to get into this market,”he said. “It’s only just opened, but it’s already boiling with buying orders. U. S. Gadget is up two points. Blocks of orders are coming through for American WidgetGeneral Baking is soaring, too — er — no —■ I’m sorry, General Baking has n’t opened yet!"‘

In the gullible twenties, tyros in the stock market felt that the title of customers’ man meant, just what it said. To them the customers’ man was the person who helped the customer in his investment problems. He had a fiduciary relation to his client. His advice, in consequence, was above suspicion. If be counseled a customer to buy, if he suggested that the customer should switch his holdings, then he must be thinking only of his client’s interests.

Such naïveté had a rude awakening in the fall of 1929. The awakening turned into shock when customers’ men, as broke as their clients, turned to the writing of Confessions. What misdoings they confessed! Perhaps some of the disillusioned authors drew as freely upon their imaginations in writing about their jobs as they did in performing them. I don’t know. But, as a former newspaper habitue of Wall Street, I do know something of the priiclic.es w hich used to be current in a certain class of brokerage office. For instance, pretty women, with more knowledge of clothes and cosmetics than stocks and bonds, were put on as customers’ counsel. The Pecora investigation threw a searchlight on other methods of soliciting business. One was told of manipulators distributing to customers’ men options on the stock in which they were conducting a pool. The object, of course, was to get the customers’ men to place such stock among their clients. In some cases the customer seemed to be just a sucker to his counselor. In that invaluable source book of the gaudy era in stock-market history, The Security Markets, put out by the Twentieth Century Fund, the authors say, ‘It has often been alleged, and apparently on substantial grounds, that customers’ men on occasion “played the market ” against customers whose accounts they largely controlled.‘

The fact was that customers’ men, in the nature of things, owed first allegiance to their employers. They were really brokers’ men, not customers’ counsel. And, since the broker’s profits are dependent upon the orders he executes, the prime function of the customers’ man was to drum up commission business. In some cases the job necessitated much more than the employment of the most artful tricks of salesmanship in seeking out new customers. It meant persuading old clients to keep on switching their portfolios. A quiescent account was no good to the customers’ man or his commission-hungry employer. At all hazards the portfolios must be kept in motion by repeated buying and selling. It was because of such activity that the customers’ man contributed in no small measure to a ‘churning’ of stocks which in the late twenties seduced a get-rich-quick public. He did his part in creating in the public mind that poker-playing kind of valuation of stocks in which nobody supposed anybody wits going to hold his stock for any length of t time.

The scandal of the customers’ man was apparent long before the Pecora investigation. It came precisely on ‘the morning after.’ A public which, shorn by the collapse, was in full cry for a personal devil, picked upon the spellbinders in Wall Street, from the pool operators down to the customers’ men. The New York Stock Exchange oven under the ancien régime had to take notice of the public clamor. As far back as May 7, 1930, it issued a set of ‘supplementary rules’ governing customers’ men. By their very nature those rules acknowledged the abuses that had previously flourished like the green bay tree.

Since 1930 the restrictions on customers’ men have been strengthened. In this respect the SEC prefers to work through the stock exchanges. As one of the commissioners once said to me, ‘the stock exchange is a club, and it is preferable that a club should make the rules, though the SEC is always ready to exercise its police rôle if the exchanges don’t act.’ Prodded by the SEC, therefore, the exchanges have rained rulings upon the bewildered brokers. Customers’ men are probably the most circumscribed persons in our economic system!

And yet, as the business man’s story proves, the old abuses are coming back again.

Though customers’ men are now prohibited from speculating—that is, trading on margin — for their own account, the ruling says nothing about the wife of the customers’ man or his relatives. Nor does it mention the possibility of side betting in brokerage offices on the day’s performance of a particular stock. Though customers’ men are prohibited from carrying ‘discretionary’ accounts, a client cannot be prohibited from saying to his customers’ man, ‘If anybody asks you for your instructions, just tell him that I put in the specific order by telephone.’ Powers of attorney, moreover, may be delegated to the partner of a brokerage firm, and by that partner to the customers’ man. At least this is what one broker tells me, though on reading over the regulations of the New York Stock Exchange I find that even this procedure is not permitted without the consent of the Committee on Customers’ Men. In the regulatory circumscribing of the advice that used to be so lavishly given by customers’ men, telephonic calls to clients’ ‘domiciles’ are now disallowed, but nothing is said about such calls to their offices, where most clients are ‘domiciled ‘ most of the working day. In these and various other ways customers’ men may circumvent — and, if report be true, are circumventing — the regulations governing their conduct.

Evidently the SEC is worried about this return of old abuses in the relations between brokers and the investing public. On November 12, Commissioner William O. Douglas of the SEC expressed his disquiet before the New York Stock Exchange Institute. In a blunt warning he said, ‘The institution of customers’ men has at present an unestablished value. In the past it has served as a method of churning portfolios, of creating frenzy and excitement, of manufacturing and distributing rumors and tips — in short, of serving as a fair-weather device to make the market a gaming place. Whether it can be made a valuable investment service adjunct to organized exchanges rests in the hands of your generation. It will not and should not survive if the corruption of which I earlier spoke intrudes.’

In Mr. Douglas’s speech there is a tacit admission that strict regulation has failed. Of course it has. Strict observance could be guaranteed only by attaching a policeman to every customers’ man. For the problem of enforcement puts the regulations in the same category as prohibition and the blue-sky laws. I made so bold, in a recent talk with SEC officials, to liken some of the rulings to the blue-sky laws. ’Forbidding discretionary accounts,’ I said, ‘is like forbidding one to kiss one’s wife on Sunday. Quite apart from the wisdom or otherwise of the ban, how can the police officer find out?’ ‘Well, we don’t want to do that,’ a commissioner retorted; ‘all we are out to do is to prevent you from kissing somebody else’s wife.’ Nevertheless the regulations seek to govern the relations of two persons in, as it were, the same fiduciary household.

Even Mr. Douglas’s implied threat to do away with customers’ men, on the ground that they have not established their value, would not end the abuses. Inside brokers’ offices there would still be Pied Pipers and outside there would still be the ubiquitous tape.