The Stock Market Barometer, Chapter 8

Mechanics of the Market

Continued from...Judgement of Value for Profits in Stock Speculation

It has been shown that, for all practical purposes, manipulation has, and can have, no real effect in the main or primary movement of the stock market, as reflected in the averages. In a primary bull or bear market the actuating forces are above and beyond manipulation. But in the other movements of Dow's theory, a secondary reaction in a bull market or the corresponding secondary rally in a bear market, or in the third movement (the daily fluctuation) which goes on all the time, there is room for manipulation, but only in individual stocks, or in small groups, with a well-recognized leading issue. A raid upon the oil group, or upon the bear account in it, with special attention to Mexican Petroleum, may easily have a striking temporary effect. It shakes out some weak holders or it forces a few bears to cover, as the case may be. This sort of professional "scalping" is often in evidence in a secondary swing-for good reasons.

The Trader and the Gambler

Every primary market, bull or bear, tends to overrun itself. As the traders say, there gets to be too much company on the bull side; or conversely, the "loan crowd" shows that too many shorts are borrowing stocks. There is even a premium for lending them, corresponding to what is called a "backwardation" in London. This is the professional's chance. He buys in a market which is oversold or, with testing sales, he tries out the strength of a market which has been bought not wisely but too well. The small speculator, and more particularly the small gambler, suffers at the hands of the professional. He is a follower of "tips" and "hunches." He has made no real study of the things in which he trades. He takes his information without discrimination at second hand, lacking the ability to distinguish good from bad. He has no business in the market, in the first place, and it could get along very well without him. It is a great mistake to suppose that it is he, or people like him, who keep the Stock Exchange houses in business. Every one of these will tell you that their customers are becoming better informed all the time. Of course if ignorant people will sit in a game requiring expert knowledge, against others who understand the game perfectly, they can blame their losses on no one but themselves. They do, in fact, audibly blame Wall Street. A substantial part of the time of most brokers is consumed in protecting people from themselves. It is a thankless job. A fool and his money are soon parted.

Giving a Dog a Bad Name

But it must be obvious that this is no part of the main current of speculation. It bears about the same relation to that current that the daily fluctuation does to the primary market movement. There are, of course, varying degrees of knowledge, but it is a vital mistake to suppose that speculation in stocks (for the rise at least) is a sort of gamble in which no one can win unless there is an equivalent loss by somebody else. There need be no such loss in a bull market. The weak holders who are shaken out in the secondary reactions miss a part of their profits; and, in the culmination of such a movement, a great many people who have lost sight of values and are buying on possibilities only, with the latent hope that they may unload on somebody more covetous than themselves, are apt to get hurt.

So far as blaming Wall Street is concerned, it seems to have become a case of giving a dog a bad name and hanging him. The defaulting bank employee usually pleads something of the kind. All his transactions and contracts are matters of record; but how seldom the court asks him for an exact statement of his speculative account. He says nothing about fast women and slow horses, or the many other devious ways of spending other people's money. He pleads that he was "robbed in Wall Street," and sentimental people take him back to their hearts, registering horror at the temptations of the wicked financial district, whose simplest functions they have not been at the pains to understand.

A small and unsuccessful speculator, chagrined at his inability to make money in the stock market but failing to understand the real reason, picks up a vocabulary of technical phrases which is apt to delude people who know even less of the stock market than himself. He is fond of denouncing the "specialist" and the "Floor trader." He classes them with the croupiers of a gambling house, and says that they are not even as respectable as that because their dealer's chance is extortionately larger. To take the floor trader first, it may be pointed out that his small but real advantage only stands him in good stead against the novice who is trying to snatch quick profits in an active market by the merest guessing. No competent broker encourages the outsider to do anything of the kind, and the brokers of my fairly exhaustive acquaintance in Wall Street do their best to get rid of a customer who is apt to be a liability rather than an asset, and is always a nuisance.

The Floor Trader and the Market Turn

There is no intention here to write a textbook on the practice of Wall Street and the Stock Exchange. There are excellent books covering that field. All that is necessary is to make sufficiently clear the mechanics of our barometer, and especially those things which may be assumed, rightly or wrongly, to influence it. It is sufficient to say, therefore, that a "floor trader" is necessarily a member of the Stock Exchange, and is usually a partner in a brokerage house. He unaffectedly operates for himself. He pays himself no commission, and he is at an advantage over the outside speculator in the matter of the market turn, which is, of course, the difference between the bid and asked price in the market. The more active the stock the closer this turn is, but it may be averaged at a quarter of one per cent. Assuming that the price of United States steel common is 90¼ bid and 90½ asked, the customer who gives an order to sell cannot expect to get better than 90¼, while, if he wishes to buy, he must pay 90½. The floor trader can often save this turn or part of it for himself - not, of course, against a customer. He may be able to deal at 90 and three eighths or even to sell at the asked price. Whatever he does has its effect in the daily fluctuation. In practice it means that the floor trader can afford to trade for a quick turn where the outsider cannot. In daily custom the trader goes home at the close with his book even, not hesitating to take an occasional loss, or glad to come out even.

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From The Stock Market Barometer by William P. Hamilton, published in 1922