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

Reform and Protection in the Stock Market

Continued from...The effect of short selling and traders.

Protection of Listing Requirements

When Charles H. Dow wrote, twenty years ago, of speculation generally, and incidentally of his theory of the market movement, some of the industrial stocks, included in the average and traded in freely on the floor of the Stock Exchange, were in what was then called the unlisted department. It would be difficult to imagine The Wall Street Journal speaking today of one of the industrials in the Dow-Jones average as a blind pool. But it did not hesitate to apply that epithet, editorially, to the American Sugar of Henry O. Havemeyer's day. The elimination of the New York Stock Exchange's unlisted department is one of the most creditable instances of reform from within. It was bitterly opposed by some conservative members of the Stock Exchange, mainly those who profited largely by that vicious vested interest. An ex-president of that institution, now dead, took upon himself to berate me loudly, in the presence of his customers, for advocating that eminently necessary reform. He said that such agitators were driving business away from the Wall Street in which they earned their living. He threw out of his office the newspaper and the financial news service with which I was and am connected.

But his own customers made him reinstate both, with humiliating celerity. American Sugar and Amalgamated Copper and the other formerly unlisted securities are still dealt in on the floor of the Exchange. Those companies saw that they laid their management under the gravest suspicion by a refusal to comply with the terms of publicity, so wholesomely exacted from reputable companies. Stock Exchange houses are naturally inclined to look askance at reforms advocated from outside. But I have never heard one of them even suggest the restoration of the unlisted department.

Federal Incorporation

It was said in an earlier discussion that something further might be done for the protection of the public, without the enactment of any of these "blue-sky" laws which only embarrass honest enterprise without seriously impeding the operations of the crook. In this discussion I can briefly set forth the sane and successful method which protects the speculator and investor in Great Britain. Under what is there called the Companies (Consolidation) Act of 1905 the London Stock Exchange is enabled to deal in any security the moment it is registered at Somerset House, London. That registration cannot be made until the fullest possible disclosure of purposes, contracts, commissions and everything else has been made. However adventurous the purposes of the company may be, the speculator knows all about them from the start. After that, under this statute, the old common-law rule of caveat emptor - let the buyer beware - prevails. It is properly held that the buyer can protect himself, as he should, when he can find out all about the property, its origin and its present conduct, for the fee of a shilling, at Somerset House.

There would doubtless be all sorts of ignorant opposition to Federal incorporation of this kind, with the law enforced and the public protected through limitation in the use of the mails. But I am convinced that it might well be done, and should, of course, be done in a strictly non-partisan spirit. To the utmost of its ability the New York Stock Exchange protects its members and their customers. But the New York Curb Market Association is simply an unlisted department in itself. I have no reason to believe that its government is not capable and honest, and I have not a word, to say against its membership. But sooner or later it is calculated to prove a source of danger and scandal. If any of its members imagine that they have something to lose, in the setting forth of the absolute and original facts about everything in which they deal, they are making exactly the same mistake that ill advised members of the New York Stock Exchange made when they shirked the disagreeable task of compelling a number of industrial corporations to comply with the listing requirements, on pain of being stricken from the list.

Real Reform from Within

Let me disclaim, however, the intention of crusading, or any bent toward that blatant and ignorant "reform" which has made such costly experiments in recent years. In my experience of it the standards of the Stock Exchange have steadily improved, to the permanent advantage of the investor and of the small speculator, who is, after all, only an investor in embryo. Practices were customary in Dow's day which would not be tolerated now. In any future bull market manipulation on the scale of James R. Keene, when he distributed Amalgamated Copper, would be impracticable, for the reason that the publicity now required by the Stock Exchange, in the accounts of such a company, would make it impossible to persuade the most reckless private speculator that the prospects of the new combination made it worth four times its book value, on any expert test. Even in those days "wash sales" were largely a figment of the public imagination, and "matched orders" were declined by any brokerage house of repute if their nature was suspected, The Stock Exchange rule against fictitious transactions is obeyed in spirit and in word. It was not a mere letter even in those days, whatever it might have been forty years ago, when the infant giant of American industry was only awakening to consciousness of his strength.

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