The majority of note-brokerage houses are partnerships, most of them being members of stock exchanges which do not allow corporate memberships. Being partnerships, they are free from much of the governmental interference to which corporations are subject.
The brokers were originally strictly brokers and sold the notes of their clients on a commission and paid for the notes when sold. The usual rate of commission for 6 months' paper is 1/4 per cent of the face value, but some brokers charge only i/8 per cent.
The rate depends upon conditions; if there is competition between two brokers for the paper of a certain firm the rate usually falls. The note-brokers have grown to such size and financial strength and good name that most of the leading houses pay the borrower upon receipt of the paper, deducting the commission, and take the risk of disposing of it at a profit. If a broker invests his money in a 90-day note at 6 per cent, charges 1/4 per cent commission, and retains the note in his portfolio till maturity, he makes 7 per cent per annum. If the market rate of interest falls his paper will command a higher price and his profits will rise accordingly; if the rate rises he will hold his paper either for a better rate or till maturity.
Purchases Through Brokers—Risks and Guaranties To buy the paper outright requires large capital and is hazard ous because of the high concentration of risk; this is the principal reason why the growth of the business has not brought a large number of concerns into it. Those brokers who can borrow at banks do so either on their single-name unsecured paper or else pledge the paper which they have bought to sell when the market favors. Large capital is very advantageous in times of tight money, when it is difficult either to sell paper without loss or to borrow to carry it.
Banks often buy paper from brokers on option, the period of option being usually a week or io days. Option is common in case of paper on which the bank has no late credit information or on which it wishes further information. Paper bought on option is investigated, and if not fully approved is returned. When the broker delivers the paper to the bank he receives payment of the face value discounted to maturity. If after investigation the
bank returns the paper, the broker reimburses the bank by paying the discounted value on date of return. Changes in the market rate of interest during the option may also incline the bank to return the paper; but this sort of dealing would amount to a speculation at the broker's risk and should not and could not be persistently done.
The brokers do not indorse the paper they sell nor guarantee its payment, though most brokers do specifically guarantee that the paper is regular and genuine, as it has become one of the un written laws of commercial-paper dealing that the broker who delivers the paper is bound to see that it is genuine and is issued in due form and course, his credit department giving him full facilities for determining this. The fact that the paper is sold by a house of good standing is considered by some less exacting buyers sufficient to warrant its quality. Banks select carefully the brokers from whom they buy; moreover, as soon as they buy they notify the issuing concern that they have bought its paper and ask a confirmation of its regularity.
The note-brokers handle single-name paper, receivables, and acceptances. The market for single-name paper has been largely restricted to firms with large capital and well-known credit. Brokers find it so difficult to sell paper of concerns having re sources from $roo,000 to $15o,000 that they usually refuse to undertake such sales, and some cater only to firms with a half million or more assets. The market for the paper of small and less known concerns is restricted since banks find it harder to look them up and satisfy themselves as to the quality of the paper, although the small concerns are often quite as good for the amount they borrow as are the larger ones for the proportionately larger amounts they require. This paper is in the form of notes of standard size, as $5,000, $1o,000, $25,000, etc., and running 9o, 120, or ao days, with maturities distributed to synchronize with receipts from sales of merchandise.