Some one may wonder how the managers can find out who the seller is. Ordinarily such a seller would place his securities in the hands of a broker to sell and the broker would not disclose " give up," as the phrase is the name of his principal. But every bond has printed on it the particular number it bears in the issue. When the managers delivered the bonds to the selling house they noted in their books the numbers of the bonds deliv ered. In turn the selling house noted the numbers of the bonds it delivered to each purchaser. So when the managers buy in some bonds to protect the market they can look for the numbers and always trace the transaction through to the first purchaser. If the first purchaser is a broker, who has just passed the bonds on to his principal and taken the broker's commission to which he is en titled, he may, and probably will, refuse to name the principal. The broker has run into trouble through his dealings with his prin cipal and next time may be a little more cau tious in dealing with him. Besides the check the managers have through the numbers on the bonds, they may trace the source of the selling through many indications readily apparent to a man skilled in the practices of the street.
Some recent syndicate agreements have sought to guard against speculative purchases by providing that the selling house shall be responsible for the character of its sales. Under such an agreement, if a house has made a sale to a man who turns out to be a specu lator who throws his securities back on the market, the syndicate manager has the au thority to buy the bonds in at the price at which they are offered, turn them back to the selling house, and charge up against the sell ing house, as a loss to be borne by it, the dif ference between the price at which the man agers bought the bonds in and the full price at which the syndicate holds them for sale. The possibility of having to bear the full bur den of such a loss would tend to make a member house very careful to get the bonds it sells into the hands of purchasers who are buy ing for investment. At the time of writing one cannot foresee whether this experiment will succeed and the provision be increasingly used, or whether the difficulties of the situa tion are such that a provision of this kind will come to be regarded as undesirable.
Very large investors in securities may be come members of joint accounts or subscribe to underwritings in order to get the advan tage of the lower price in their purchases of securities. It is understood that these par ticipations are for investment. When the syndicate takes delivery of the securities from the issuing corporation, such partici pants pay for and take up the amount of their participation. Such a transaction is called a "withdrawn participation." Whatever the arrangement as to other participants, as to an individual or institution taking a with drawn participation, the transaction would be a strictly divided or limited liability ac count. The other members of the syndicate get the advantage of having that amount of the securities taken absolutely out of the market. Owing to certain abuses, which it was believed had crept into the practices of insurance companies in taking advantage of such participations, the State of New York made it illegal for them to engage in syndi.
cate transactions.
We have discussed the formation of the underwriting syndicate as if there were al ways two syndicates whenever an interme diary makes, or attempts to make, a profit between the price received by the corporation and the price paid by the underwriters. Really, one of the several largest of the invest ment banking houses the few investment bankers sometimes called the wholesaling houses often occupies the position we have described as taken by the first syndi cate in the underwriting transaction. These wholesaling houses occupy their position by reason of their capital, their credit resources, and the influential positions they occupy both with the large issuing corporations and with the dealers in securities, who are in direct touch with nearly all the frequent buyers of securities for investment in the country. They also have foreign connections in one or more of the European financial centers, London, Berlin, Frankfort, Amsterdam, Paris, and have been able to take some, or all, of an issue out of this market entirely.
Usually, on the sale of the securities held by an underwriting, the syndicate advertises them for sale in several cities simultaneously. Often these advertisements say that on such a day up to such an hour, or up to such an hour of such a day, subscriptions will be received for the purchase of securities of the issue. Either phrase means that subscrip tions will be received immediately and re corded. If, by the stated hour, the applica tions are greater than the amount, the issue is oversubscribed. The syndicate managers then proceed to allot the securities. Just as in the case of the allotment to the subscribers to the underwriting syndicate, the managers may not allot, in exact proportion to the subscriptions, to those who have applied to purchase the securities. The managers will especially favor the smaller subscribers. The presumption is greater that they are purchas ing for permanent investment rather than for speculation. Usually they make the best possible purchasers of securities from the distributor's standpoint, because they buy to keep. The securities are lodged away and only infrequently will come out on the market to add to the floating supply and to tend to keep the price down. The distributors must keep the general market price up to the price they are asking while they are distributing the securities. They earnestly want the price to stay up and, better, to advance after they have sold the entire issue and have nothing further to gain or lose directly. But these investment bankers want to bring out an issue of securities another day, and nothing is a better silent selling argument than the fact that the clients to whom they are ap pealing made money from an earlier purchase. So, in making the allotments of an over subscribed issue, the managers favor those whose purchases will make for the best future for the issue.