In New York, on the other hand, bankers are reluctant to list small issues on the ex change, because the listing, instead of help ing to build up a broader market, simply in creases their difficulties in "protecting" the market. The investment business is not yet with us as well developed and as well under stood as in England. On account of the lack of a coterie of brokers interested in a par ticular issue both on the buying and on the selling side, some holder in haste to realize might sell a security at a sacrifice price, and the low quotation made and published would unsettle all the other holders and make them inquire anxiously of the issuing banker about the value of their security. The situation all comes down to the fact that the issu ing banking-house itself offers the only real market for most relatively small issues. Eagerness of such houses for business has de veloped a system of trading whereby an in vestor is induced to swap securities he already holds for some of the specialties of the par ticular banking-house seeking to do business with him. Listing the small issue on the ex change simply offers a rival house a place where, concealing its own hand in the matter, it can offer the other banker's " specialty " for sale, and so practically compel the issuing house, in order to protect the market, to buy back its own securities. In the language of the street it has to "hold the basket." The time does not now seem close at hand when the New York Stock Exchange will afford a market for the relatively small issues.
A corporation putting out an issue of $15,000,000 or more almost must prepare the issue for listing on the New York Exchange. Investors will think it rather queer if it is not listed. It does not follow, however, that the stock exchange will offer the only, or even the principal market, or, for that matter, even an important market for the security. The dis cussion at this point does not refer to stock. When shares are listed, especially large issues, the exchange becomes practically the only market for them; but even for those bonds most actively dealt in on the exchange, the transactions there are probably only a very small part of the total transactions in the issue. Dealings over the telephone from se curities house to securities house, and by the street trader going from office to office, learn ing of a buyer here and a seller there, on the average enormously exceed the transactions on the exchange. Such exchange transactions as there are give each day a .published quot ation which affords an index of the course-of the market in the security. An investor who considers marketability an important matter wants that daily published quotation to keep him informed of what he can do in case he should want to realize. Exchange dealings like this in the larger issues do not present the dis advantages to the issuing house that the list ing of smaller issues does, for several reasons.
In the first place, the large issues probably are widely underwritten by bankers who are themselves dealers in securities, and extens ively subscribed for by smaller dealers, who besides getting the regular dealers' quarter point concession off the price at which the issuing bankers publicly place them on the market, count on the demand being so large as to send the market price somewhat above the issue price. From the very start a large number of dealers are interested in the secur ity, and their efforts immediately establish a trading market.
When an issue is small, however, a single banking-house can, and frequently does, handle it without the help of other houses or dealers. At the most, two houses join in mar keting the issue. Such underwriting as may be done is not by bankers and dealers who would be interested on their own account in creating a market, but by capitalists who are ready to assume the kind of a risk involved in that special security. Except in the case of an enterprise in the construction stage, that is, without an established earning power, there is probably no underwriting at all. The issu ing banker has to bear alone all the burden of creating a market.
Again, investors purchasing securities of large issues expect to take the risk of some fluctuation in the market, of a possible de cline in price. When the market falls off some what from the issuing price, they do not hold the issuing house blamable. They recognize that when they bought they then accepted the risk of the market. They understood that they were called upon to exercise some judg ment both of the merit of the security and of general market conditions.
Since in the case of small issues the house putting them out is the market, purchasers hold that house responsible both for the in trinsic merit of the security and for its market position. Because the purchaser usually is not as well situated to judge of either the sound ness of the enterprise or the general state of the market for a security of the class offered, it is not unfair that he should place greater responsibility on the issuing house. From the very magnitude of the corporation putting out large issues the investor knows, or can know, something about it. Reports of its earn ings are published in the daily papers, or, if not in them, at least in the financial papers. There, also, are published quotations of se curities of a similar kind for him to judge the general market condition from.
Such considerations as these govern the matter of listing in order to extend the market for an issue. It is desirable to list the larger issues, and therefore they must meet the list ing requirements in form.