8. Wash manipulation of stock by means of "wash sales" is extremely rare upon the Stock Exchange. These fictitious transactions are the result of collusion and conspiracy and are both de ceitful and malicious. Broker A arranges with broker B to bid high for a stock when A offers it. Other brokers unaware that A and B are confederates are misled in believing that a real market exists for the stock. Formerly "washing" was said to be common on the curb. The committee appointed by Mr. Hughes when he was governor of New York, to report on speculation, had this to say on wash sales : So far as manipulation is based upon fictitious or so-called 'wash sales," it is open to the severest condemnation, and should be prevented by all possible means. These fictitious sales are forbidden by the rules of all the regular exchanges, and are not enforceable at law. They are less frequent than many persons suppose. A transaction must take place upon the floor of the Exchange to be reported, and if not re ported does not serve the purpose of those who engage in it. If it takes place on the floor of the Exchange, but is purely a pretence, the brokers involved run the risk of detection and expulsion, which is to them a sentence of financial death.
9. Matched much more common and important form of manipulation of the market con sists in matching orders. This is a practice which deserves careful consideration. It is manipulation in the strictest sense of the word. It corresponds to Mr. Milburn's definition referred to earlier in this chapter. An operator who desires to advance or de press the price of a stock does so by matched orders. In these transactions he uses different brokers some of whom he instructs to buy and others to sell, naming the price limit in each case. By simultaneous or sub stantially simultaneous orders to buy and sell, the market is given an appearance of activity. In the words of Mr. S. A. Nelson, the well known writer on stock exchange subjects, the manipulator "will cover his tracks with the skill of an Indian." In most cases the brokers to whom these tasks are assigned are ig norant of the object in view and execute their trans actions in good faith. Nevertheless a large operator with ample resources can. by this measure secure the same ends, as he formerly attained with wash sales. The only disadvantage is that he may be obliged to absorb a large amount of stock which is offered by out siders and which is naturally purchased in good faith by the innocent broker in preference to that offered by his unknown ally. This stock must of course be paid for in the regular way. The purchase of the stock at high prices, however, materially reduces the profits of the operator in his stock market campaign.
From the foregoing description it is readily ob served that a sharp line of demarcation exists between wash sales and matched orders.
10. Defense of matched orders.—Many brokers have defended vigorously the practice of matching orders. They say that where a stock is both bought and sold on a varying scale, or at the prevailing market price, the market is rendered more steady and is al ways active enough to permit investors to buy or sell without serious loss. "It makes a constant liquid market," says one broker. Another says : It is a species of advertising. People begin to study the earning capacity and possibilities of the property, the shares of which are being made active.
The dry goods merchant manipulates when he prepares a bargain sale and advertises the same. The real estate op erator does the same, either by word or mouth or by adver tising, or by the purchase of property in the vicinity. It seems to me that without manipulation none of us would want anything but the sheer necessities of life.
11. Evils of manipulation.—Brokers freely admit, however, that manipulation may be overdone and abused. This abuse ranges all the way from mod erate efforts to stabilize a market to outright fraud. Obviously, excessive manipulation defeats the very purpose of a stock exchange, because the market es tablished in a stock is no longer the result of normal supply and demand. A further adverse point to be made is that all manipulation in new securities is not for the laudable purposes set forth but often to en able the "insiders" to sell out. In the case of estab lished properties the manipulation may be to discount some favorable news known only to a chosen few, or to keep up a favorable market to let the "insiders" out if bad news is coming.
But this abuse tends to correct itself. Excessive manipulative efforts usually fail and ruin the per petrators. Matched orders moreover, are very expen sive. Especially on the produce exchanges advancing prices often incite so much selling from farmers as to ruin the operator.
12. Prohibition of manipulation.—At the 1913 ses sion of the legislature of the State of New York, a law was passed (Laws 1913, the 476, sec. 951. In effect May 9, 1913) prohibiting operations of this character. If it develops from any inquiry that an outsider has abused the facilities of the Exchange in this respect, the Exchange must report him at once to the district attorney.- Whether there have been any matched orders since this law was passed or whether there can be in the future, it is difficult to say. It is generally conceded that manipulation of all de scriptions has diminished in recent years.