8. Legal relation of broker and customer.—From this outline of the duties and relationship of customer and broker it will be observed that there are three steps in the trade which involve different legal rights; (1) there is the relationship of principal and agent. The broker is ordered by his client to make purchases of certain securities which he should proceed to do with diligence and care. For his trouble in perform ing the duties of agent he receives a stipulated rate of commission. His task once performed he assumes immediately a different legal role.
(2) His functions are then transferred from the territory of agency into the field of credit. His prin cipal is now the debtor and he becomes the creditor. Inasmuch as his customer merely pays down ten per cent or thereabout and leaves the remaining sum to be raised in some way or other by the broker, the latter becomes the creditor of the former.
(3) The final transformation takes place when the securities the broker has purchased are delivered to him. While the customer is the legal owner of the securities they remain in the possession of the broker because he has a lien on them for all the money he has advanced directly or indirectly and for his unpaid commission charges. Here we have the relation of
pledger and pledgee. The total sale price less inter est on the sum advanced, the principal itself and corn mission fees are turned over to the client in case of sale. When purchases are involved, the account of the customer is debited with the interest on the 90 per cent or so borrowed, and credited with interest on the margin.
As a result of so many complicated relationships, disputes frequently arise between brokers and cus tomers. As already stated a large body of legal de cisions has been built up around these many points. But on the other hand the actual transaction of busi ness proceeds far more smoothly than might be sup posed. Disputes are relatively few considering the immense volume of business. The average stock op erator never suspects the intricate legal, financial and accounting relations that exist between him and his broker, for the simple reason that the machinery takes care of them without a hitch. On the Stock Ex change such disputes as do arise are far more often settled by the Committees of the Exchange than by recourse to law.