Tuesday, September 25, 2012

The Day's Work in Wall Street

The book is 83 years old and in reasonable condition except the staples have rusted through and disintegrated, leaving a pair of neatly shaped stains at the margin of each page. The topic is the description of a profession, and regular readers will know how fond I am of these. In the past we covered dustmen and postmen. This time it’s stock-brokers.

The Day’s Work in Wall Street is a lecture on the workings of the New York Stock Exchange written in 1919 and revised ten years later by Frederick S. Todman, the head of one of the principal accounting firms of this era. The exact date of the revision – precisely when in 1929 – is not recorded, but we could reasonably assume that it was some time before the market’s dramatic unravelling that began on October 24 of that year. Knowledge of that particular event makes the book a sort of unwitting and unfinished crime thriller, one in which the murder is never consummated but might as well have been, as far as the reader is concerned, for we know what happened next. And so that the stock market should be described as such an ordered, harmonious and well-functioning machinery at this particular time is a source of some frisson, like when Yale economist Irving Fisher declared just ahead of the crash that stock prices seemed to have reached ‘a permanently high plateau’. We rightly scoff at these statements, but they are also revealing of the extent in which the financial system – long before the invention of credit default swaps – knew how to render itself opaque to the very people who ought to have been most familiar with its workings.

In spite of his technocratic confidence, Todman hints at this opacity in the lecture’s opening statement.
Probably few persons outside the stock broker's office fully understand the minutiae of the game of fortune-making in the stock market. Everything is so technical: the abbreviations on the ticker, the parlance of the street and the sign language used by the brokers on the floor.
In fact the New York Stock Exchange had a history of being quite secretive about those minutiae. In the previous decade for instance it forbade visitors from taking pictures, which is why a photographer working for the Pearson Publishing Company had to snap the one below with a camera hidden in his sleeve.

Of course it is quite possible that what the directors of the exchange wished to protect was their intellectual property in the very things that Todman set out to describe: namely, the combination of technological and human systems that allowed the exchange to carry out and record with remarkable speed and accuracy the orders to buy and sell it received each day.

On the human side, the Stock Exchange – we are assured – is governed by strictest principle of ethics. The broker is fundamentally honest, because he [sic] is trained to be honest, and besides ‘the laws governing the conduct of members on the Board also foster that habit, so that it does not take very long for the dishonest ones to be weeded out of the fraternity.’ If anything, it is the customers who frequently cannot be trusted, and several examples of such dishonesty are given. Nonetheless the broker is seldom indifferent to their interests.
Many times he is asked to carry their commitments thru a period of storm, when owing to their temporary embarrassment they are unable to finance them fully. This he does cheerfully, if he is reasonably certain that the customer means well and that his indisposition is but a matter of adjusting his bank balance.
You see how the bad reputation of brokers amongst the public was unwarranted even back then? Except of course these lending arrangements were not borne out of compassion, and the necessity to recoup the amount loaned – which at peak totalled a staggering $8.5 billion – meant that brokers had a very vested interest in driving prices higher in the lead-up to the crash.

If the psychological type of the broker is sketched rather crudely, Todman is more useful and at times more lyrical when describing the technological side of things. There is for instance in the book a lengthy description of what happens when the ‘tape is late’, meaning that the lag between a flurry of trades taking place and their being printed on the ticker tape has prevented a buy or sell order from occurring at the desired price point. Such lags of course nowadays are defined by the servers of an investment bank operating a micro-second faster than those of another investment bank. Of a similarly quaint nature are the author’s attempts to impress us with the ‘wire room’, the never centre of the broker's organization, where in one corner you might see as many as ‘half-a-dozen wires leading to the West and the South.’ All that this means is that they had a bunch of phones and telegraphs, but what they did with them was still remarkable for its time.
As an example of the speed with which orders are executed, the following will serve: The London office cables in Hartfield's Code: Smitell, N.Y. DEPEFHENEP. The cable when decoded is found to be an order to sell 1,000 shares of United States Steel Common at the market price. The order is entered, executed, coded to London, and actually sent within three minutes from the time of receipt!
The exclamation mark at the end of this passage condenses an ideology that readers familiar with Adam Curtis’ All Watched Over by Machines of Loving Grace would find familiar, except what it also underscores is that you don’t need digital computing to develop the idea that a market that works faster is a better market, and that if it worked even faster it would be an even better market, and so forth. We might in fact wish to reflect upon the fact that the crash of 1929 was made possible by such rudimentary technologies, and marvel that the bubble waited patiently for each sale sheet to be made up in triplicate and each comparison issued in duplicate before bursting.

Shortly after the revised edition of this small book was published, Todman’s story ‘of brains, of keen foresight and of prompt action’ came to a devastating end, and what he had called ‘a game of fortune-making’ was branded by The Times as early of October 30, four days after Black Thursday, as ‘The Great Gamble’. The very concept of a day’s work in Wall Street would have radically changed as the market went on to lose over 80% of its value in a protracted fall that lasted three whole years. As for Todman himself, his company still traded and carried his name when it was censured by the Securities and Echange Commission in 1991, long after his death, which suggests that he came through the Depression okay. What exactly we are to make of his book I don't know, but I can tell you that it is valued over one hundred dollars on the second-hand market.


merc said...

Create capital, build, impute value, repeat until collapse = planet Earth.

Ben Wilson said...

What a classic find, Gio. $100? Cheap at the price. A perfect testament the old concept that no empire ever looks so strong as just before its catastrophic collapse. At this point it has become so enamoured with its success and security that they're writing a book to lay it all open. If only the production of such books were a reliable predictor of impending collapse. Could they be as reliable as the indicator one sharp broker I used to work with used to avoid the 1987 crash? He told me that he became very nervous about the stockmarket upon overhearing a plumber talking to a builder in the lift of his building about their stock portfolios. He could only see such laypeople being involved in that market as a terrible sign of a bubble.

Giovanni Tiso said...

Interestingly, that's a trope that goes back to the year 1900 or so, and Todman (who wasn't concerned, as he didn't see it as a dangerous precedent) phrases it as follows: "Apparently the idea of making money in the stock market has gripped bell-boy, chamber-maid and capitalist alike". In fact only about one in five Americans were invested in the stock market at the time of the crash, and one doubts that the number would have included many bellboys and chambermaids.

Stack said...

I wonder if books with rust marks where the staples were are automatically very interesting? I have one called 'Everyday words and Phrases - a ready reference for Pacific Islanders coming to New Zealand'. It has English, Samoan, Niuean, Cook Island Maori, Tokelauan and Tongan in six columns. It has sections on various topics. I can't work out the ordering strategy inside the sections, but the one titled 'WHO CAN HELP ME?' starts with: Church, Protestant Misister, Catholic Priest, Citizen's Advice Bureau, includes Estate Agent and ends with Family Planning Clinic.

George D said...

"Please prove you're not a robot"

On the stockmarket floor (stock: in its traditional sense - what a quaint concept) there's no such requirement. We'd like it both; the human empathy and sanity that takes us away from the edge, and the computer-driven immediate logic that puts us above the razor's edge.

Ben Wilson said...

>In fact only about one in five Americans were invested in the stock market at the time of the crash, and one doubts that the number would have included many bellboys and chambermaids.

It struck me as a pretty hit-and-miss way of making decisions, to rely on overheard conversations between strangers. But it's a hit-and-miss profession, it seems. Indeed, if markets actually are efficient, as economists will often say, then it would have to be hit-and-miss, and it really wouldn't matter if it was chambermaids doing it, or monkeys, or analysts with years of professional training.

bmk said...

Indeed, if markets actually are efficient, as economists will often say, then it would have to be hit-and-miss, and it really wouldn't matter if it was chambermaids doing it, or monkeys, or analysts with years of professional training.

I think it doesn't matter. In fact they find most highly-trained analysts still on average under-perform an index fund. So in fact the experience and training may actually be a disadvantage or,if not a disadvantage, not a help at all. It's why also you are generally putting say Kiwisaver money (if you have any :) - I know I don't) into a fund that simply tracks an index and isn't managed - this will generally outperform a managed fund and a managed fee also costs more in fees.

Regarding the main point once, it seems human nature not to learn from the past. A few years ago despite the crashes of '29 and '87, people telling me that property would just keep increasing in price at the same rate indefinitely.

I wonder what type of books the Romans were writing at their peak. Though their empire took a long time to fall and decline - there must still have been hubris there for some time I imagine.

Megan Clayton said...

Oh the ticker and the wires and the writing on the walls,
Oh the verity, humanity, the legend of the falls.

Greyhoos said...

> it seems human nature not to learn from the past.

Or, perhaps more specifically, to proceed by delusion and denial, thinking that it won't/can't happen again, that the laws of gravity somehow don't apply to oneself.

Because really, it was evident as early as 2002-2003 that there was housing/building bubble in the offing. Myself, I counted the proliferation of cranes along the skyline of Chicago, the number of high-rises going up; at the same time noticing that the ones that had been completed the year before still had low occupancy rates and were clamoring for residents. And also looking at the number of neighborhoods in the cities where developers had been allowed in to run roughshod over everyone and everything; all of them aiming to make the community gentrifier-friendly, only to watch it go belly-up in the market, leaving the neighborhood half-gutted.

And you didn't need any specialized training or advanced knowledge of economics to see where it was all going, where it would most likely end up. All you needed a modicum of common sense -- a measure of pragmatism and restraint. Of which there apparently were some at various financial institutions in the run-up to the meltdown. Thing is, those voices tend to get crowded out/ignored -- finding themselves uninvited to the meetings, if not sacked outright.

I am not a robot.