The jobbers always acted as principals in their trades and assumed full responsibility, enforceable in courts of law, for fulfillment of their contracts. The brokers always acted as agents only, and by avoiding ultimate responsibility for completion of the trades in which they were involved also avoided risk of default. Despite their different status before the law of the land in terms of contractual obligations, however, both groups had an interest in resolving contractual disputes that arose among them as quickly and definitively as possible. Keeping the Committee on General Purposes small and meeting frequently with the power to adjudicate disputes and enforce its decisions by internal sanctions facilitated the continued smooth flow of business to the advantage of all concerned, including the general public. The only difficulty was that the decisions of the Committee were more binding on the brokers than on the jobbers, because the latter had constraints imposed upon them by a higher, outside authority.
A given amount of debt would be advertised for placement. By the time of the Napoleonic Wars, the typical package would be a mix of 3% Consols, another irredeemable security and an annuity for a fixed term of years. Fixed terms would be announced for the annuity and one of the irredeemable stocks. Bidding would then be invited on the remaining stock. Applications would be received either from the public or, increasingly after the middle of the 18th century, from various groups of contractors. When allotments were made to the highest bidders, an initial payment of 10-15% had to be made by each subscriber, with the remainder paid in installments over the next eight-nine months. Only when the full amount subscribed had been paid in was the stock registered in the books maintained by the Bank of England. Until then trade could be done in subscription receipts, a cheap form of speculation in the first few months when only a few installment payments had been made. Moreover, dealing could be done in advance of allotment, if one wished to speculate upon the price at which the loan would finally be settled in the market. Given the large sums involved, only a limited number of groups could cover the subscriptions and each had to involve a large ring of subsidiary subscribers. By the end of the Napoleonic Wars, the government was receiving identical bids from each group and the allotments were divided up proportionally among them.2 This confirmed the division of traders into brokers and jobbers, a division maintained to the present day.
As self-interested, profit-maximizing, rent-seeking stock brokers and jobbers, the Members of the London Stock Exchange responded eagerly over the course of the 19th century to new clients made available by the improved communications with the provinces or with foreign countries. And just as naturally, they defended their new source of income from competition by new brokers and jobbers. For example, each enlargement of potential demand for their services inspired a new format for the Stock Price List issued to serve as the official gauge of the accuracy and fairness of prices quoted to the brokers' customers. But each increase in the number of potential competitors also provoked a new set of regulations or, in extremis, a new institutional form.
From the animosities between the two (or more) groups came the odd institutional structure of the London Stock Exchange. The Exchange itself was owned by a joint-stock corporation with closely held shares by the Proprietors, who set the terms for use of the building by subscribing Members. These, in turn, were the active traders, divided by then into the distinct categories of Jobbers and Brokers.
During the stock market mania of 1825 when hundreds of new firms were being promoted, the delay between advertisement of a new venture and news of its charter being granted lengthened and the uncertainty over the value of subscription receipts increased as a result. The abolition of the Bubble Act in late 1825 was likely an attempt to reduce the uncertainty in the market by speeding up the disposition of applications pending. In the Joint Stock Companies Act of 1844, dealing before allotment was formally outlawed.3 This legislation was repealed, however, by the Joint Stock Companies Act of 1856. The difficulty was that such contracts would continue to be enforced by the Committee on General Purposes, provided they were accepted as common practice by the membership. And they were good business for the traders of the LSE. So the division between brokers and jobbers worked to encourage risk-taking on Initial Public Offerings. Jobbers could "make a market" or test a market for a new issue, while brokers could avoid these risky ventures entirely.
The difficulty with this division of labor arose when handling trades for the great majority of stocks, which, once listed, were seldom traded. Dealers were not willing to take positions in these stocks without knowing in advance from the broker how many shares were involved in the commission and whether it was for a buyer or a seller. Given the risks involved for the dealer in seldom traded stocks, this seemed reasonable, but dealers frequently insisted on knowing the price the broker's client was willing to pay or take. They would then take as their "turn" the full difference in price from the counterparty they managed to find.
This conflict between brokers and jobbers foreshadowed a growing problem at the end of the 19th century: brokers found that their expanding clientele from the provincial and foreign exchanges overlapped with the expanding number of securities from the provinces and abroad in which jobbers could profitably specialize. As a result, brokers and jobbers found themselves in competitive positions when attempting to exploit these new trading opportunities. With the advent of telegraph connections, jobbers could make direct contact with off-site brokers and continue to make substantial profits from the differences in prices for the same security in different places. Their increased business, however, came at the expense of the on-site brokers who were also members of the LSE, and much more numerous when it came to voting on regulations and on electing the Committee for General Purposes.4
The efforts of the brokers to discourage off-site trading by the jobbers culminated in 1909 with a ban on any trader acting in the dual capacity of broker and jobber and in 1912 with a set of minimum commission rates. This was potentially very disruptive to the nationally integrated securities market.
The rise of canal companies was quite independent of the activities or initiative of the London Stock Exchange. The canals were financed by local landowners anticipating capital gains on their properties and were closely held corporations from start to finish. It appears that the role of the London market was important for some of the canals at times when the stock market was expanding in general. At those moments, a canal company could turn to the broader market for additional funds, always needed to maintain or extend the route and to add facilities for increasing the flow of traffic. Typically, however, canal companies had to make calls on the existing stockholders, or to issue mortgage bonds, mortgaged against either the right of way or tolls.5 Despite the existence of a well-organized, central market in London with access to huge amounts of investor capital, then, it appears to have had little influence on the rise of canals. Rather, the exchange added the shares of long-standing companies held mainly by stockholders in their respective service areas when it wished to increase the volume of its business or to widen the range of its clientele.
The rise of railways, by contrast, was very much enhanced by the initiatives undertaken by the stock traders in London as they tried to interest investors in iron railways before the age of steam and promoted a number of steam railways prematurely. On the investing side, the new railways were less interesting to landholders than to the mercantile and manufacturing class. As railways spread from the original success stories in Lancashire and Yorkshire, those local investors also invested disproportionately in the railways elsewhere, necessarily directing their orders through the London market. Despite the long lag between listing iron railways on the London Stock Exchange and the actual start of a serious round of railway construction in England, it seems clear that the stock exchange was important for the finance of railways in a way it was not for canals. The reason stems from: 1) the long process required under British law for registration of a joint-stock company formed to construct a railway; 2) the long period of construction required for most railways; and 3) the peculiarity that in the long run, local landowners tended not to be the major shareholders in their area's railways, unlike the U. S. experience with railway investment in this period and unlike the earlier U. K. experience with canals.
The rise of the Empire and the attendant investment flows from the 1850s on to the outbreak of World War I built steadily on portfolio investments in precisely railroad and public utility corporations that mimicked the organizational forms found so attractive by the original class of investors and traders in London.
2 Morgan and Thomas, pp. 45-50.
3 LSEC, p. 19.
4 Morgan and Thomas, ch. 9.
5 Ward, ch. IV, "The organization of canal finance".