What Is The Stock Exchange Clearing House?

A place where the brokerage differences in the accounts of the members of the New York Stock Exchange are settled.

Before the establishment of the clearing house a broker who had made sales of stock was obliged to send stocks to the office of the various purchasers and collect payment from them, and brokers from whom he had bought stocks were obliged to send the stocks to his office to collect payment. This entailed annoyance and resulted in many delays. He was compelled to make collections and payments for the full amounts, but under the clearing house plan, he can settle all transactions in one operation.

A member, at the end of each day, makes up a sheet called a clearing house sheet, containing his purchases and sales. On one side of the sheet, under the head, "Received from," puts down his purchases, each purchase having a line for itself. In each transaction the name of the broker from whom the purchase was made comes first, and then in order below the number of shares, the name of the stock, the price at which purchased, and the amount in dollars of the purchase.

The other side of the sheet under the head, "Delivered to," contains the list of stocks sold.

If the broker has bought more of any particular stock than he has sold, or sold more than he has bought, there is a stock as well as money difference to be settled, but the settlement of the stock difference is provided for when the sheet is made up.

The settling price is an arbitrary price fixed by the manager of the clearing house. Each day at the close of business the manager of the clearing house sends out through the ticker the settling prices for the various stocks for the use of brokers in making up their clearing house sheets. In their use in making up the sheets they are called making-up prices; in their use in making settlements they are called settling prices. These settling prices are the even prices next nearest to the last prices of the day.

The broker who is short stocks in his sheet by selling more than he bought, must borrow the stocks that he is short of for his deliveries, according to Stock Exchange Rule.

Not all stocks that are dealt in on the New York Stock Exchange are cleared through the stock exchange house. Only those on the clearing house list are cleared. The stocks on this list are the ones actively dealt in. If an inactive stock becomes active it is put on the list; if an active stock becomes inactive it is taken off the list.

Transactions in stocks not on the clearing house list are not reported to the clearing house at all. Settlements in these stocks are made between the brokers in the ordinary course of business.

What Is Borrowing And Lending Stocks?

When a customer sells stocks "short," the stocks must be delivered to the purchaser, and must be borrowed to make delivery. The speculative customer sells stock short on margin and the broker must deliver the stock to the purchaser according to the Stock Exchange rules. It is usually very easy for the broker to make delivery of stock, as there are holders long of stock and willing to lend it. The lender of stock on exchange is credited with the market value of it in money and pays interest to the borrower.

Brokers on the New York Stock Exchange who have stocks to borrow or to lend meet immediately after the close of business to report transactions closed, and arrange deliveries for the next day. Should they fail to secure the stock the same day, they must do so before 2:15 the day following. When returning borrowed stock, the borrower must notify the lender before it is called on the day of delivery, and the lender is required to observe the same rule in demanding stock. On a "flat" loan the loaner is relieved from the cost of carrying the stock. The premium that the loaner receives is velvet. If a loaned stock advances in market price, the lender may require the borrower to pay the difference between the price at which the stock was loaned and the advance price. On the other hand, if the stock declines in price the borrower may require the lender to return to him the difference.