Durham E-Theses Share Trading and the London Stock Exchange 1914-1945: The Dawn of Regulation SWINSON, CHRISTOPHER How to cite: SWINSON, CHRISTOPHER (2016) Share Trading and the London Stock Exchange 1914-1945: The Dawn of Regulation, Durham theses, Durham University. Available at Durham E-Theses Online: http://etheses.dur.ac.uk/11627/ Use policy The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that: • a full bibliographic reference is made to the original source • a link is made to the metadata record in Durham E-Theses • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders. Please consult the full Durham E-Theses policy for further details. Academic Support Oce, Durham University, University Oce, Old Elvet, Durham DH1 3HP e-mail: [email protected] Tel: +44 0191 334 6107 http://etheses.dur.ac.uk 2 SHARE TRADING AND THE LONDON STOCK EXCHANGE 1914–1945 THE DAWN OF REGULATION CHRISTOPHER SWINSON OBE, MA, FCA Submitted to Durham University in conformity with the regulations for the degree of Doctor of Philosophy DURHAM UNIVERSITY BUSINESS SCHOOL MARCH 2016 SHARE TRADING AND THE LONDON STOCK EXCHANGE 1914–1945 THE DAWN OF REGULATION ABSTRACT In the London of August 1914, there was no statutory regulation of share trading. By the beginning of 1946, only traders registered in accordance with the Prevention of Fraud (Investments) Act 1939 were permitted to engage in share trading between members of the public. This study examines the stages by which share trading in the United Kingdom came to be a statutorily regulated activity and by which the London Stock Exchange moved from being antagonistic towards public regulation in 1914 to lobbying in 1944 for the new scheme to be implemented. A number of challenges were posed by changes in the character of the demand for and supply of securities which were evident before 1914 but hastened by the 1914-1918 war. There is no evidence that the Exchange, its members or outside observers understood how these changes would affect the overall character of the market or its sensitivity to risk. Almost all regulatory interventions between 1914 and 1945 responded to crises which exposed the failure of existing arrangements to cope with the consequences of market changes. Whilst these interventions show that self-regulatory arrangements could be effective, they also demonstrate the limitations of reliance on self-regulation alone. Although the Exchange’s members supported severe action after the crashes of 1929, the criminal justice system again proved inadequate to deal with abusive share trading generally. The 1939 legislation responded to the criminal justice system’s failure and, for the Exchange, was made palatable by protecting its formal independence. Each successive regulatory intervention in part responded to compromises in previous interventions occasioned by the need to secure acceptance by market operators. Page ii SHARE TRADING AND THE LONDON STOCK EXCHANGE 1914–1945 THE DAWN OF REGULATION TABLE OF CONTENTS Page Abstract ii Table of contents iii List of tables v List of charts vii List of appendices viii United Kingdom Acts of Parliament ix United Kingdom Statutory Instruments and other x regulations Cases xi Abbreviations xii Acknowledgements xv Copyright xvi Chapter One Introduction 1 Chapter Two 1914 – On the brink of war 21 Chapter Three 1914–1918 – Surviving a war 69 Chapter Four 1919–1929 – The post-war Stock Exchange 95 Chapter Five 1919–1929 – Post-war new issues 116 Chapter Six 1919–1929 – Regulating share trading – part I 139 Chapter Seven 1929 – The year of two crashes 166 Chapter Eight 1930–1939 – The market’s recovery 201 Chapter Nine 1930–1939 – Regulating share trading – part II 231 Chapter Ten 1939–1945 – Surviving another war 273 Chapter Eleven Conclusions 291 Bibliography 306 Page iii Page iv LIST OF TABLES Number Title Page Chapter Two 2.1 London Stock Exchange membership: May 1904– 24 November 1914 2.2 Nominal value of securities quoted in the London Stock 33 Exchange Official List 1873–1913 (£million) 2.3 Nominal value of securities quoted in the Stock 33 Exchange Official List 1873–1913 (%) 2.4 Stock market values of domestic corporate entities 34 quoted on major national exchanges at the beginning of 1900 2.5 Nominal and real returns to investment in equities, 42 bonds and bills 1900–1913 2.6 Yield on Consols 1863–1902 4 3 2.7 Equity risk premia in major exchanges 1900–1910 44 2.8 Size of shareholdings 48 2.9 Male and female shareholdings by number and 48 nominal value Chapter Three 3.1 Initial members of the Fresh Issues Committee, 76 Chapter Four 4.1 New in 1928: top five lead brokers ranked by total 105 amount subscribed 4.2 New issues in 1928: top five lead brokers ranked by 105 number of issues Chapter Five 5.1 Leyland Motors Limited: Net profit over net assets 123 (three year moving average) % 5.2 Top ten issuing houses ranked by total amount 130 subscribed for issues in 1928 5.3 Categories of speculative stocks issued in 1928 132 Page v Number Title Page Chapter Seven 7.1 Shares issued in February–March 1929: proportion of 167 issue left with underwriters – five largest 7.2 Low denomination shares issued in 1927 and 1928: 168 market price changes January–June 1929 Chapter Eight 8.1 Data from tax assessments for brokers and jobbers 204 1909–1938 8.2 Percentage distribution of net life assurance company 216 investment 1927–1937 8.3 New issues in 1938 (domestic commercial): top ten 219 issuing houses ranked by total amount subscribed 8.4 New issues in 1938 (domestic commercial): top five 220 lead brokers ranked by total amount subscribed 8.5 New issues in 1938 (domestic commercial): issues 220 managed by top five lead brokers analysed by involvement of an issuing house 8.6 Five-year survival rates by industry 1919–1938 (%) 221 8.7 Exposés of allegedly bogus financial newspapers and 224 circulars 1930–1937 Chapter Nine 9.1 Number of cases arising annually 1930–1938 233 9.2 Cases in which arrest warrants were not executed 234 9.3 Serial company promoter/share-pusher prosecutions 243 Chapter Ten 10.1 Estimated value of dutiable Stock Exchange 279 transactions 1938–1946 10.2 Members’ numbers: brokers and jobbers 1938–1939 279 compared with 1945–1946 Page vi LIST OF CHARTS Number Title Page Chapter Two 2.1 Number of company promotions 1885–1900 per Nye 41 (2012) Chapter Four 4.1 Estimated value of dutiable Stock Exchange 97 transactions 1911–1930 4.2 New capital issues of the United Kingdom 1920– 98 1930 4.3 Income yields on ordinary share and debentures 107 1912–-1926 as presented by HE Raynes in 1928 4.4 Equities and bonds: indices of real values 1914–1929 109 4.5 Percentage of total net investment by insurance 110 companies in corporate securities 1923–1930 4.6 Net investment by insurance companies in different 110 types of corporate security 1923–1930 Chapter Eight 8.1 Estimated value of dutiable Stock Exchange 202 transactions 1928–1939 8.2 New capital issues of the United Kingdom 1928– 203 1936 Page vii LIST OF APPENDICES Number Title Page Chapter One 1.1 Principal regulatory interventions 1914–1945 13 1.2 Clarence Hatry’s transactions 14 1.3 Clarence Hatry’s transactions: principal archival 17 sources Chapter Six 6.1 Cases of suspected share-pushing: 1910–1929 161 6.2 Offences quoted in Appendix 6.1 165 Chapter Nine 9.1 Cases of suspected share-pushing: January 1930– 261 February 1936 9.2 Cases related to share-pushing and fraud: January 265 1930–September 1939 Page viii UNITED KINGDOM ACTS OF PARLIAMENT Year Title Pages 1861 Larceny Act 145,165 1862 Companies Act 50,62 1867 Companies Act 62 1869 Newspapers, Printers and Reading Room Repeal Act 165 1879 Companies Act 51 1890 Partnership Act 28 1890 Directors’ Liability Act 51, 52 1890 Companies (Winding Up) Act 63 1894 Finance Act 214 1900 Companies Act 51, 103 1901 Larceny Act 165 1907 Companies Act 51 1908 Companies (Consolidation) Act 119, 148 1914 Defence of the Realm Act 88 1916 Larceny Act 165, 235 1916 Registration of Business Names Act 165 1922 Finance Act 214 1925 Trustee Investments Act 192 1927 Finance Act 214 1928 Companies Act 154,232 1929 Companies Act 154, 165, 232 1930 Finance Act 214 1937 Finance Act 215 1939 Prevention of Fraud (Investments) Act 247, 257, 258 1939 Emergency Powers (Defence) Act 275 1946 Borrowing (Controls and Guarantees) Act 288 Page ix UNITED KINGDOM STATUTORY INSTRUMENTS AND OTHER REGULATIONS Year Title Pages 1897 County Councils (Stock) Regulations 187 (SR& 1897 Number 614). 1897 District Council (Stock) Regulations 187 (S&RO 1897 Number 615) 1919 Regulation 30F made under the Defence of the Realm Act 88. 89, 90, 92 1914 1932 The Stock Regulations 187 (SR&O 1932 Number 436) 1934 The Local Authorities (Stock) Regulations 1934 187 (SR&O 1934 Number 619) 1939 The Prevention of Fraud (Investments) Act, Licensing 258 Regulations (SR&O 1939 Number 794) 1939 Rules dated July 267 1939 made by the Board of Trade 358 under the Prevention of Fraud (Investments) Act 1939 (SR&O 1939 Number 787) 1939 Control of Capital Issues 274 Regulation 6 made under the Emergency Powers (Defence) Act 1939 Page x CASES This is a list of the United Kingdom civil proceedings and judgments cited in the text.