The jobbing system-Modifications for block transactions and in other circumstances where spreads are wide

The jobbing system
b)Modifications for block transactions and in other
circumstances where spreadsare wide
In principle, a jobber buys or sells any amount of stock
at his bid or, respectively, at his offer. There are
limits to this, however. An order may be so large that
the jobbing firm cannot assume the risk of the position
arising from an immediate execution of the order; since
jobbers themselves have no direct contacts with
investors,
 their opportunities for rapidly running down
large positions are limited. Even if the jobber is
willing to take up the position, his quotation will
necessarily vary according to the size of the transaction
and the point will eventually be reached at which the
broker holding the order will ask himself whether, in the
interests of his client, he should forgo the immediate
bargain and try to discover, by asking other potential
buyers, whether they are interested in doing a deal
and, if so, at what price. A broker, however, who feels
that the price offered by a jobber is not good enough,
must
1.find out from the jobber the prices he is quoting
for the transaction or for parts of the transaction,
2.allow the jobber to take on at least part of the
transaction at the eventual dealing price provided
this does not prevent the execution of the order,
and,
3.  if he  (the broker) has obtained matching orders,
he must allow the jobber to offset these orders
against the original order or the remaining portion
of the original order  ("put-through"). 
For this the jobber receives a smaller spread, which
has nothing to do with the cost of immediacy but
rather should be seen as a "price consultancy
commission" or a "fair price commission". A small
portion of this spread should - as in every other
case - be interpreted as a "commission for guaranteeing
settlement", as the jobber would himself be liable
to the buyer or seller if the broker and the parties
he represented failed to honour their commitments.
This spread normally ranges from 0.1  to 0.4% of the
value of the transactions.
The put-through procedure has grown greatly in importance
with the increasing  "institutionalization" of share-
dealing, because institutional investors often come to
the market with orders so large that they cannot be
dealt with by the normal methods of the jobbing system.
The procedure is to be used for all stocks listed on a
domestic or foreign stock exchange. But a broker is free
to deal in Eurobonds unaided by a jobber and may also
do so for his own account, or he may, also without the
assistance of a jobber, execute an order abroad if it
is to his client's advantage. The proportion of put-
through transactions to total stock exchange turnover
is now about 10%. Recently, there seems to have been
a growing trend towards put-throughs even for
transactions of normal size. Some brokers, it seems,
are assembling offsettable orders so as to exclude,
if not the jobber, then at least his forward cover
service.
 Complaints have been heard, moreover, that
jobbers are being completely circumvented by brokers
executing orders in leading British shares not in the
United Kingdom or Ireland but on stock exchanges or
over-the-counter markets abroad.
The broker who effects a put-through deal can generally
speaking charge his clients on both sides of the trans-
action the usual commission. If, however, he himself
and at least two jobbers - where there is more than
one - come to the conclusion that the deal is too large
or leaves no room for a spread, the jobbers may decline
to put through the business as described under 3 above.
However, the broker then does the offsetting himself
and may charge a provision only to one party to the
transaction, so he does worse than he would have done
if a jobber had been involved.
Besides the put-through, a technique which where
large orders are involved resembles over-the-counter
block-assembling  (see K II  1a infra), there are other methods for dealing with block orders. A broker will not always be able to create matching orders from his
clientele to meet the part of a large order which the
jobber of iiis choice cannot execute at an acceptable
price.
 In this case he will first do a deal with the
jobber for the amount that he can obtain under
acceptable conditions. He will then usually put a
price limit on the remainder of the order and leave
it with the jobber. The jobber may then try to
provide the right conditions for the execution of
the order by making suitable quotes, or he may,
with the broker's consent, enquire of other jobbers
whether they are interested in doing a
 deal.Or the jobber might make an offer to another broker which
that broker would put to one or more of his clients
so that a counterparty may be found in this way.
Some large firms of stockbrokers specialize in putting
proposals of this kind to dozens of institutional
investors within the space of a few minutes. Finally,
it is open to the jobber, as it is to the broker,
to resort to international arbitrage.
Even with transactions of normal size it may happen
that a broker finds the jobber's margin unsatisfactory
or that the jobber registered  for the issue does not
quote two prices at all but only makes a one-way
market.
 In that case the broker may proceed exactly
as described above. Alternatively, he may challenge
the jobber and make a counter-offer for the client on
his own account, in which case the jobber has the
right to trade on the terms offered. But if a bargain
is transacted for the broker's own account, he may
not charge even a single commission as described
above in the case where he carries a transaction
through between two clients, but may charge none at all.
This circumstance has already been explained with the
aid of an example, on page 39. There it was stated
that it seemed reasonable on the face of it that a
broker should not claim a commission as agent for
transactions in which he did not act as agent but dealt
on his own account. However, our analysis there made
it clear that the rule which prevents the broker from
charging commission in this instance is not an
economically valid rule designed to protect the
investor. At this point we may add that the rule is
a means of protecting the jobber from competition.
The price at which a broker sells direct to his
client must be higher than the jobber's bid by the
amount of one commission; the price at which the
broker buys for his own account from a client to
challenge a jobber must be lower than the jobber's
ask by the amount of one commission. So long as a
jobber does not pitch his spread wider than the amount
of one commission, he is safe from competition from
brokers.     Cents Zero
 A broker cannot profit from challenging a jobber then. 
 the source by Dr.Hartmut Schmidt