The jobbing system - The normal dealing procedure

The jobbing system
a)  The normal dealing procedure
In the normal procedure the jobbers act as market makers
- they are in fact the archetypal market makers -
that is to say they are willing at any time during
business hours to buy or sell certain securities
immediately  for the account of their firm and on the
basis of a spread  (the jobber's  "turn") which they
themselves determine. At the end of March 19 75 there
were 21 jobbing firms with 569 representatives
registered with the Exchange. Most jobbers make markets
in at least a few dozen securities. Ten years ago
there existed, in London alone, 60 firms of jobbers
with 750 dealers. Although no statistics are
available, information provided by the Stock Exchange
indicates that for all the more important stocks there
are at least two jobbers on the market and three

jobbers  for specially active issues. However, the
number of jobbers dealing  in a given  issue is not
necessarily  an indication of the degree  of 
competition  for transactions, since many jobbers  combine 
their market-making positions and  "make a joint book",
i.e. they act for joint account.
The jobbers can usually be  found on their firm's pitch
on the  floor of the exchange, where, either in person
or by telephone, they quote the prices  at which  they 
are prepared  to deal and they enter into deals. But
they can also, exactly  like the market makers on the
American over-the-counter market, take care of  all 
enquiries  and business by telephone  from their offices.
When  a broker receives  an order, he will  first  ask 
the appropriate  jobber or jobbers on the floor of his
local stock exchange  for their quotations  without 
revealing whether he wishes to buy or to sell;he will
then telephone  the jobbers at other exchanges  or 
outside the Stock Exchange to find out their prices.
Only  then will he consummate  the trade with the  jobber 
offering the price most favourable  to his client.
It is only necessary  in certain cases  for the price
to be published. Basically, members are  free to  choose 
whether or not  to report the prices at which they have
dealt.
 So only every  third or fourth price  is published.
The volume of individual deals is never  reported. 
Disclosure of the price and volume of each  individual 
transaction  is resisted, especially by the jobbers.
They rightly  fear that complete information on prices
and turnover would enable their competitors or brokers
to draw conclusions as to the state of their market-
making position  and make  it harder  for them to
liquidate such positions without a
 loss.
The same applies to the provision of information
about current quotes. It is not easy even for a
broker to get a complete picture of the situation.
A broker can discharge his duty to secure the best
price for his client only by having someone ask the
jobbers or by asking them himself. Some help is
provided by the middle prices chalked up by the
jobbers on their pitches but these prices, lying
mid-way between bid and ask, are often out of date.
More reliable information on middle prices is
supplied by the Stock Exchange's electronic Market
Price Display System (MPDS).It shows on a display
screen the movements in the middle prices of the more
active shares, starting with the closing middle price
of the previous day and continuing with the London
jobbers'middle prices, which are ascertained from the
jobbers continuously by price collectors and fed
into the system. MPDS is a valuable aid for advising clients and for
members in offices and at the provincial stock exchanges
but it does not tell a broker - unlike Nasdaq, for
example  (see K III 1a and K IV 2b infra) - which jobber
is offering the highest bid or the lowest ask. This
information would speed up the search for the best
counterparty and could sharpen competition, particularly
between jobbers at different stock exchanges. Quite
apart from the fact that with 10 000 to 30 000 bargains
per working day the 4 000 brokers are not very heavily
burdened, even if not all of them are actively engaged
in stock exchange dealing, failure to provide complete
information on quotes is less serious with only two

or three jobbers per issue than it would be if market-
makers were more numerous. From the point of view
of the stock exchanges a certain lack of transparency
may even be desirable, because the more reliable the
information about current quotes on the exchange,
the more likely it is that orders will be executed
outside the exchange with consequent loss of business
to jobbers and other members.
A special feature of the transaction service offered
by members of the British Stock Exchange to their
clients is that bargains are in principle concluded
immediately, since it is mandatory to deal through
jobbers and the jobber constitutes an immediately
available counter-party  for the deal desired by the
investor. As already stated on page 24, this special
service has its price, the immediacy premium or discount,
Both together go to form the dealer's spread, if one
disregards costs other than those of immediacy. It is
now said in various quarters in the City that spreads
have widened in recent years and differ less from
share to share than was once the case. Since a jobber
does not usually buy and sell at the same time - indeed
it is precisely his task to bridge the time gaps
between the receipt of orders to buy and orders to sell -
his spread or turn is not a very reliable indicator
of how much the instant bargain costs the individual
investor or all investors in aggregate. The aggregate
actual earnings of all jobbers from dealing - that is
to say their earnings after they have bought in stock
at a certain time and sold it at another time, whether
at a profit or a loss - would be a better indicator,
particularly if one compared these earnings with total
purchases and sales in order to ascertain the cost
Cents Zero
of the jobbers' services to investors per unit
transacted. But as will be shown below, jobbing
firms are not single-product undertakings and this
is one of the reasons why this method produces a
figure for the cost of immediacy to investors per
unit transacted that is rather too low.
By making calculations of this kind the Stock
Exchange tries to counter accusations that jobbers'
turns are too wide. It arrives at a figure of
realized spreads per unit of sales only for a large
jobbing firm with business mainly in bonds  ranging 
between 0.05%  for 1973 and 0.11% for1975.
 In the case
of another large firm, whose main business is in
equities,the corresponding figures are 0.09% for
1975 and 0.19%  for 1971. Unfortunately these
calculations were based not on gross earnings from
dealing but on net earnings after full or partial
deduction of various expense items such as salaries
and rents. It was not possible to ascertain the
amount of these expense items. Without doubt reliable
statistics on the cost of the jobber service per
unit of turnover would be very useful for judging
the procedural efficiency of the jobbing system.
Such statistics would also reveal what earnings a
jobber needed in order to cover the cost of handling
his business from the technical point of view and to
cover the cost of his capital which corresponds to
the risk of holding market-making positions. In
addition, a jobber, when building up a"bull"or "bear"
 position, must also include an element of
forward cover discount or premium
in his bid or ask respectively. Viewed as a whole,

however, the unrealized profits initially gained
by the forward cover discount or premium will,
under ideal conditions of intensive competition
between market makers, completely disappear in the
liquidating transactions the jobbers effect. This
forward cover discount or premium is not therefore
borne by investors in their aggregate, but for an
individual investor it may, in conjunction with the
other costs of the market-making service, be so
substantial that he would prefer - if he had the
choice - to forgo his instant bargain and instead
wait for a suitable counter-order to turn up in due
course.
 We shall have cause to return to that problem
time and again.
The cost of immediacy is greatly influenced by the
conditions under which the market makers must
operate.
 The Stock Exchange has created favourable
conditions for jobbers in three ways:
1.  All securities - with the important exception of
British, Irish and Commonwealth government
stock and the loans of some international
organizations - are traded forward  (the "account
system"),
 with the result that the costs of
procuring funds and securities for market making
are kept low in comparison with the cost of cash or
regular way transactions. In the case of government
and public authority stocks there are special
facilities that help to keep these costs down.
2. The jobbers are kept continually up to date on
important economic and political developments
by a news ticker on the floor of the exchange.

Without this information they would run the risk
of misinterpreting the orders of investors. If they
did not have access to continuous information they
would have to protect themselves against this
risk by applying on the average higher forward
cover discounts or premiums. In other words, the
news ticker reduces the jobbers' information risks.
3.  The rule that business must go through jobbers
exposes the jobbers to the full flow of orders.
A jobber can thus clear his position more quickly
than would be possible under any other trading
procedure. Hence his risk of having to suffer
losses is smaller than it would be in a situation
where it was not mandatory to trade with jobbers.
The jobbing system will therefore tend to keep
forward cover discounts or premiums down.
Unlike the market makers on the New York Stock Exchange
(see K II 1ainfra),the British jobber, however, has
no idea of how his position is protected by the market,
because he has no knowledge of the orders awaiting
execution. His book is only a book of his actual
positions, it is not an order book; orders, as such,
are not in principle passed to him. If a jobber who,
for instance, had to buy a fairly large block of shares,
knew that a substantial volume of orders to buy up to
a limit a little below the present price had been
received, so that if the price were to fall his
position would be protected, this knowledge would not
be without influence on the size of his forward cover
discount. Lack of knowledge about orders received and
awaiting execution has a twofold effect: on the one
hand it makes it harder for the jobber to estimate the

price risk he runs, and on the other hand it protects
the investor from counter-action and from being
wilfully denied priority, and there is no need for
special regulations in this connexion. For  related 
reasons a jobber is not allowed to have investor clients of his own.
 the source by Dr.Hartmut Schmidt