Wall Street - The Pool Operators
( Originally Published 1939 )
"Boys, we'll make a killing!"
"I'm not sure of that, Bill," the tall, slender and reserved member of the trio replied. "Distribution is not so easy now."
"Be yourself, Fred, be yourself," admonished the stout, affable and most genial looking one of the group. "If we can't make a half-million out of this baby, my name's not Jim Holmes, and I've been answering to that handle for more years than I care to remember."
"There's no doubt about it, Jim," the first speaker continued. "The trouble with Fred is that he can't forget the licking we took in Bextrel. But hell! No one could foresee what would happen then. We merely got a tough break, that's all."
The trio which assembled in the office of Jim Holmes, in the financial district, on lower Broadway, represented, among them-selves and friends, an aggregate wealth running into millions of dollars. Few, yes few indeed, would have ever associated the names of William Haliburton, Frederick Comstock and James W. Holmes, as being among the powers in Wall Street, to whom the movement of market ups and downs were often contributed; nevertheless, behind the veneer of social activities, polo playing and yacht races, this seemingly play-boy group were factors to be reckoned with.
The licking which Haliburton referred to happened a few months before. The trio had rounded up, together with a call and open market purchases, approximately 175,000 shares of Bextrel at an average price of 46. Despite their well-formed campaign, a definite bearish trend had set in, and they were forced to abandon their call, and sell their open market purchases at a considerable loss.
Comstock's part of this licking had amounted to something over a half-million, and thereafter he was prone to exercise what one of the boys described as "a dam' fool caution."
"You can't play this game, Fred, without being willing, as Kipling said, 'to make one heap of all your winnings'," was the final argument that swung Comstock into line.
"How much stock did you say the bank has, Bill?" Comstock finally inquired, after he had decided to take the step.
"They've got 81,000 shares and there's 50,000 more with the administrator of the estate over in Phill'y. The bank will give us a call on theirs at a scale up, and they're sure they can tie the Philadelphia stock up on the same scale.".
"What's the scale?"
"Twenty thousand at 20, twenty thousand at 22, ten at 30, ten at 35, ten at 40, and the balance at 50. Including the Phill'y stock, and what we can get in the open market, we should start the ball rolling with not less than 150,000 shares."
"What was the close last night?" "23½ bid, 24 asked."
"How much selling will it take to knock it down to 15?"
"Ten thousand shares should do it," was the genial response, "provided you get that artful propaganda of yours under way. Shake out all of the weak sisters, and if we can pick up fifteen or twenty thousand shares under twenty, it will put enough in the kitty, to pay the expenses of the campaign."
"All right, boys," Comstock agreed. "Get the call signed up, and we'll get things under way. Telephone me at the club when everything's set."
With a round of drinks and a hearty toast to the success of their new undertaking, the trio shook hands and parted.
It was four days later before they gathered once more in Holmes' office. The call had been secured from the bank, with the proviso that twenty thousand shares be taken down during the first thirty days, twenty thousand the following thirty, and the remaining forty-one thousand shares before the expiration of ninety days. In addition they had secured an option on the fifty thousand shares in Philadelphia, on the same terms as was ex-tended by the bank. The Pool was getting ready to start operations.
"Who do you contemplate giving the `buy side' to, Jim?" Hallburton asked as they sat down to figure out the intimate details connected with their venture.
"Oh, we can give it to the usual bunch," Holmes replied. "It's not that side that's worrying me much, it's the `sell side' we've got to cover up. If we see where we can give it a good ride, I'd suggest that we use Chicago, Boston and Detroit, and possibly_ a little foreign selling out of London might help. You can't be too damn careful, if we're going to pull the plug!"
"That's jake with me," Haliburton agreed, and then turning to Comstock, asked;
"You ready, Fred?" "Yep."
"Okay, sell a hundred at the market, then offer five hundred and then a thousand shares. If that doesn't break it, offer two thousand, then keep hitting the bid with a hundred or two at the time."
Comstock moved quickly to obey orders.
"What did it do, Fred?" Holmes asked a few minutes later as they sat huddled around Comstock who had four telephone receivers down.
"Broke a half point on the five hundred offer, and a full point on the thousand."
"What's the bid now?"
"21 for five."
"Hit it, and ask for a bid on another five." "Done! It's now 20!"
"Slap it with another five!"
"Okay," Compton breathed a few minutes later. "Bid is now 18.
"Give them a few minutes rest. Meanwhile, Bill," Holmes directed, "get the gang in Boston and Chicago to slap it with a thousand each. They'll wonder where the hell the selling is coming from."
Twenty minutes later, under the impetus of a new flood of selling which was quickly traced back to Chicago and Boston, Vostex broke down to 17, 16 1/2, 16 and then closed at 15 3/4.
"I guess that'll start things hummin' by tomorrow!" Holmes exclaimed as they balanced up the accounts for the day. "5000 shares broke it down 8 points. When the papers get out this afternoon there will be some speculation as to its nose-dive."
"Vostex, merely goes to prove that it's not how much selling that comes in, it's the way it's put in," Haliburton joined in. "Doesn't seem possible that 5,000 shares could break it down 8 points though. Wish to Christ we could find out what's on the book."
"There'll be plenty there tomorrow morning, old top," Holmes laughed. "When the news greets the weak sisters in Okefonekee, they'll break their necks to unload."
"What's the program for tomorrow?"
"Let's see how it opens. If it's strong, give it one more whack, and start covering around fifteen or better."
The following morning was an ideal one for the operations of the wily trio. Not only had several papers featured the unusual and unaccountable break in Vostex, but combined with late news from Washington, which the market-wise regarded as unfavourable, it was predicted that Vostex was merely a forerunner of what was to come that day. And come it did. Not only did the entire market open weak, it remained weak. The bears sensing their advantage, during its temporary technical condition, proceeded to take full advantage of it. Selling was fast and furious during the first two hours of trading.
Vostex opened at 15½, and 200 shares knocked it down to 15. Another 500 shares broke it to 13.
Haliburton came rushing into the office. "I've succeeded in getting the book boys. Jim was right. The weak sisters are ready to unload. There's 8200 shares in to sell at 15, there's another 5000 with a stop order at 12."
"Okay, Bill," Holmes spoke up. "Let Fred hit the bid with 500 shares. That will knock it down to 12. Go to it, Fred!"
"12½ offered for a hundred, Jim," Comstock said a few minutes later.
"Sell 'em a hundred, and then pull your bid."
"A thousand offered at 12, Specialist says, has no bid." "Okay, buy a thousand at 12, Now what?"
"Offers another thousand!"
"Take that too. Ask him what's the idea. Bid him 12 for five thousand."
"He took four thousand of it, Jim. Says that cleans his book up to fifteen. He's got 9,000 shares at that price."
"Let 'em sweat with it awhile. We went short 5000 shares at an average of 17 and bought 6,000 shares at 12 to cover. We'll also get that 9,000 shares a damn sight cheaper than 15 if this market continues. In the meanwhile the kitty is twenty-five grand to the good. Let's go out and eat some lunch!"
The market, however, had rallied and was going strong when the trio came back from lunch. Vostex was still offered at 15 though, and some timid speculator had put in a bid for 200 at 14, figuring that the previous activity, combined with the general rally, would send it back.
"Guess we've touched bottom, boys," Haliburton said after they had scanned the ticker and made several phone calls. "While that 9000 shares is there, we better go in and take it, otherwise they might wise up and pull the offer out."
"Clean up the book, Fred," directed Holmes, "and we'll call it a day."
Cleaning up the book in this instance meant buying everything the specialist had on his sell side, which had been predetermined as 9000 shares at 15. Thus the operators, by selling 5000 shares of the stock short, had knocked it down to twelve dollars per share. There was nothing relating to the company, or conditions, to justify such a break, and neither was there sufficient volume to warrant it; nevertheless, the selling which was executed in a weakened market, and in such psychological lots did the trick.
The operations of the trio had so far resulted in them making $25,000 by selling 5000 shares short, at an average of 17, and covering the short sales at 12. They had also picked up an extra thousand shares at 12 and had cleaned the book of 9,000 shares at 15. Hence if they could "rig" the market back to 23, they stood to gain $108,000 on their two days transaction.
"Not so bad, boys, not so bad!" Holmes said, in his deep, euphonic voice, tingling with satisfaction. "I'll undertake to wiggle it on back to 23, while Fred makes the rounds and sees the boys. The real job lies ahead, for we've got to distribute one hundred and forty thousand shares before the end of ninety days. You ready to leave, Fred?"
"Yes, I'll take the plane to Chi' at midnight. What's your idea about a call for the boys?"
"Give them a call on a hundred at 25 and a hundred on each five points up."
"Do you think that will satisfy them?"
"Christ almighty, yes! That's six hundred shares, and if they ride it to the top they're ten grand to the good. What the devil more could they want?"
The boys whom they were discussing, consisted of customer's men employed by reputable houses over the country. A few such key-men, located in different centres and controlling any number of accounts, can always generate plenty of buying.
The old parable about rumors circulating with the speed of lightning, can be interpreted as almost literally true, as it applies to stock market rumors.
The customer's men need only to whisper around among several of their clients that a pool is about to start, and in comes an avalanche of grist for the mill. The customers in turn tell their friends, and, within a short time, thousands throughout the nation are eagerly watching every movement of the stock. As the buying comes into the market, the pool operators supply the stock to fill the orders, either from the supply they have accumulated or from the stock they have on call. From day to day they raise their offering price a little higher. To do this they must also buy all of the stock which comes into the market, such as people taking profits, but unless the orders to sell exceed those to buy, the price keeps going up day after day. If an avalanche of sell orders come in, however, in competition with the stock offered by the pool, the operators lower their bid price for the stock, and after it is purchased, they immediately put the market back up to its former figure. This accounts for some of the violent breaks you have noticed, such as a stock opening at 30, falling to 25, and then closing for the day at 31.
As is always the case, however, the higher a stock goes the more eager the public seems to buy. Hundreds of timid speculators who had the tip at the start, hold off and off, watching the Aladdin ticker spell out from day to day what might have been. Finally, unable to resist the magnetic influence of that constant and up-ward trend, supplemented by artful propaganda, "the sky's the limit," they take the plunge. Possibly only a hundred shares at first, but once they've marked up several hundred in paper profits, they're ready to go the limit, susceptible to any and everything they hear.
Comstock arrived in Chicago early the next morning and catching a cab from the airport at Cicero, he was soon registered at the Palmer House. He had only two people to see in the "Windy City," and he was determined to finish up with them before the market opened.
It was six in the morning when a telephone call awakened two sleepy customer's men, but two hours later they were both having breakfast in a secluded corner of the huge Palmer House dining room.
"Vostex is a sure go, boys," said Comstock, as they pushed their plates to one side and started to linger over cigars and coffee. "We knocked it down to 12, and picked up all the weak stock, and within a few days it will be back where it started from."
"How about some of the other boys?" Williams, the good-looking, redheaded member of the breakfast party inquired. "They can influence a lot of buying you know."
"There's no percentage in it until the stock reaches 25," Corn-stock replied. "After then, twenty-five cents a hundred between 25 and 35, and fifty cents a hundred between 36 and 50. How-ever, impress upon them, they've got to keep the stock put. We've got the deal sewed up tight, so I can darn soon tell if any of the stuff starts coming in. If it does, they'll have to kick back the commission."
The boys whom Williams referred to were other customer's men, minor brokers, or anyone who could influence buying into the market. For this, Comstock agreed to pay twenty-five cents per share while the stock was selling between 25 and 35, and fifty cents per share above that price.
In keeping the stock "put", Comstock meant that they were to keep their clients in, or to keep them from selling and taking their profits. This task was not a difficult one, for the ticker tape itself, would from day to day, vindicate their claims that the stock was going higher and higher. As long as it was rising, very few would jeopardize their dream-castles by selling, and even those who did, shortly regretted it as they watched the stock continue to climb. More often than not the sellers were lured back, at a higher price, as they witnessed the stock forge ahead.
The tragedy of it is the obvious fact that any investor can make money in a pool operation, if he would be satisfied to buy low and sell high. Many of them do, but the majority, influenced by the great god of greed, refuse to cut loose.
In this respect, one is reminded of how little monkeys are trapped in the far away South American jungles. Natives stroll through the jungles, simulating the eating of rice from cocoanuts. Here and there they nonchalantly drop one of these carefully pre-pared traps, in which a small hole is bored and filled with rice. When they disappear the monkeys scamper down from nearby trees and greedily thrust their tiny paws into the hole. They find that when they have clinched their hand full of rice, it's impossible to pull it out without relinquishing their prize. The hole is not large enough. Nevertheless, they refuse to turn loose, even with `the reappearance of the natives. They try to scamper through the bush, dragging their heavy handicap with them, and thus easily become prey to the hunter's net, a victim of their own greed.
Certainly there is a close analogy between the greed of the jungle monkey, and many American investors. A little more, a little more, and finally the system takes its toll. No pool could successfully operate without the benign influence of the god of greed.
"All right, Mister Comstock," Williams assented. "The boys will keep it put, don't worry on that score. How about some newspaper publicity? Are you going to have any?"
"Yes, plenty of it," Comstock answered. "The company has a wonderful set-up. There's any number of things which will make good reading matter. Leave that to me and get ready to start when you see the stock hit 25. In the meanwhile get your customers primed. A hold off for a few days always intensifies interest. It will also permit those you do tip off to circulate the information among their friends. Everything will be red-hot by the time I say go!"
Comstock left Chicago for Detroit at noon that day, and the following day caught a plane for Boston. The line of procedure in both cities was practically the same as in Chicago. The pump was primed and primed right. Six customer's men were lined up, and they in turn had a battery of fifteen or twenty others, each with a definite financial interest in seeing the stock go up.
What would happen when the stock went down? Nothing! The client wouldn't blame the man who gave him the tip. Certainly not. The tip was given out at 25. The stock did all which was claimed for it, and more, too. Up, up and up it went, over a period of three to four months, 30, 35, 40, 45, 50, 55 and even 60.
No blame could be attached to those who were trying to make money for their customers. They couldn't guarantee to defeat Newton's law of gravity, "what goes up, must come down." The client who held on and on, emulating the practice of the greedy monkey, would blame only himself. He would kick him-self, if such a thing was possible, for not taking his profit, and resolve that if he ever touches the stock market again to be satisfied with a reasonable profit. Such resolves, however, are like New Year's resolutions. Easily made, but seldom kept.
"How'd you make out, Fred?" Holmes asked Comstock, as he walked in with Haliburton, the morning after he returned from Boston.
"Everything's set so far as the boys are concerned," Comstock replied. "I see you've got it back to 21. About ready to start?"
"No, not quite. I've just drawn a report on the company from Standard Statistics. They're in darn good shape. I've passed it along to Hodgkins. That fellow can make a dry balance sheet read like a page out of the Arabian Nights. And, he's got plenty to romance about in Vostex."
"Did you get the stockholders list?"
"Sure! I'm sending that to Hodgkins also. The holders of Vostex will be glad to know there was no justification for the break, and they'll eat it up. When they see Hodgkins' forecast coming true, that Vostex will reach fifty, they'll scramble to get in for more. No danger of their stock hitting us. We couldn't pry it loose."
"That's fine, Jim. When do the letters go out?"
"They'll get out tonight. I'll start closing it up from a half to five-eighths every day from now on."
And thus it came about that Vostex slowly climbed from 21 to 22, on to 23, hung around 24 for a few days, waiting for some definite advance in the market. Some favourable news was in the offing and Holmes discounted it by closing the market strong, 25 bid and 25 1/4 asked.
This was the signal for the activity. A few hundred shares struggled in with a bid of 25, but Holmes refused to dip down and get it. Instead, he sold a hundred at a quarter and jacked the offering price up to 26. Orders began to pour in "at market," and on every few hundred shares he sold, he kept the market moving up a quarter of a point. The day's transactions closed the stock up to a new high of 28, and 4,000 shares of their call had been distributed.
Every pool operation must and does have two or three broker-age houses with whom they work through. This does not imply that the houses or the exchange members are in league with the pool operations. In fact, they definitely are not. It is strictly against the rules of every legitimate exchange. However, the members are there to execute orders for stocks listed on the exchange, and when they get orders to buy or sell, provided sufficient margin or stock is forthcoming, they have no alternative except to comply. Such is the rule in any free market.
Holmes would place his orders on the "sell side" each morning, on a scale up. For example, he would telephone the house or houses which had the "sell side" and place orders for five or ten thousand shares of Vostex to be sold, say 500 at 25, 500 at 2514, 500 at 25 1/2, 500 at 25 3/4, 500 at 26, and so on and on. As soon as the first 500 shares were cleaned up, the specialist's book would then read 500 offered at 25 1/4. When that lot was sold, the book would then read 500 offered at 25½. The next lot was obviously 253/4, and so on.
On the opposite side of the scale was the "buy house", to which Holmes had issued orders to buy all stock offered for sale at fifty cents per share under the offering price. Thus the specialist's book was fortified. On one side he had definite orders for so many thousand shares to be sold at stipulated prices, graduating up and up, as lot after lot was disposed of.
On the other side he had orders to buy any and all stock offered at fifty cents per share under- the price at which he was offering. Thus the pool was doing both buying and selling, but principally selling. As the forces of supply and demand exerted themselves in the market, the price would automatically climb from day to day. The customer's men would create the demand, and the more demand, the higher the price.
It should be remembered, however, that no pool operates against the market. If the market declines, the pool lowers the bid for what they will buy and correspondingly lowers the asked price. Under such conditions they seldom make an effort to distribute stock. They merely mark time, following the rise and fall of the market with a back and fill, back and fill.
Holmes was a cagey operator. The market opened strong the following morning, and he quickly changed his sell orders so that 500 shares carried the market to 31. It was at this price that he distributed 7,000 shares, fluctuating the offering price from 30 7/8 to 31 1/8.
The customer's men in New York, Chicago, Detroit and Boston, now had something to talk about. The tip they had given out at 25 had materialized. Six points in two days. The tip had been circulated freely, and as the market advanced temperatures began to rise.
" Let's don't carry it too fast, Jim," Haliburton counselled. "We've got a bunch of stuff to distribute."
"I don't intend to, Fred," Holmes replied. "We'll lose about fifteen thousand shares more around these prices, and then rock it along for awhile. As matters now stand, we've sold the ten thousand shares we picked up in the market at 15, and we've taken down about 5,000 on the call. There's no hurry though, we've got three weeks in which to take down the first twenty thousand on the call.
And so it went. The Pool could not afford to advance the market too rapidly, and yet the demand became increasingly greater. They had no alternative but to let the market take its course. Up, up and up went Vostex. Quite naturally they could fill orders with cheap stock, but why should they? Why sell a stock, which was costing them 22, for 35, if they could just as easily get 40?
Seven weeks from the day, the trio had signed up the call with the bank, they had finished with their distribution. Vostex was a public favorite. It needed no artifical stimulation. The Pool had distributed in all nearly 150,000 shares. The market had passed 55, and for the past ten days had been hovering around 60.
Where would Vostex go? There were plenty of optimists who predicted 100. Others said 75, but all were in accord that the top was not in sight.
"What's in the kitty, Fred?" Haliburton inquired, one evening after the market closed.
"Around sixteen hundred thousand as near as I can estimate, Bill," Comstock ventured. "That's after deducting all commissions of course."
"All right, but we need a million each out of this deal. What do you say to riding down on a hundred thousand shares?"
"It's okay by me, Bill," Comstock laughed. "Especially so, since I'm the one who was a little skeptical to start with. I'd be a hell of a fellow to question your judgment now."
"What's your sentiments, Jim" Haliburton asked, turning to Holmes."
"Why bother to ask?" Holmes grinned. "I don't particularly need the money, but I like the fun."
"All right. Give the boys a ring. Tell them to generate a little fresh buying in the market, and we'll sell a hundred thousand short, between 60 and 70."
Thus did Vostex, under a new impetus of fresh buying and bullish propaganda, slowly creep up to 70. The Pool had sold their entire holdings and were now going to supply the fresh demand. Within a week's time the 100,000 shares were in the public's hands.
"How far do you anticipate knocking it down, Jim?" Comstock inquired as they drew their plans to raid the stock.
"We will have to knock it below fifty to get any sacrifice selling. I believe we can cover every darn share we're short between 30 and 40."
"Swell! Get in touch with Lamson up in Boston. Have him issue a bearish letter to all Vostex stockholders, predicting the stock will reach 20 before Christmas. He's an artist at pessimism. They say his wife won't live with him, and even his dog growls when he comes in at night. Leave it to Lamson. He can get everything ready to mail out the first time we get a bear raid in the market."
"Seems to me, Bill," Comstock joined in, "that if we can get a few sheet houses to sponsor Vostex as a good short sale we won't have to start covering until it gets near the bottom. No need to cover at 45 if we can cover at 30."
"Right you are, Fred," Haliburton assented. "Go to it."
Thus the paper profits, which had been so enthusiastically ac-cumulated by hundreds of investors, began to disappear. Not only paper profits, but, as the stock kept dropping, hard earned cash began to go with the profits. Margin calls went out. Encouraged by a little rally, the ever-optimistic and bullish customer would dig deeper, and deeper, until he could go to the well no more. As each account was sold out, it meant that a fresh supply of stock was coming into the market, and as the supply grew greater, the bid was lowered, little by little, day by day, until Vostex finally rested upon its basic foundation, twenty-five.
Just as a nation cannot rise above its own people, a man above his own thoughts, or water above its own level, neither can a stock permanently stay above the level of its basic foundation. Why will thousands of good, hard headed business men and women, deny the truth of such a principle? Nevertheless, they do, preferring to risk their life's savings and subordinating their judgment to tips and rumors.
The Pool had finished. Books were balanced, The manipulators were lounging in easy chairs at an uptown club.
"Are you going to Palm Beach this winter, Fred?" Haliburton asked.
"Might as well, if I have the money."
"Listen to him," Holmes laughed, "We made a million and a half going up, and nearly three million coming down. And him talking about, `if he has the money'. Hell, another deal like Vostex, and I can begin to pay my wife's dressmaker's bills."