Exploring the way stocks were bought and sold before online trading changed everything.
A jobber is a professional speculator, and buys and sells shares for himself. He does not have any clients. His business is to speculate on which way prices are moving and make a quick profit on it. He does not want to buy shares and keep them for the long term as investors do. But, to do business on the floor of the stock exchange, he needs to have a broker as a sponsor. He shares a part of his profit with the broker under a pre-decided agreement.
You could say that in a way he acts as an agent of the broker. If the jobber defaults on a deal, the broker is held responsible by the stock exchange. Brokers, therefore, choose jobbers with care. Jobbers were an important source of liquidity, and brokers would always deal through them.
Of all the players in the stock market, it was the jobber whose role fascinated me the most.
I would closely observe them as my seniors negotiated trades with them. A jobber helped create liquidity in a stock by offering two-way quotes and also helped in price discovery. He took on the risk, confident that he would be able to sell whatever he bought and buy back whatever he sold. But for this breed of players, it would have been difficult for genuine buyers and sellers to transact with ease.
A jobber would buy from you at a rate lower than what he would sell to you for, and the difference, or “spread” as it was known, would be his profit. The spread quoted by the jobber would depend on the quantity of shares you wanted to buy from him or sell to him—the smaller the quantity, the less the spread, and the bigger the quantity, the wider the spread. A jobber had to ask for a higher spread while dealing in big quantities since the risk he took was higher.
To be a successful jobber, one had to be very good at mental arithmetic. If you were jobbing in more than one or two stocks, then your skills needed to be even sharper. That is because you were carrying an inventory of shares at all times, irrespective of whether you were long (had a buy position) or short (had a sell position) on a stock.
It was not just enough to remember the number of shares you were long or short on; you had to remember the average buying or selling cost of those shares.
That in turn would decide the bid-ask spread (“bid” is the price quoted by the buyer and “ask” by the seller) a jobber quoted.
Jobbers would note down their deals on their sauda pads, but sometimes, when there was frenzied trading, a jobber would be doing trades in rapid succession and not get enough time to write all of his deals down. He could also be trading in more than one stock, making his task even more complex.
It was in these situations that a jobber’s skills were tested to the maximum. I knew of expert jobbers who could memorise their inventory and the average price of trades in nearly two dozen stocks without having to check their deal pads.
A good jobber also had to be a skilled psychologist. It required him to be able to size up a prospective counterparty and gauge whether he was a likely buyer or seller. His profit margin would hinge on his ability at this. No counterparty would reveal whether, and how much, he wanted to buy or sell. All he would do was ask for quotes from the jobber.
A typical conversation between the two would run on these lines:
“What is the quote for Arvind Mills?” “57-60.” (I will buy from you at 57 and sell to you at 60) “What quantity is this valid for?” “500 shares.” “I want to sell 500 shares.” “Okay, bought 500 shares from you at 57.” “Does your quote hold good for another 500?” “Yes.” “Okay, I want to sell another 500 shares.” “Bought 500 from you at 57.” “I want to sell another 500.What’s your quote?” “56-59.” “Okay, I am selling 500 more to you.” “Bought 500 from you at 56.” “How about 500 more?” “55-58.”
As the client keeps selling more, the jobber will keep lowering the bid-ask quotes, but not necessarily the spread, which will remain Rs3. That is because the jobber is now running up a plus-position, and his profit will depend on how cheap he can get the shares.
A good jobber will move in and out of positions as many times as he can for a small profit each time. His aim is to make a decent profit through a series of small profits instead of through one giant trade.
The more heavily traded the stock, the smaller will be the jobber’s spread, because there will be plenty of buyers and sellers. For an illiquid stock, the spread would be wider, and at times even outrageous if a jobber enjoyed a near monopoly in that stock. There were different categories of jobbers, depending on the risk they were willing to take.
A jobber also had to have the instinct to figure out who the ultimate buyer or seller of the shares he dealt in was likely to be. Sometimes the counterparty would have information the jobber was not privy to, and the jobber might end up buying or selling a stock, unaware that the die was loaded against him.
A broker transacting with a jobber could be acting on his own behalf, or on behalf of a retail client, an institution or even the promoter of the company whose shares he was trading in. When a promoter is behind a deal, he may not necessarily be capitalising on some inside information. But if he is, then the jobber would likely be in for trouble.
A jobber was always in demand because brokers preferred to deal with him rather than with each other. Since jobbers played for small profit margins by trading as many times as possible, brokers had the comfort that they would not be overcharged. Most jobbers had to get out of their positions quickly enough, even if it meant taking a smaller profit, since their ability to absorb losses was limited. Rarely did they carry positions to the next day.
There was an unwritten rule that brokers would not try to make a big profit at the expense of the jobber because that could ruin him.
At the same time, the jobber too had to respect the confidentiality of the broker dealing with him. If a broker was buying on behalf of a promoter using some inside information or buying a huge block of shares for an institution, he would, after the trade, casually tell the jobber something like, “Don’t keep your position open for too long,” or “Take your profit and move on quickly.”
This meant that more buying or selling was coming and that the price could see a sharp move. Of course, the broker had to trust the jobber enough to let him in on such information. An honest jobber would then try to close out his position quickly and not take up a position on the same side as the broker so as to profit from the information.
Brokers looking to buy or sell large blocks were often at the mercy of jobbers, and it was to the credit of the jobbing community that a great majority of them did not misuse this power. As mentioned earlier, the quote offered by a jobber was valid only for a certain quantity of shares. Beyond that quantity, a buyer or seller would have to move on to the next jobber or trust the same jobber’s ability to source the extra shares or dispose of the remaining shares, as the case may be.
There was a dangerous and hated breed of jobbers called “robbers.”
Though they were in a minority, they were financially strong and had the wherewithal to hold on to large positions. The code of honour and unwritten rules among trading members mattered little to these “robbers,” whose only motive was to earn maximum profit even if it came at the expense of their clients.
Despite knowing the “robbers” were dishonest, brokers often had to deal with these characters for buying or selling large blocks of shares. If a broker was looking to buy a big chunk of shares, the “robber” would corner as much of the same stock as he could, to sell to the broker for an exorbitant profit. Similarly, if the broker wanted to sell a big lot of shares, the “robber” would sell ahead of him at a high price, and then buy the shares cheap from the broker.
Two such “robbers,” AS and PS, had earned notoriety for their practice of exploiting the counterparty at every opportunity. Funnily, AS and PS did not trust each other either. Occasionally, they would buy from and sell shares to each other. I was told that they would peek into each other’s sauda pads to ensure that the correct details had been entered.
And yet, many brokers dealt with them once in a while because AS and PS could procure or dispose of large blocks of shares. And because the duo had deep pockets and were big risk takers too, they could hold on to those positions for a few days or even weeks, till they found another counterparty to square up the trades.
Despite the combined curses of many a client weighing on them, AS and PS have done very well for themselves. Karma is yet to pay them a visit as I write this story.
Excerpted with permission from Bulls, Bears and Other Beasts: A Story Of The Indian Stock Market, Santosh Nair, Pan Macmillan. This post first appeared on Scroll.in. We welcome your comments at email@example.com.