COMPARISON AND SECURITY CLEARANCE 325
be satisfied if A and B pay C $5 apiece. In the first case, B,
the intermediary, is relieved of any need to pay anything except
as he releases his claim on A, while in the second case B is
relieved of as much of his indebtedness to C as he can claim
from A, and needs only to pay the remaining balance to C.
The essential economies effected by either bank or security
clearing systems consist in this obviation of the really super-
fluous payments which an intermediary like B would otherwisz
have to make.
With security clearances, there is involved a double process
involving securities as well as money. If Broker A sells 100
Steel to Broker B at 100 ($10,000), and B proceeds at once
to resell the same stock to Broker C at the same price, obviously
both stock commitments and money obligations can all be ex-
tinguished at once if A will deliver the 100 Steel to C in return
for C's payment to him of $10,000. Here B is saved from
needlessly receiving and delivering securities as well as money,
and his intermediate contracts for 100 Steel and for $10,000
also can be cleared for him by any system which can make sure
that A and C fulfil their respective engagements.
Unfortunately for students of security clearing systems,
however, stockbrokers rarely do business with each other in
this way at exactly the same price. Broker A, let us suppose,
sells 100 Reading to Broker B at 79, and B at once resells it
at 81 to Broker C. The security clearing house can still effect
a clearance of B’s stock by instructing A to deliver the 100
Reading to C. But this is only half the story, for the money
aspect of the clearance has still to be arranged. When A de-
livers the stock to C, the latter will expect to pay $8,100 for it,
or $200 more than A sold it for. Meanwhile B, who bought
it for $7,900 and sold it for $8,100 is looking for his profit of
$200, and will not be satisfied until he obtains it. If the clear-
ing system attempted to let all the A’s and B’s search each other
out and settle their differences with each other in this way,
chaos would in practice result.
