THE DISTRIBUTION OF SECURITIES 101
begins, unless some stipulated condition has still to be met
before such trading can take place.
The Creation of an Active Market.—The “free and open
market” maintained by the Stock Exchange demands, as is
made clear in the distribution statement, that “all stock is free
for sale and is held under no syndicate, agreement or control.”
This requirement is, of course, designed to prevent blocks of
the new issue being held off the market by a syndicate to main-
tain an unduly high price for it.
An underwriting syndicate invariably feels a keen respon-
sibility for the market action of its newly listed security during
its initial career on the Exchange. The syndicate members
realize that the financial reputation of their respective firms is
largely at stake over the success of the issue. But while there
is a considerable element of self-interest in the syndicate’s atti-
tude toward the initial career of its new issues on the Exchange,
there is also a large ethical element involved. An integral part
of the work of an underwriting syndicate is to see not only that
its issues are initially distributed among investors and that
other investors can at all times readily buy them, but also that
such investors shall be protected by being able, if need be, to
sell them with equal readiness. Now there is no inherent magic
in listing on the Stock Exchange which can produce auto-
matically an active and stable market in a new security as soon
as trading in it is permitted. Active markets in any security
result from many buyers and many sellers, and their stability
depends in large measure upon the orders to sell above and
buy below the current price, which stand on the brokers’ and
dealers’ books.** But it takes time for the investing and specu-
lating public to become enough interested in a security to buy
and sell it in equal enough and constant enough volumes to
create an active market for it. Moreover, when it is first listed
there has been no opportunity as yet for the stabilizing orders
“away from the market” to accumulate in dealers’ and spe-
i4 See Chapter VIII, p. 225.
