The Origins of the Discount Houses in the Early Nineteenth Century

There are certain features inherent in the business of present day discount houses that have characterised their operations throughout their history. In the first place, although some of them operate as brokers through subsidiaries, acting to bring together buyers and sellers, discount houses carry on their main business as principals, by the purchase and sale of financial claims on account of their own portfolios, deriving a profit from the difference between the price at which they buy and the price at which they sell. Secondly, to finance their portfolios, which will contain a variety of short and longer-term assets — for example, certificates of deposit, bills and bonds — discount houses borrow funds at very short term from a wide range of banks, non-bank financial intermediaries and other institutions. All but a very small fraction of funds are borrowed on a secured basis which means, in effect, that the institutions which have provided the funds hold as collateral the assets in which the houses have invested the borrowed money. For the lenders the discount houses provide a very important adjustment mechanism through which banks and other institutions can regulate their liquidity position on a daily basis.