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Four of these results are of outstanding importance:

First. The first is the establishment of a basic fixed relationship to the round-lot price, at a modest differential of one eighth more or one eighth less than the round-lot price. Before the present highly organized odd-lot system became fully operative, odd-lot price suffered irregular and heavy discounts from round-lot prices.

The odd-lot price differential is small as compared with the differential the buyer of small amounts of commodities is often compelled to pay in comparison with the buyer of large amounts. The buyer of an odd lot, for example, trades with the odd-lot dealer at the rate of only one eighth of a point more per share, plus taxes, than the buyer of 10,000 shares; whereas the buyer of a small measure of a commodity, such as coal, is often charged å very great price difference, as compared with the buyer of a large quantity.

Second. The second important result the odd-lot-dealer system has achieved in prompt and efficient service to the odd-lot public in a business of immense details. This requires highly developed odd-lot organizations.

Consider briefly the amount of detail necessary. Each day, the odd-lot dealers handle as many individual trades as are made in round-lots on the entire stock exchange.

This obviously involves an immense amount of labor, in the execution of orders and in the office work of bookkeeping and of splitting up, transferring, and delivering stock.

The odd-lot dealers have demonstrated their fitness for holding the public trust involved in the dealer system. The firms dealing in odd-lots are represented on the floor of the stock exchange by over 125 members of the exchange who devote their services exclusively to the business of one of their respective dealer firms. In normal times, some of these firms employ from 600 to 1,000 clerks. In active times, the employees of one odd-lot-dealer firm numbered 1,500.

The burden of these expenses could be carried only by a large volume of business. This is purely a production proposition and any material reduction in the volume of the dealers' business would make the employing of this large staff of clerks and brokers a financial impossibility

I think perhaps, Mr. Chairman, that answers the question you had in mind. The volume of the business is very, very large.

Mr. HUDDLESTON. I understood you to say that the pending bill would destroy the odd-lot dealer's business because the odd-lot dealer had to be a member of the exchange. I am wondering whether it would be possible that the odd-lot business could be done through a broker or someone who was represented on the exchange.

Mr. HETHERINGTON. Well, the odd-lot dealer deals with brokers who handle their business who are members of the exchange. It would scem impossible for that to be done, Mr. Chairman. They are brokers in a sense that many of the exchange brokers are considered, but they are not brokers in the sense that they are not principals except that they act for the odd-lot dealer.

Mr. HUDDLESTON. I understand that. But what I am wondering is whether the odd-lot dealer might take care of his business through someone who was represented on the stock exchange.

Mr. HETHERINGTON. Well, I think that the size of the business would practically make that impossible, Mr. Chairman.

Mr. HUDDLESTON. Perhaps someone may be able to draw that conclusion who is familiar with the business, but I cannot. I wanted your opinion about it.

Mr. HETHERINGTON. I think that it would be most impractical: I think it would be impossible.

DEALER SYSTEM ALWAYS FURNISHES A MARKET; A MATTER OF GREAT SIGNIFICANCE AND VALUE TO THE PUBLIC OF SMALL STOCKHOLDERS

Third. The third achievement of the dealer system of outstanding value to the odd-lot public lies in the very broad market for odd lots it provides. The odd-lot dealers have an enviable record for having continued to furnish this market, even in times of the most acute panic.

In such times, when sellers throw stocks on the markets regardless of price, the round-lot market is at times able to produce a buyer for only a single round-lot of 100 shares, before a further abrupt drop in price. That sale of a single round-lot, however, may cause the odd-lot dealers to become buyers of hundreds of shares, at the price of the single round-lot, less the one eighth differential.

The dealers purchase any stock and as much as is offered in odd lots at prices defined by this differential. If, for example, the public has placed orders to sell 1,000 shares at 20 in odd lots, the dealers purchase the entire 1,000 shares at 20 in odd lots even though only 100 shares may have sold at 20% in the 100 share market. In the October 1929 panic, the dealers repeatedly purchased in odd lots large amounts of stock on a sale of only 100 shares. They took this flood of liquidation through the panic.

In the 60 years during which the odd-lot houses have been in operation, there has never been an insolvency of any one of them.

Such a market furnished by the odd-lot dealers is of inestimable public value. The risks and losses inherent in the maintenance of this continuous, broad market, together with the heavy overhead expenses, can be met only by organizations of strong capital structure and capable management.

ODD-LOT SYSTEM NOT SUBJECT TO MANIPULATION

Fourth. The fourth great advantage of the odd-lot dealer system to the public interested in small lots of stock is the fact that the system is not subjected to manipulation.

The odd-lot dealer has no choice in reporting the price of the odd lot. When the effective round lot sells, the odd-lot market order must be executed at a price one eighth more or one eighth less than the round-lot sale. The odd-lot price is fixed automatically. An elaborate system of checks on the correctness of prices is made available by the odd-lot dealer firms for the use of the public.

This basic fact takes the vastly important matter of prices on odd lots out of the realm of arbitrary or optional personal determination.

Absence of the personal element, so inherent in the odd-lot system, is likewise the dominating factor in its administration. Neither the dealer firms nor their brokers are interested in obtaining a price advantage-an eighth, a quarter, or any other-over their customers. The associate brokers who represent the odd-lot dealer firms have, for example, no share in the profit or loss in the stocks in which they work. The interest of both the dealer and his broker is solely in determining the correct price because the serviceability, safety and financial stability of the system-and of the dealer firms with it—rest upon volume of business.

Volume in turn depends upon service to the odd-lot public. Impartial and impersonal effort for correct price determination under the automatic rules of the system is therefore the foundation of the success of the business.

Mr. KENNEY. Mr. Hetherington, going back to the question of the odd-lot dealer, and your house

Mr. HETHERINGTON. Do Coppet & Doremus.
Mr. KENNEY. Are you members of the New York Stock Exchange?
Mr. HETHERINGTON. Yes.
Mr. KENNEY. You are not members of the Curb Exchange?
Mr. HETHERINGTON. No.
Mr. KENNEY. Were you at any time?
Mr. HETHERINGTON. No.

Mr. KENNEY. Did you deal with odd lots before you became a member of the stock exchange?

Mr. HETHERINGTON. No. The system is older than I and I am not a young man..

Mr. KENNEY. Thank you.

Mr. HUDDLESTON. How much longer will it take you to complete your statement?

Mr. HETHERINGTON. It is just about one more page.
Mr. HUDDLESTON. The committee wants to adjourn at 4:30.

THE ODD-LOT DEALER MUST BE ABLE TO SELL SHORT

Mr. HETHERINGTON. There is one other matter of vital importance we wish to present, namely, that of short selling in relation to the dealer system.

It is inevitable that the odd-lot dealers are frequently forced by the buying of the odd-lot public to be short of stocks. The odd-lot dealers agree at all times both to sell and to buy any amounts of odd lots, irrespective of the number of 100-share lots that sell. If, therefore, a single lot of 100 shares of a stock sells at 19%, it might oblige an odd-lot dealer to sell 1,000 shares of stock in odd-lots at 20. Even though the dealer buys the 100 shares at 19% in the round-lot market, he would still have to be short of 900 shares.

If it is unlawful to be short of stock, as provided in the bill, the oddlot dealers would obviously be forced out of business.

It should be clearly borne in mind that short selling of this character has no manipulative effect whatever on the open market.

SUMMARY

Let me summarize. The case for the odd-lot dealer system rests on three chief points:

First. Because this odd-lot dealer system organizes the market for odd lots of stock, it stimulates a spread of the ownership of industry to the small investor and gives that small investor practically the same advantage as to market and price as that enjoyed by the holder of larger units of stock.

Second. The odd-lot dealer firms have no contact with the public (their only customers being other stock exchange firms) and no influence whatever on the orders the public places with them. Therefore, the odd-lot dealer system has no effect on security prices, as the transactions of the dealer firms in the open market are merely a reflection and a result of odd-lot orders placed by the public, over which the dealer exerts no influence.

Third. The magnitude of the business precludes the possibility that any other system could effectively, or economically, provide a constant market for odd lots of stock.

Mr. HUDDLESTON. Thank you very much.

Mr. WHITNEY. Mr. Chairman, may I just answer your question a little more fully as to why the odd-lot business could not be carried on except with a member of the exchange?

In the first place, they could not possibly operate, and I believe you will agree if they were not members, because no member would be willing to pay the full commission for the execution of the round lot on the floor of the exchange, and if they were not members of the exchange and dealing on the exchange they would not allow them to have the tickers on which to buy any such transactions. It is necessary therefore that they be members of the exchange.

Mr. HUDDLESTON. Are there any who are not?
Mr. WHITNEY. None that I know of.

Mr. Sprague, one of the specialists is here, and he was planning to appear and state his case and answer questions which I think are of vital interest to you, and if it is found desirable for him to return some other day he will be available and can come at any time you suggest.

Mr. HUDDLESTON. The chairman has asked me to announce that the committee will adjourn until 10 o'clock tomorrow, at which time the Association of New York Stock Exchange firms will be heard. What is planned for the future in connection with the hearings I do not know.

Mr. WHITNEY. That, of course, entirely rests with the committee.

Mr. BULWINKLE. I was just going to suggest that we might continue on until 5 o'clock to hear Mr. Sprague.

Ir. HUDDLESTON. We members of the committee have got a day's work to do in our offices after the committee adjourns. Most of the members must have some time to attend to other matters.

The chairman asked me to adjourn at 4:30. I suggest that we take this up with the chairman, when he is present, and he can arrange for the time.

Mr. WHITNEY. Naturally, Mr. Chairman, we will be available to serve you either day or night. As you know, we consider this, what you are considering here, very vital to our business and we wish at all times to present our case as you would have us do.

If there is no further time for the stock exchange and its representatives who appear here, may I thank you very sincerely for the very gracious and courteous way that you have heard us.

I understand that some of the members of the committee are to be in New York this coming Saturday and we will welcome gladly any of you gentlemen and would like for you to go on the floor of the exchange and see how the specialists work. That will be arranged and I trust it may be instructive to you.

Or if there is any other branch of the exchange you would like to visit, to see how it works, we will welcome you. We have nothing to hide.

Mr. HUDDLESTON. We thank you for your cooperation, Mr. Whitney.

Mr. THOMPSON. Mr. Chairman, before you adjourn, may I refer to a question that was asked here concerning the number of members on the New York Stock Exchange? May I say to you that there are 940 members in the Exchange that belong to the Association of Stock Exchanges, and in addition to that there are 1,232 members of other exchanges outside of New York that do not belong to our association. That does not include the membership of the Chicago Board of Trade which has a stock department.

Mr. HUDDLESTON. The committee will adjourn until 10 o'clock tomorrow morning.

(Thereupon, at 4:30 p.m., an adjournment was taken until 10 p.m. of the following day, Saturday, February 24, 1934.)

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