The new Bill as now formulated provides two types of specialists: that of the dealer-specialist (one who trades for his own account and cannot accept commission orders) and broker-specialist (who executes orders for others and cannot trade for his own account). This means a division of the functions now performed by specialists. If this dual capacity is broken up so that there are two categories, viz: dealer-specialists and broker-specialists, a situation will arise which will have a broker-specialist working for the interest of his customers and a dealer-specialist who has no responsibility except to himself. The present specialist lives because of the fact that if he does not at all times make a just and ample market, the commission houses will speedily introduce a competing specialist in his field and his business will be cut_down. He, therefore, does everything in his power to make such a market. Let us assume for the moment that the broker-specialist operating as provided in the Bill cannot trade for his own account and a dealer-specialist may. The dealerspecialist has no customers, is responsible to no one save himself, and it is inconceivable that he would have the same interest as the present specialist in the maintenance of a continuous fair market for securities. The specialist's success depends upon the efficiency and intelligence with which he serves his clientele; without that efficiency and intelligence he would shortly find himself without orders. The fact that the business of the specialist has been developed over a period of time and requires a high degree of alertness and specialized knowledge for its efficient functioning, and the fact that it involves the livelihood of several thousand people, including the necessary staffs, cannot, of course, be a primary concern of your Committee. But your Committee is rightly concerned with the maintenance of a liquid, or immediately accessible, market to the investor, which in turn means an opportunity for the nation's industry to finance its development. We believe that the specialist performs an essential function in that branch of national economy. If the liquidity of he market is at any time impaired it will unquestionably mean that collateral would necessarily be more difficult of disposal. Banks would accordingly be reluctant to accept stocks as collateral for loans which might be needed for productive enterprise. The effect, in truth, would be to impair a capital market on all exchanges in the United States where securities may now be either obtained or sold, with the inevitable consequence that other world markets would be ultilized. The end and aim of commercial banks is, at all times, to have such a degree of liquidity that they may accommodate the short term needs of business. Destroy the liquidity of the market and the ability of the banks so to function would be proportionately curtailed. There are many examples today of the inability to liquidate in other lines of business. We believe the intricate and complex functions of the specialist should not be disturbed as they now exist, and we respectfully submit the suggestion that the members of your Committee visit the Exchange to observe these functions in actual operation. 66 The corporate structure of American business has resulted in the issuance of hundreds of millions of shares of stock held, it is said, by over twenty million people. These are the people who, in the last analysis, make the market". If the prospective legislation is followed to its logical conclusion, the functions now performed by the New York Stock Exchange would be seriously curtailed. This would not only impair the savings of millions of people but also throw many thousands into unemployment. Therefore, it is respectfully petitioned that Section 10 of the Bill be amended in accordance with the recommendation of Richard Whitney, Esq., President of the New York Stock Exchange, made to the Committee on Interstate and Foreign Commerce of the House of Representatives at a public hearing on Thursday, the 22nd of March, 1934. Section 10, as thus amended, would read as follows: "Section 10. (a) It shall be unlawful for a member of a national securities exchange while on the trading premises of such exchange to act as a dealer and broker in contravention of such rules and regulations as the commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. (b) Subject to such rules and regulations as the commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to insure compliance with the provisions of this subsection, the rules of a national securities exchange may provide for the registration of members with the privilege of acting as dealers, and any member so registered shall have the privilege of acting as a dealer and as a broker within the limitations of this subsection. It shall be unlawful for a member with the privilege of acting as a dealer who also acts as a broker to effect any transaction in a security by use of any facility of a national securities exchange or otherwise, (1) if in connection with any such transaction he directly or indirectly extends or maintains or arranges for the extension or maintenance of credit for a customer on any security (other than an exempted security) which was a part of a new issue offered to the public by him as a dealer or distributor within six months prior to such transaction, or (2) unless, if the transaction is with a customer, he discloses to such customer in writing any interest he may have in connection with the security which is the subjectmatter of the transaction and offers the customer a reasonable time not exceeding ten days to refuse the transaction after the disclosure if the disclosure is not made at the time of the taking of the order and confirmed in writing substantially simultaneously therewith." Respectfully, BLAIR S. WILLIAMS, 308 Lexington Ave., New York City. JOHN H. AUERBACH, 778 Park Ave., N. Y. CHARLES K. Cook, 40 Fifth Ave., New York City. BENJAMIN H. BRINTON, Chestnut Street, Englewood, N. J. N.B. The specialists of the New York Stock Exchange are assisted in their labors by 1,290 employees who support 2,481 dependents. The annual salaries of the employees total $2,166,708. The specialists pay in real estate rentals and clearances $1,846,999 per annum. WASHINGTON, D.C., Saturday, March 24, 1934. PETITION ON BEHALF OF THE FLOOR TRADERS OF THE NEW YORK STOCK EXCHANGE The Honorable Committee on Banking and Currency of the United States Senate, Washington, D.C. GENTLEMEN: The undersigned members of the New York Stock Exchange, representing some sixty members engaged in trading exclusively for their own account on the floor of the Exchange, respectfully invite the attention of the Committee to a provision in Section 10 of the pending National Securities Exchange Bill, the effect of which would in our opinion be the virtual paralysis of the activities of floor traders and substantial injury to the interests of the entire investing public of the United States. The provision to which we refer is, in substance, that it shall be unlawful for any member of a stock exchange (except "odd-lot dealers" and "specialist dealers ") to effect any transaction whatever for his own account while on the trading premises of the Exchange. (Sub-section (c).) The exclusion of the floor trader from the privilege of trading on the premises would seem to indicate either that the language employed does not express the intention of the Committee or that the functions of the floor trader are imperfectly understood. The floor trader is a member of the Exchange who acts exclusively as principal and, as a rule, only with his own capital. He has no customers and accepts no commission orders. He buys and sells securities for his own account, assuming the entire risk of profit or loss. He is not restricted to a fixed post nor to a limited number of securities. In the course of the day's trading the floor trader is to be found at various parts of the floor in competition with specialists and other traders, contributing in this manner to the maintenance of a fair market in all stocks. If he has, on the one hand, as compared with the investor off the floor of the Exchange, the advantage of instant information concerning the technical position of the market, he is subject, on the other hand, to the disadvantage (in view of the exclusion of news tickers from the trading premises) of not being immediately apprised of developments in the outside world of industry, finance and politics. The floor trader performs indispensable services in the public interest by his contribution to the maintenance of a continuous and liquid market in which securities may be bought and sold at equitable prices. It is obviously in the interest of the investor that the securities which he holds, and which he may desire to use as collateral for the financing of productive enterprises, shall have a continuous fair market value. On an Exchange which was limited to the execution of commission house orders, there would inevitably be many occasions on which the divergence between the price bid and the price asked would be so extreme as to result in wide fluctuations. In the filling of the gap between bids and offers and the prevention of sudden and unreasonable fluctuations the interposition of the floor trader plays an outstanding part. Without the constant personal presence of the floor trader, ready to buy or sell instantly for his own account and on his own responsibility for small profits, the market would be characterized by excessively sharp rises and declines. The initiative of the floor trader and his competition with specialists and other traders are at all times factors of the highest importance in the maintenance of fair market prices. His services in this respect are particularly conspicuous on occasions of stress, when there is a great preponderance of either buying or selling orders from all parts of this country or from abroad. On such occasions the floor trader is pre-eminent in taking the initiative in buying or selling as the situation may require. So highly are his services in this respect valued on the Exchange that floor traders are frequently informed of an abnormal market situation by a governor of the Exchange, acting in the public interest, with a view to assuring the execution of buying or selling orders at a fair price. In view of the indispensable services performed by the floor trader, as above indicated, we earnestly trust that it is not the intention of the Committee to eliminate the floor trader as such. We respectfully submit that the floor trader should be allowed to continue his operations substantially in accordance with the present practice. In this connection we wish to signify our hearty endorsement of the suggestion made to the Committee on Interstate and Foreign Commerce of the House of Representatives by Mr. Richard Whitney, President of the New York Stock Exchange, with reference to the revision of Section 10 of the Bill. Respectfully, HERBERT L. CARLEBACH, 35 East 76th St., New York City. ARTHUR K. HARRIS, 1125 Park Avenue, New York City. ROBERT CRAIG MONTGOMERY, Bronxville, New York. DRAFT BILL FOR REGULATION OF NATIONAL STOCK EXCHANGE This bill has been submitted to representatives of the following exchanges for criticisms and suggestion: Detroit Stock Exchange. Hartford Stock Exchange. Minneapolis-St. Paul Stock Exchange. New Orleans Stock Exchange. Pittsburgh Stock Exchange. Salt Lake Stock Exchange. and also, for the purpose of consideration of this bill, the following nonmember exchanges: To provide for the regulation of National Stock Exchanges operating in interstate and foreign commerce or through the mails and to prevent unfair practices in security transactions and for the protection of investors, and other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SHORT TITLE SECTION 1. This Act may be cited as the "National Stock Exchange Act of 1934." DEFINITIONS SEC. 2. When used in this Act, unless the context otherwise requires (1) The term "exchange means any board, market place, exchange, chamber of commerce or association, whether organized or unorganized, however managed or conducted, and whether incorporated or unincorporated, where contracts or offers for the purchase or sale of securities or other transactions in securities are customarily made. (2) The term "national stock exchange" means any exchange which has been duly licensed pursuant to the provisions of Sec. 6 of this Act. (3) The phrase "facility of an exchange" includes its premises and tangible property whether on the premises or not, any right to the use of such premises or property or any service thereof, including any system for the distribution of quotations of transactions made on the exchange. (4) The term " person" means an individual, corporation, partnership, association, unincorporated association or exchange. (5) The term "member" means any person who is permitted to effect transactions on a national stock exchange without the services of another person acting as broker or to use the facilities of an exchange for transaction thereon without payment of a commission or fee or with the payment of a commission or fee which is less than that charged the general public, or any firm of which a member is a partner, or any partner of such firm. (6) The term "bank" means (a) a banking institution organized under the laws of the United States, (b) a person engaged in the business of banking pursuant to the laws of any State, who is subject to examination or regulation by Federal or State banking authorities, (c) a banking institution organized under the laws of a foreign country or any agency or branch thereof authorized to engage in business in a State and which is subject to the supervision of State banking authorities, or (d) a receiver, conservator or other liquidating agent of any institution included in clause (a), (b) or (c) of this paragraph. (7) The term "broker" means any person engaged in the business of effecting transactions in securities for the account of others and receiving commissions therefor. (8) The term "dealer means any person engaged in the business of making purchases and sales of securities, or of distributing securities, for his own account through a broker or otherwise. (9) The term "broker" or "dealer" shall not include a bank and the term "member" shall include a bank which is a member of a national stock exchange only to the extent that it shall act as broker or dealer. (10) The terms "buy" and " purchase " shall include any contract to buy, purchase or otherwise acquire. 66 66 (11) The terms sale and sell" shall include any contract to sell or otherwise dispose of. 66 (12) The term security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, voting-trust certificate, certificate of interest in property tangible or intangible, or, in general, any instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase any of the foregoing. (13) The term "State" means any State of the United States, the District of Columbia, Alaska, Hawaii, Puero Rico, the Philippine Islands, Canal Zone, the Virgin Islands, or any other possession of the United States. 66 (14) The term Commission means the Federal Stock Exchange Commission as constituted pursuant to the provisions of Sec. 5 of this Act. MANIPULATIVE PRACTICES PROHIBITED SEC. 3. (a) It shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce or any facility of a national stock exchange— (1) To effect any fictitious transaction in any security or any transaction which purports to be a purchase or a sale of a security but involves no change in the beneficial ownership thereof; (2) To enter orders, by prearrangement with any other person or persons, for the purchase and sale of any security at substantially the same time at substantially the same price, for the purpose of creating a false or misleading appearance of the volume of trading in such security or of establishing price quotations therefor which do not truly reflect the market value of such security; (3) To effect, either alone or in conjunction with one or more other persons, a series of transactions for the purchase and sale of any security for the purpose of creating a false or misleading appearance of the volume of trading in such security or of establishing price quotations therefor which do not truly reflect the market value of such security; (4) To circulate or disseminate with intent to deceive any false or misleading information in regard to any security for the purpose of inducing the purchase or sale of any security; (5) To pay or cause to be paid for the purpose of inducing any purchase or sale at prices which do not fairly reflect the market value of any security in which the person making such payment or causing the same to be made is directly or indirectly interested, any consideration to any person to circulate or disseminate as news or disinterested opinion any information intended to induce the purchase or sale of such security at such prices, or to receive knowingly any consideration for such circulation or dissemination. (b) Any person who wilfully violates any provisions of this section shall be liable to any person who shall suffer any injury by reason of such violation for any loss sustained thereby and may be sued therefor in law or in equity in any court of competent jurisdiction. (c) No action shall be maintained to enforce any liability created under this section, unless brought within two years after the cause of action accrued and unless brought within six years after the violation upon which it is based. REGULATION OF MARGIN REQUIREMENTS SEC. 4. It shall be unlawful for any member of a national stock exchange or any broker or dealer transacting a business in securities through any such |