Transactions of $500,000 are in many nonmember houses a commonplace. Before passing on, also please note how seriously our legitimate function of distributing the $50,000 block at 10112 has been crippled by this parasitical transaction.

Now, if my remarks above are true of the New York Stock Exchange with its large issues, how much truer is it of those smaller issues of 5 to 20 millions, which officials and directors of companies never chose to list, because, as many of them have said to me, they knew there would be no natural market on account of lack of wide distribution, lack of public interest, and so forth, but which nevertheless the New York Curb grabbed and admitted to what is known as "unlisted trading privileges."

You will, I believe, begin to understand our opposition to extension of unlisted trading in less active bonds and investment stocks beyond June 30, 1936. We hold and shall continue to hold that "The laborer is worthy of his hire"; that the parasitical growth which prevents his proper functioning should be rooted out and prevented from continuing to damage the welfare of investors.

I pass to another consideration important in its implications by reinforcing what I have said about the laborer and his hire. A secretary of one of the larger exchanges told me that the commission charged by the exchanges was never designed to cover the cost of the investment part of the business which, he went on to say, had never been carried on at a profit, but was made small in order to develop active trading in and out in other words, speculation. Hence, the development of the "customer's man" of whose "still prevalent encouragement of activity—in trading-by irresponsible talk", Mr. Landis spoke in Princeton on Saturday.

Now, in regard to the statement about the commission for investment service not covering cost-it is a fact, as I will show you by analysis: $7.50 less 3.75 to broker on the floor equals $3.75 net to the house to cover all service. By the way, I am not quite sure of the $3.75 net. It may be $1.50 more than that, but I have not been able to check it. But the result at any rate is so small as to make no difference in the principle. Out of this comes all overhead and items spoken of above, and in addition the following of the bond to maturity.

I might say right here that the first thing my secretary does of a morning is to go to the service we have in regard to called bonds, sinking-fund bonds, and all that, and find out whether any of the bonds we have ever sold in our entire history have been called for payment, so that we may advise our customers to the end that when the 6 months' coupon comes around they may not find they have lost 6 months' interest. And that goes to each and every bond we have ever sold in our entire history, until the maturity of our bonds. And that expense comes out of our original gross spread of 1.45 as shown for 2 months' profit, net. And that is the net only for those 2 months, while that service is continually coming out of our earnings all the time.

Senator COUZENS. Is there sometimes an effort to call bonds that do not carry a callable provision?

Mr. KENDALL. Well, generally speaking, I think a public advertisement is made that such-and-such company will take in securities for a fixed amount on tenders.

Senator COUZENS. But they cannot force a calling in of such bonds. Mr. KENDALL. No, sir. That is a question of legal arrangement through the indenture.

Senator COUZENS. All right.

Mr. KENDALL. As I started to say, in the light of these facts the phrase "competition between exchange and over-the-counter markets" in connection with issues of only moderate activity, which I have heard since my arrival in Washington, fills me with gravest alarm. As far as the private investor is concerned, there would be no competition, for the effect on the over-the-counter would be the same as I have cited above in the 991/2-10112 case. And may I point out that the investor runs the risk of perfunctory service in connection with transactions carried on a loss.

Of the stock-exchange houses, you should find out how many have genuine investment departments such as the best distributing and underwriting houses have. For those comparatively few member houses, are the best grade investments to be reserved by the results of this procedure?

Are the nonmember houses to be driven to distribute lower-grade securities in order to live? And if they are, who suffers? The investing public. And if they don't survive-and it is well known that houses handling such do not live long-who then is to carry on the distribution of the hundreds of millions of syndicate issues? Is it to be left to the great originating and distributing houses of large capital? History has shown recently that when these reach too great a size they bring about their own ends. Witness the affiliates reaching out for more and more bonds to sell because they had such great organizations to supply.

Or is the answer for the small distributing house, whose pride in its relationship to its clientele prevents betrayal of confidence reposed in them, simply liquidation?

It would be strange legislation whose result might be that those most worthy to survive cannot.

You will hear no squawking from the low-grade "gyp" houses on these proposals. They don't handle, except rarely and for windowdressing purposes, securities for which any reputable exchange could represent and prove to the Securities and Exchange Commission that there was an "adequate and appropriate market."

Under the bill provision is made for trading a security listed on one exchange on an unlisted basis on another or others. How, then, is an investment house to protect itself in distributing such an issue of which it owns a block by entering protecting bids on an exchange? It obviously cannot enter such on several exchanges, and if it did, would such a house not render itself liable to the penalties of the Securities Exchange Act of 1934 for "pegging"? It would certainly

seem so.

It would be interesting to inquire, as study is made of this entire subject of marketing securities, whether the extortionate spreads of profit which undoubtedly exist in the over-the-counter market, have been found in any issues which, now over-the-counter, could be properly put onto an exchange. My experience as code committeeman did not so reveal. Unfortunately, publication of prices in the metropolitan papers does not protect the small town and country dweller-the farmer-who subscribes only to small local papers which carry no

quotations at all, or at the most a short list of perhaps 10 of the market leaders in stocks.

So, in closing, I would say that we representatives of the investment. houses which compose the backbone of the business, find ourselves astonished and dismayed in having to fight for our very lives against the encroachments of the unlisted markets on exchanges whose continued existence is dependent on gambling on a large scale.

We beg you to "go slow"!

Then I have a few random remarks that I want to put in.

A curb broker said, "When a broker executes an order in bonds he is through. How can he afford to give the service of following the bond to maturity for one-fourth of 1 percent?"

A very large house-one of three or four of the largest in the country-said, "We have practically given up small investors because we can't get an adequate spread." Of course, a great big house cannot buy three or four bonds at a time and put them out to sell, because their machinery is so big that they must purchase and sell in large blocks at a much narrower spread.

These proposals make no differentiation between bonds and stocks; between investment and speculative media. Brokerage, encouraged under the report, pays little attention to bonds as investments.

You should not fail to note the tendency to concentrate the business in bonds on stock-exchange members, where there is only a limited number of seats, not purchasable on account of cost by many reputable houses of small to moderate capital. These stock-exchange houses receive the entire commission from their own and others' labor.

The underlying philosophy seems to be that if adequate information is available, the investor will ipso facto be protected. If so, the supporters of this thesis are naive in their knowledge of the mental processes of investors. The experience with prospectuses, the reiteration of better business bureaus of the slogan, "Before you invest, investigate", shows how little information is desired and made use of. The only protection of the investor worth while comes from the efforts of the reputable houses at a fair profit to sell reputable securities. The disreputable house does not appeal through facts but by "scenery" and chiefly by appeals to expectation of profits.

The net result of this attempt to drive securities onto an exchange which, I understand from Mr. Landis' declaration this morning, is not intended, but that is the way I prepared my statement in the light of the situation as it was presented to me-will be, in our opinion, the weakening of the houses now doing the most constructive work for the investor. If the nonmember houses cling to their standards, they will be driven out of business, hundreds, maybe thousands of them, to the benefit solely of stock-exchange members or of the "gyp" houses. If they do not cling to their standards but are animated by a desire to stay in business and make a living for themselves and their families, there will be large accessions to the ranks of the low-grade houses, who finally become, as the result of handling small volume on a wide spread, the only medium available to the small investor for investment advice. Small volume must be done at a wider spread-that is axiomatic-in every line from jewelry to groceries, or failure ensues.

Senator COUZENS. Have you any information as to the trend from the listed to the over-the-counter market as a result of the Securities Act? I understand that over-the-counter business has greatly increased because of the Securities Act; is that true?

Mr. KENDALL. Not in that connection, sir.

Senator COUZENS. Well, has it occurred in any connection?

Mr. KENDALL. I think there were four issues that were delisted from the New York Stock Exchange, and that that was all. However, that statement is subject to correction.

Senator WAGNER (presiding). Commissioner Landis, you might furnish to us for insertion at this point in the record the figures on delistings, which I believe were contained in the report of the Securities and Exchange Commission.

Mr. LANDIS. You will find them on page 35 of our report of January 3, 1936.

(The statement is as follows:)

Comparative analysis of exchange listings showing number of issues which have disappeared from exchange trading as of December 1, 1935

1 Los Angeles Curb Exchange merged with Los Angeles Stock Exchange Nov. 1, 1934

Senator WAGNER (presiding). We will now hear Mr. Troster.

STATEMENT OF OLIVER J. TROSTER, OF HOIT, ROSE & TROSTER, NEW YORK CITY; PRESIDENT OF THE NEW YORK SECURITY DEALERS' ASSOCIATION

Senator WAGNER. I suppose, Mr. Troster, you would prefer to present your statement by adhering to your manuscript.

Mr. TROSTER. Today, if I may, I would prefer to pick out certain points and elaborate on them, I mean for the time being.

Senator WAGNER. You may proceed.

Mr. TROSTER. As president of the New York Security Dealers' Association I appeared before this committee 2 years ago in regard to the Securities Exchange Act and 3 years ago in regard to the Securities Act. The only reason I am still president of that association is that every 6 months they double my salary. These associations which have little or no money continue their officers with the statement: "We will keep you for another year at double your present salary." [Laughter.] That is the reason I am down here again as the president of that association.

Senator WAGNER. I hope you may finally get your salary. Mr. TROSTER. I do not want to cast any aspersions upon the previous speaker [Mr. Kendall], because he is a Harvard professor and I am a middle-western farmer who has come to New York in an effort to make a living. I graduated from a college of agriculture and have often said since that time that it was possible my agricultural education was not a mistake, because we have been told that Wall Street is where the bulls and bears are always on the rampage: that sheep are driven in for the shearing and lambs for the slaughter; and I know of no place where there are more hogs. [Laughter.]

I thought by way of introduction I would like to explain the first sentence that appears in my memorandum, and that is in reference to "half-listed securities." Doubtless you have been considerably mixed up in your mind, as we who are in the business have been, by the use of the term "Admitted to unlisted trading privileges upon exchanges", and that applies to each and every exchange from San Francisco to New York.

The association which I represent, now called the New York Security Dealers' Association, was originally called the Unlisted Security Dealers' Association.

Senator WAGNER. Might I interrupt you long enough to ask that you give the committee some idea of that association, its membership? Mr. TROSTER. The organization was started in 1926. At that time, as I say, it was called the Unlisted Security Dealer's Association One of the reasons for getting together was because, say, in the New York Times you might find a quotation on American Brass, 95 bid and 98 offered, and the Herald-Tribune might quote it at 98 bid and 101 offered. Some other paper, the old Globe, I presume it was, would show the quotation 95-96, and some other paper in an effort to cover the whole range might say 95 to 105. În order to collect some adequate and accurate quotations, our association was formed. One of the original purposes was to get accurate quotations in the newspapers so that our customers who might possibly have sold us stock at bid price as shown by the Times, would not feel terrifically upset when they saw the Herald Tribune quotations, because these several quotations might have been gotten from different houses at different times of day, some giving them at 10 e'clock in the morning and others at 5 o'clock in the afternoon. With that as the background we have grown. We have never had very much help from outside organizations. We have tried to keep our membership among those houses which are exclusively over-thecounter dealers, but of recent years more and more stock exchange houses having unlisted departments have come into our membership. At the present time we feel that we have a large majority of the high-grade, strictly over-the-counter houses. There are some houses that are not members of our association which are high-grade, and there are many exchange members with large over-the-counter departments which are not members of our association, but we do have, as we think, the best of the over-the-counter dealers in our association.

Senator COUZENS. How many have you?

Mr. TROSTER. At the present time I believe there are 82 members of the association. Does that give you a sufficient background of the association, Mr. Chairman?