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.

Mr. 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.)

NATIONAL SECURITIES EXCHANGES-H.R. 7852

SATURDAY, FEBRUARY 24, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The committee met, pursuant to adjournment, at 10 a.m., in the committee room, New House Office Building, Hon. Sam Rayburn (chairman) presiding.

The CHAIRMAN. The committee will come to order.

I see we have this morning the Association of New York Stock Exchange Firms. The first witness is Mr. Hope.

STATEMENT OF FRANK R. HOPE, PRESIDENT OF THE ASSOCIATION OF STOCK EXCHANGE FIRMS, NEW YORK, N.Y.

The CHAIRMAN. Mr. Hope, will you qualify by giving the reporter your full name and address?

Mr. HOPE. Frank R. Hope, President of the Association of Stock Exchange Firms, New York.

Mr. Chairman and gentlemen of the committee: I speak on behalf of the Association of Stock Exchange Firms, a voluntary association of substantially all member firms of the New York Stock Exchange. Any legislation or regulation of the New York Stock Exchange directly and immediately affects our members as we are bound in the conduct of our business by all of the rules and regulations of the exchange, and anything which affects the exchange obviously affects us. Our members, although not the actual floor operators, nevertheless are the house partners and therefore the persons in the New York Stock Exchange business who are in constant and immediate contact with the customers and the investing public.

It is for this reason we are so particularly concerned with this bill which is so fundamental in its effect upon practically all existing financial and corporate practices and so drastic and far-reaching in its effect upon the entire banking, credit, and investing structure of the country, to say nothing of its immediate effect upon the operation of the New York Stock Exchange as such and all transactions cleared thereon.

In order to save your committee's time, I will not rediscuss any matter already fully presented by Mr. Whitney but will rather concisely invite your specific attention to certain salient features of the bill from the point of view not so much that of the stock exchange itself but rather that of the member firms and their relations with their customers and the investing public. I desire, however, leave to file with your committee the analysis which our association has made of the bill.

I particularly desire at the outset to heartily endorse on behalf of the Association of Stock Exchange Firms the proposal made by Mr. Whitney on behalf of the New York Stock Exchange as to the creation of a Stock Exchange Coordinating Authority. This proposal has been submitted to the board of governors of our association and I am authorized to say to you that they join in the making of this proposal as a sound, workable, and efficacious way to regulate the stock exchange should regulation be deemed in the public interest. I have every reason to believe that this proposal meets with the hearty approval and will receive the full cooperation of all.

I will not have presented any discussion of the constitutional aspects of the bill, as Federal Trade Commissioner Landis has already presented to your committee the brief on this subject prepared by Mr. R. E. Desvernine, counsel for our association, which I understand is in the possession of each member of the committee.

The only definition in section 3 to which your attention has not been called, which requires your special consideration, is subsection 10 of section 3, pages 6 and 7 of the bill.

The only securities which are exempted from the bill are "direct obligations guaranteed as to principal or interest by the United States.". It is not clear from this language if it is intended to only include guaranteed obligations and to exclude direct obligations. Furthermore, State, municipal, and bonds of quasi-governmental bodies, such as Port Authorities, and so forth, are not exempted, which will result in an impairment of the value of these obligations and will result in the forced sale of many of such securities now held as collateral.

Section 5, on page 9 of the bill, is entitled "Registration of National Securities Exchanges."

The most outstanding characteristics of the proposed form of regulation is that the Federal Trade Commission is to to granted detailed and complete supervisory power over all the transactions on the exchanges and that as a condition of registration, an exchange must agree to abide by any future rule or regulation made by the commission. In this connection it should be pointed out that the Roper report contemplated that the governmental agency exercising supervision over security exchanges would primarily have power to interfere with the exchange only in the event of certain improper conditions arising in respect to the operation of the exchange and the conduct of its members. Until such conditions arose the operation, control, and management of the exchange, and the responsibility therefor would be primarily that of the exchange itself and its officials and governors. The present proposal gives the Federal Trade Commission power from time to time to change all rules and requirements, including the power to prescribe regulations for the election of officers and committees of the exchanges; for the suspension or disciplining of members, and so forth, thus substituting itself to the fullest extent in the place of the private management of the several exchanges.

This is a real problem because it renders the present exchanges absolutely impotent to effectively and efficiently act; it deprives them of all self-government and implies the principle that the Government will in fact run, not alone supervise, the exchanges.

Most careful consideration should be given as to what body should be given such powers and to the special and expert knowledge and