Mr. WHITNEY. I think it will eliminate that particular type of financing; yes, sir.

The CHAIRMAN. You do not think that there should be any distinction as to brokers and dealers?

Mr. WHITNEY. I think, Mr. Chairman, that is a matter for great study. I am of the opinion that insofar as it affects members of the exchange who maintain offices outside of New York, it would be of infinite detriment to them, and to the investing public. I believe that most of such financial houses have a dual purpose of dealing in securities for their own account, as distributors of those securities, and doing a commission business. Under this act they may not do both, and I think it would have a tremendous effect upon them, be of tremendous detriment.

The CHAIRMAN. Just why?

Mr. WHITNEY. Because I think in a large measure, sir, they are the financial advisers in their particular localities. I do not think that they could possibly exist if they are not allowed to do both, because I do not think there is enough money in only the one business, and if you eliminate their doing both, then, to my way of thinking, you would do harm to those people who are interested in securities the millions throughout the country who must have some access to security markets, and security advice.

The CHAIRMAN. You think that if a man goes on the floor, he should be allowed to buy and sell for himself and buy and sell for other people at the same time?

Mr. WHITNEY. Under certain specified rules, sir, only.

The CHAIRMAN. You think that is all right, under certain rules? Mr. WHITNEY. Under certain rules; yes.

The CHAIRMAN. Well, of course, under certain rules, some of them might, but they would have to be very drastic and might not amount to anything.

Mr. WHITNEY. If I may explain, Mr. Chairman, I am going to cover that part with regard to the specialist. I think there is quite considerable confusion as to what he is allowed to do, and I will cover that a little while later, if I may answer then.

The CHAIRMAN. Yes.

Mr. MALONEY of Connecticut. Do you think that we will, Mr. Whitney, if we adopt this section to which I made reference, make it almost necessary for bond and security firms in towns of 100,000, or thereabouts, to close their offices?

Mr. WHITNEY. I do not see where there would be a sufficient amount of business for such firms to carry on, if they were prohibited from doing the two kinds of business.

Mr. MALONEY of Connecticut. Thank you.

Mr. WHITNEY. Certainly not in any such times as we have had in the last few years, or in average times; but on that score, sir, there are men appearing before you that are far more competent than I to speak on that.

The consequences of the enactment of this section would be very grave

The CHAIRMAN. It is only 5 minutes until a quarter of five, and I think we had better close here, Mr. Whitney.

Mr. Whitney, I must say that we are going to have to close with you and your experts by noon tomorrow, because we have others.

Mr. WHITNEY. Would you like for me to give you the suggestions that I have mentioned, now, Mr. Chairman?

The CHAIRMAN. I think that we will feel better if we get them in the morning, if you will give them to us then. You mean that you want to hand them to us?

Mr. WHITNEY. I want to read them.

The CHAIRMAN. Some of the members of the committee see your statement on the reporter's desk, there, and I think if you have a sufficient number of copies they would like to have them.

Mr. WHITNEY. I am going to give this to you.

The CHAIRMAN. We would be glad to have it now.

Mr. CROSSER. Yes, I would like to have it.

Mr. WHITNEY. They are coming down by air express, and should be here tonight, and if we could get your addresses, from the secretary of the committee, we will send them to you.

Mr. CROSSER. I thought that you had some copies of them.

Mr. WHITNEY. We do not have any more of them, but we have a few more coming down.

Is it your desire that I read these suggestions with regard to a program in reference to the exchanges that I told you I would have? The CHAIRMAN. Well, if we can have that, and then have the other this evening, that might help, if that is available.

Mr. WHITNEY. That is not available. This is very brief, only one page.

The CHAIRMAN. All right. Go ahead and read it now.

Mr. WHITNEY. Mr. Chairman, as I stated in my opening remarks, the New York Stock Exchange has constructive suggestions to make in regard to the pending legislation for the regulation of stock exchanges.

The purposes to be accomplished by such legislation are: First, the prevention of fraudulent practices affecting stock-exchange transactions; second, the prevention of the use of an excessive amount of credit for security speculation; and, third, the elimination of practices. which, though not fraudulent, permit the manipulation of security prices.

The most important question in regard to any regulatory legislation is the determination of what body shall exercise the regulatory power. Obviously this body, whether it be called a commission or an authority, must include persons who are familiar with credit conditions throughout the United States and also persons who are fully conversant with the technical problems connected with the operation of stock exchanges. In addition, a majority of the members of such a body should be outstanding individuals who would represent the public. Having this in mind, we suggest the creation of a stockexchange coordinating authority to consist of seven members.

We suggest that this authority be composed of 2 members appointed by the President; 2 Cabinet officers, who might well be the Secretary of the Treasury and the Secretary of Commerce; 1 person appointed by the open-market committee of the Federal Reserve System; and 2 persons representing stock exchanges, 1 to be designated by the New York Stock Exchange and the other to be elected by the members of those exchanges in the United States, other than the New York Stock Exchange, that primarily offer a market place for securities. Such an authority would not only represent the interests of the public

but would have the benefit of the opinions and advice of two Cabinet officers, and through its connection with the open-market committee of the Federal Reserve System would be in close contact with credit conditions throughout the United States. It would also include men who had detailed technical knowledge of exchange operations.

We suggest that this coordinating authority be given plenary power to control the amount of margins which members of exchanges must require and maintain on customers' accounts; and further, that it should have plenary power to require stock exchanges to adopt rules and regulations preventing not only dishonest practices but also all practices which unfairly influence the price of securities or unduly stimulate speculation. Without attempting to define at this time, the scope of these powers, we believe that they should include the power to fix the requirements for the listing of securities; the control of pools, syndicates, and joint accounts and also options intended or used to influence market prices; the power to control the circulation of rumors or statements calculated to induce speculative activity; the use of advertising and the employment of customers' men or other employees who solicit business; to the end that all practices which may tend to create unfair prices may be eliminated.

This Authority should also have power to study, and, if necessary, to adopt rules in regard to those cases where the exercise of the function of broker and dealer by the same person is not compatible with fair dealing and to adopt rules in regard to short selling, if it should become convinced that regulation of this practice is necessary. These suggestions represent the considered view of the New York Stock Exchange and I have been authorized to present them by the governing committee of the exchange. I can say confidently that the exchange will cooperate fully in attempting to prevent unwise or excessive speculation and abuses or bad practices affecting the stock market.

I appreciate the courtesy which the committee has extended to me in affording me this opportunity to state fully the position of the exchange in regard to this bill. I trust that the committee will feel free to ask for any information which it may desire from the exchange or its officials. I can assure you that all of the records of the exchange of every character and nature will be made fully available to you and, in addition, not only the officials of the exchange but all of its technical experts are at your disposal.

I did not realize, sir that this has been printed, and that these can be given to you now, if you wish them.

The CHAIRMAN. We would like to have them.

We are very much obliged to you, and we will meet tomorrow morning at 10 o'clock, promptly.

(Thereupon, at 4:45 p.m., the committee adjourned to meet the following morning at 10 o'clock, Friday, Feb. 23, 1934.)

NATIONAL SECURITIES EXCHANGES, H.R. 7852

FRIDAY, FEBRUARY 23, 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.
You may proceed, Mr. Whitney.

STATEMENT OF RICHARD WHITNEY, PRESIDENT OF THE NEW YORK STOCK EXCHANGE, NEW YORK, N. Y.-Resumed

Mr. WHITNEY. Mr. Chairman and gentlemen of the committee. The CHAIRMAN. Mr. Whitney, are you going through with all of that statement, or are you going to read all of it? I am afraid that it is going to take all of the remainder of your time if you do.

Mr. WHITNEY. It being my understanding, Mr. Chairman, that the committee is pressed for time

The CHAIRMAN. We are very much pressed for time, and you are going on somebody's else time this morning. That is the reason why we are having an afternoon session.

Mr. WHITNEY. I was planning, if time sufficed, to go through a few more sections that are most important.

The CHAIRMAN. You will have an hour and forty-five minutes, Mr. Whitney, and you can use it as you think best, except what time the committee uses in asking you questions.

Mr. COOPER. Mr. Chairman

The CHAIRMAN. Mr. Cooper.

Mr. COOPER. Mr. Whitney, I would like to ask one question.
Mr. WHITNEY. Yes, sir.

Mr. COOPER. I think you agree with me that this measure gives the Federal Trade Commission tremendous power over the regulation of private industries and business.

Mr. WHITNEY. Yes, sir.

Mr. COOPER. Do you know whether industries, businesses, and banks were consulted at all in any way in the drafting of this legislation?

Mr. WHITNEY. I have no knowledge, sir, at all of their being consulted in any way.

The CHAIRMAN. That is not final though, that they were not?

Mr. WHITNEY. I beg your pardon?

The CHAIRMAN. I say that is not final; you say you do not know

whether they were.

Mr. WHITNEY. I say, I do not have any knowledge.

The CHAIRMAN. You just do not know.

Mr. WHITNEY. No, sir.

The CHAIRMAN. All right.

Mr. WHITNEY. We were on section 10 of the bill, and if I may say, parenthetically, how this section will affect the various separate businesses engaged in by our members, as will be told you by our representatives, and as I have previously stated, provided time suffices, either today, or at a future time at the pleasure of the committee.

The consequences of the enactment of this section would be very grave. It would absolutely prohibit the odd-lot business, which today provides a market for all purchasers and sellers of listed stocks in amounts of less than 100 shares. There are literally millions of investors who hold odd lots of securities, and it would be grossly unfair to deprive them of the benefirs of a market on the exchange purely for the purpose of separating completely the functions of broker and dealer. Mr. Hetherington will speak to you more in detail in regard to this subject, but I would like to give you certain statistics which prove what an important part of the market consists of the purchases and sales by small investors. In the year 1929, when the total reported sales on the New York Stock Exchange amounted to 1,124,000,000, our rich odd-lot houses bought in odd lots more than 142,000,000 shares and sold in odd lots more than 156,000,000 shares. Together those small purchases and sales exceeded in that year 300,000,000 shares. The year 1929 was unusual because it included a period of rising prices followed by a panic. This fact, however, did not unduly affect the volume of odd-lot transactions and odd-lot purchases and sales have been as important, if not more important, throughout the entire depression. From April 1 to August 1, 1933, odd-lot sales aggregated nearly 57,000,000 shares and, in the same period, odd-lot purchases were nearly 56,000,000 shares, or a total in odd-lot transactions of nearly 113,000,000 shares in a 4-month period. During these same months the total sales reported on the New York Stock Exchange were 403,000,000 shares.

This section also makes it unlawful for a specialist to trade for his own account and prohibits him from accepting orders except at a fixed price. Mr. Sprague, one of the governors of the exchange who deals in specialties is here, and will explain this particular business. This prohibition will completely destroy the specialist system as we know it today and would have serious consequences for the whole market. This sytem originated many years ago when a member who had met with an accident was unable to move around the floor. We, therefore, sat in a chair at one post and offered to accept orders from other brokers and execute them as the market permitted. It was soon found that he could render better service in executing orders at limited prices, and that he could also execute market orders more rapidly than the average broker because he was constantly present at the post. Other persons imitated his example and there were soon many specialists. At the present time there are about 325 members of the exchange who act regularly as specialists and there are two or more competing specialists in every important active stock. The existence of the specialist system facilitates trading and is, in my opinion, an essential part of any important market for securities.