On some of our smaller exchanges there are a few members who are designated as specialists in certain securities which have a market active enough to necessitate having a specialist. This provision would prohibit these specialists from purchasing or selling securities on their own account. Where the markets are not broad, it is usually necessary that there be someone who is willing to purchase or sell stock when the occasion arises when there are no near bids or offers on the books. If this did not prevail, the fluctuations in stocks would be greatly increased to the extreme detriment of the customer.

As previous witnesses have covered the entire bill in detail, I shall not impose a further discussion of other sections of the bill on the committee. However, I wish to point out that the other provisions of the bill would work a great hardship on all of the securities markets in the country, the corporations whose securities are listed thereon, and the public in general.

Mr. HUDDLESTON. Who do you want to be heard next?

Mr. THOMPSON. Mr. Shaughnessy of the San Francisco Stock Exchange.

STATEMENT OF FRANK C. SHAUGHNESSY, PRESIDENT SAN FRANCISCO STOCK EXCHANGE

Mr. SHAUGHNESSY. Mr. Chairman and members of the committee: As president of the San Francisco Stock Exchange, it is not my desire to criticize unduly the general tenor of the proposed legislation. I should prefer that the committee consider my statement as counsel which may assist in clarifying some of the issues involved in the act and in furthering the objects which the framers of this legislation had in mind.

The San Francisco Stock Exchange is both willing and anxious to further every regulation that will give to persons who deal in securities a protected and well-organized market.

Mr. Whitney, I believe I only arrived here this morning, and I am told that he has proposed some legislation.

I believe he is right, but I am sent here particularly to give the committee a message from my members, and that is, if possible, you should call together a conference of the various stock exchanges, that through their representatives, they could meet with the congressional committee. We stand for regulation to the fullest degree, but we believe that it should be intelligent regulation and should be done by those who are familiar with the situation, and while I am here I would like to answer the question which hits my particular situation, which one of the gentlemen asked this afternoon, and that is as to the listing requirements.

In San Francisco we have full and complete listing requirements. Last fall Mr. Thompson called upon us in San Francisco, and he started in on what was supposed to be about a 3-hour session. It developed he had a lot of things to say to us in the way of changing the rules, and so forth, at that time. I presided. The president was away. Mr. Thompson left our meeting after having been shown that there was nothing in our rules that needed to be changed as a result of the depressing influence of the last 4 years, and I make the statement now that not a single rule has been changed since the investigation has gone into effect.

Now, the New York Exchange, we follow them along as far as possible. We do not think that the New York exchange has adopted a paternalistic attitude toward us. We regard ourselves as a competitor of the New York Stock Exchange. That sounds like California bragging, but that is the way we feel about it.

Now, in San Francisco our memberships are usually worth about one quarter of the value of the New York seats, though our membership is about one twentieth in number of that of the New York Stock Exchange.

So, you can see, in my community it is still somewhat of an honor and dignity to be a member of the San Francisco Stock Exchange. We own one of the finest buildings and for years we have had a very splendid record. However, I will now get back to my original thoughts, as I had prepared this statement.

Stock-exchange procedure has been developed through experience. In the past 15 years it has been greatly improved. The shocking scandals which have recently been disclosed represent a very small amount of the total volume of business transactions done on the exchanges, and an equally small amount in the value of money of the billions of dollars of securities that have been traded in these various exchanges. Many evils which by implication are ascribed to stock exchanges are entirely independent of market transactions. As an example, during the boom or before the boom, the Southern Pacific stock sold as high as $150, approximately. At the time that the stock of the Southern Pacific sold at $100 a share it was probably earning $10 a share or more. At the very depth of the depression Southern Pacific was down to about $7 a share. So you see it had gone from approximately $150 down to $7 a share, and the answer is very simple. When the stock sold at the high figure, the company was earning and paying dividends. When the stock sold at $7 a share, the company's earnings produced no funds applicable to dividends, and it had to apply for relief to the Federal Government.

Now, that action took part entirely separate from the stock exchanges and that simply shows you how a natural market does act. The San Francisco Stock Exchange has sought to maintain a market on a natural basis with a minimum of artificial influence. It is, and always will be, a very difficult matter to regulate a natural market. A market that is subject to extensive manipulation is as artificial as the type of market which will prevail under excessive regulation. The few features which you aim to eliminate in this act would be present in a different form under the strictest regulation. With the main purpose of the bill very few will find fault or will disagree. There have at times been abuses of trust, and brokers and banks have taken the part of both principal and agent. There should be stricter limitation of the use of proxies. And there should be some regulation of the transactions in a corporation's securities on the part of officers, directors, and large holders. We also agree with that.

The object of this bill is clearly to effect reform where a certain amount of reform is needed. The main question is how that reform may be accomplished. It is worth remembering that through selfregulation, stock exchanges have, in the main, been carried on with highly ethical standards and engagements involving millions of dollars are carried out by only oral contrcats. This bill attempts to reform

On some of our smaller exchanges there are a few members who are designated as specialists in certain securities which have a market active enough to necessitate having a specialist. This provision would prohibit these specialists from purchasing or selling securities on their own account. Where the markets are not broad, it is usually necessary that there be someone who is willing to purchase or sell stock when the occasion arises when there are no near bids or offers on the books. If this did not prevail, the fluctuations in stocks would be greatly increased to the extreme detriment of the customer.

As previous witnesses have covered the entire bill in detail, I shall not impose a further discussion of other sections of the bill on the committee. However, I wish to point out that the other provisions of the bill would work a great hardship on all of the securities markets in the country, the corporations whose securities are listed thereon, and the public in general.

Mr. HUDDLESTON. Who do you want to be heard next?

Mr. THOMPSON. Mr. Shaughnessy of the San Francisco Stock Exchange.

STATEMENT OF FRANK C. SHAUGHNESSY, PRESIDENT SAN FRANCISCO STOCK EXCHANGE

Mr. SHAUGHNESSY. Mr. Chairman and members of the committee: As president of the San Francisco Stock Exchange, it is not my desire to criticize unduly the general tenor of the proposed legislation. I should prefer that the committee consider my statement as counsel which may assist in clarifying some of the issues involved in the act and in furthering the objects which the framers of this legislation had in mind.

The San Francisco Stock Exchange is both willing and anxious to further every regulation that will give to persons who deal in securities a protected and well-organized market.

Mr. Whitney, I believe I only arrived here this morning, and I am told that he has proposed some legislation.

I believe he is right, but I am sent here particularly to give the committee a message from my members, and that is, if possible, you should call together a conference of the various stock exchanges, that through their representatives, they could meet with the congressional committee. We stand for regulation to the fullest degree, but we believe that it should be intelligent regulation and should be done by those who are familiar with the situation, and while I am here I would like to answer the question which hits my particular situation, which one of the gentlemen asked this afternoon, and that is as to the listing requirements.

In San Francisco we have full and complete listing requirements. Last fall Mr. Thompson called upon us in San Francisco, and he started in on what was supposed to be about a 3-hour session. It developed he had a lot of things to say to us in the way of changing the rules, and so forth, at that time. I presided. The president was away. Mr. Thompson left our meeting after having been shown that there was nothing in our rules that needed to be changed as a result of the depressing influence of the last 4 years, and I make the statement now that not a single rule has been changed since the investigation has gone into effect.

Now, the New York Exchange, we follow them along as far as possible. We do not think that the New York exchange has adopted a paternalistic attitude toward us. We regard ourselves as a competitor of the New York Stock Exchange. That sounds like California bragging, but that is the way we feel about it.

Now, in San Francisco our memberships are usually worth about one quarter of the value of the New York seats, though our membership is about one twentieth in number of that of the New York Stock Exchange.

So, you can see, in my community it is still somewhat of an honor and dignity to be a member of the San Francisco Stock Exchange. We own one of the finest buildings and for years we have had a very splendid record. However, I will now get back to my original thoughts, as I had prepared this statement.

Stock-exchange procedure has been developed through experience. In the past 15 years it has been greatly improved. The shocking scandals which have recently been disclosed represent a very small amount of the total volume of business transactions done on the exchanges, and an equally small amount in the value of money of the billions of dollars of securities that have been traded in these various exchanges. Many evils which by implication are ascribed to stock exchanges are entirely independent of market transactions. As an example, during the boom or before the boom, the Southern Pacific stock sold as high as $150, approximately. At the time that the stock of the Southern Pacific sold at $100 a share it was probably earning $10 a share or more. At the very depth of the depression Southern Pacific was down to about $7 a share. So you see it had gone from approximately $150 down to $7 a share, and the answer is very simple. When the stock sold at the high figure, the company was earning and paying dividends. When the stock sold at $7 a share, the company's earnings produced no funds applicable to dividends, and it had to apply for relief to the Federal Government.

Now, that action took part entirely separate from the stock exchanges and that simply shows you how a natural market does act. The San Francisco Stock Exchange has sought to maintain a market on a natural basis with a minimum of artificial influence. It is, and always will be, a very difficult matter to regulate a natural market. A market that is subject to extensive manipulation is as artificial as the type of market which will prevail under excessive regulation. The few features which you aim to eliminate in this act would be present in a different form under the strictest regulation. With the main purpose of the bill very few will find fault or will disagree. There have at times been abuses of trust, and brokers and banks have taken the part of both principal and agent. There should be stricter limitation of the use of proxies. And there should be some regulation of the transactions in a corporation's securities on the part of officers, directors, and large holders. We also agree with that.

The object of this bill is clearly to effect reform where a certain amount of reform is needed. The main question is how that reform may be accomplished. It is worth remembering that through selfregulation, stock exchanges have, in the main, been carried on with highly ethical standards and engagements involving millions of dollars are carried out by only oral contrcats. This bill attempts to reform

by limiting speculation through the regulation of brokers, corporations, and individual investors.

In its present form it will not only fail to obtain its end, but it will also certainly impair the value of speculation in furnishing marketability to investment securities. In aiming at the excess of speculation on the New York Stock Exchange, it sets restrictions which will virtually ruin local exchanges which render an indispensable service in their communities. The effect of the bill will be to further concentrate the control of the country's capital in the chief financial centers. It will drive the corporations which are large enough to afford listing to Wall Street. By making margin requirements unnecessarily severe, it will force small and moderate buyers out of the market and make stock-investment the exclusive privilege of the rich.

In forbidding a single individual or firm to act both as broker and dealer, it fails to consider the problem of the small exchange member. It clearly takes into account only the situation of members of the New York Exchange, where business for years has been so plentiful that extreme speculation in the field of finance has been possible. Members have been able to prosper as strictly floor traders, odd lot dealers, specialists, or as brokers for brokerage firms, investment bankers, and as dealers in puts and calls.

Naturally, no such specialization is possible in smaller financial centers where, in order to carry out the securities business at all, it is often necessary to combine many of these functions in the same firm. In a very inaccurate market for certain local securities, it is very often necessary and in the interest of the security owner, for the broker to make the market and just act as a dealer. Under this act this almost indispensable service is forbidden.

One of the main objects of this bill is to curb manipulation of security prices by rules. Here, again, however, the framers had in mind conditions which do not generally prevail on the San Francisco Stock Exchange. With only 75 members and only 106 securities, it is almost impossible for a pool to operate with the secrecy which is necessary to its success-to attain its ends.

There is thus in the small exchange a natural check to the type of manipulation against which certain provisions of this act are leveled. There is in the small exchange a natural check to the type of manipulation like a pool, and to short selling.

Not only are many of the evils aimed at not generally present in the San Francisco Stock Exchange; and it will clearly be against the community interest to threaten ruin to this business.

The record of this exchange has been excellent. In its whole history of 52 years there have been only eight failures, and in only six of the eight have meant loss to the public.

If this bill should pass in its present form, the existence of this exchange would certainly be threatened, because of the 106 securities listed, 100 represent companies with less than 500 shares of stock. Many of these companies will not face the expense of going to New York for listing, and not many could afford the expense of quarterly reports for independent audits. They would therefore be forced to withdraw their securities from even the local exchange. As a result, the investor would be denied a market for most securities except those which could afford the requirements of the New York Exchange in the event that the San Francisco exchange should be forced out of business.