companies, of white-collar workers, laborers, of professional men and women; also of the customers of these corporations, the consumers of their products, the small householders of the land.

In no other nation of the world, has this remarkable sharing of capitalistic ownership been spread to the masses of the people. In no other land, does this basis exist for the further spread to the people of the intrinsic wealth of the country. It is as important a bulwark against communism as are savings bank deposits and insurance policies.

But at the same time it is a striking presage of a broader distribution of the country's wealth to the people.

The odd-lot dealer system of the New York Stock Exchange has not only been an instrument of primary importance in achieving this distribution. It has been and now is the means of maintaining for these small lots of stock a market of a breadth and safety that no other system thus far devised has been able to attain.

Yet the proposed National Securities Exchange Act of 1934 would put this odd-lot dealer system completely out of business.

PROVISIONS OF THE BILL BEFORE THIS COMMITTEE WHICH WOULD DESTROY THE ODD-LOT SYSTEM OF THE NEW YORK STOCK EXCHANGE

It is our understanding that the chief objective of the Congress and the President in the proposed legislation, are to secure the elimination of any practices considered to be against the public interest and to eliminate, so far as it may be possible, unnecessary, unwise, and destructive speculation.

I shall describe briefly the odd-lot dealer system, its evolution, operation, character, and achievement. I hope to be able thereby to show that neither of the objectives just stated will be advanced in the slightest degree by legislating the odd-lot dealer system out of existence.

On the contrary, legislation against the odd-lot system would be a definite blow against the public interest.

The destruction of the odd-lot dealer system would be accomplished by section 10 which makes it unlawful for any member of a national securities exchange to act as a dealer in securities.

Under section 3, any person engaged in the business of buying and selling securities for his own account is a dealer. As the sole business done by the odd-lot dealer firms is to buy and sell securities for their own accounts, it would appear that if these provisions become law the only recourse of the odd-lot dealers is to go out of existence.

Another provision of the bill which threatens the existence of the odd-lot dealer system is that which prohibits short selling with exceptions as provided by the Federal regulatory commission. As will be explained later, the odd-lot dealer is forced to be either short or long of every stock in which he deals. He has no volition. It is, therefore, evident that without the privilege of being short of stocks, the oddlot dealer is unable to carry out his vastly important function of providing a market for the small investor. Further discussion of this important subject will be given later.

Does the bill carry the intention of ending the odd-lot dealer system?

The interpretation of the two sections previously quoted (not including that dealing with short selling) may be based upon inac

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.

curate phrasing of the provisions. If this is the case, if it is not the intention of the sponsors of this bill to destroy the odd-lot dealer system, we pray this committee to clarify and to do so specifically.

It would seem, however, that the drafters of the bill did not intend to outlaw the odd-lot dealer (as we have just pointed out may be done by section 10) because section 18 (c) indicates that the continuance of the odd-lot business is intended. This section, 18 (c), specifically gives the commission the power to prescribe rules and regulations for the odd-lot dealer. There would be no need for prescribing rules and regulations for the odd-lot dealer if it had been intended that he should be outlawed.

If it is the intention of the framers of this bill to destroy the odd-lot dealer system, we crave your earnest consideration of the following facts.

Mr. KENNEY. Would you mind explaining how the odd-lot system works?

Mr. HETHERINGTON. I do that, I believe, Mr. Kenney, further on. Mr. KENNEY. Very well.

Mr. HETHERINGTON. The odd-lot dealer system is virtually an exchange within the exchange, for the purpose of giving the small investor the benefit of the market which otherwise would be available only to large investors.

The working of the odd-lot dealer system is as follows:

Let us assume that a customer of a stock exchange commission brokerage firm desires to sell 10 shares of Steel. He gives his broker an order to sell 10 shares at the market. As the unit of trading on the New York Stock Exchange is 100 share, this 10-share order cannot be executed in the usual way.

The odd-lot order to sell 10 shares of Steel is sent by the commission brokerage firm, not to its own broker on the floor of the exchange, but to the broker representing the odd-lot dealer. When the odd-lot broker receives the order, he will buy from the commisson firm 10 shares of Steel at a price one eighth of $1 lower than the price at which the next 100-share lot of Steel sells. If the next 100-share lot sells at 59, the odd-lot broker will buy 10 shares from the commission firm at 58%. The commission firm will charge its customer the usual commission for handling the order and deduct the stamp taxes from the proceeds. When the individual customer buys 10 shares of Steel, he pays one eighth of $1 more than the price of the next sale of a 100-share lot, plus taxes.

The commission brokerage house buys odd lots from the odd-lot dealer and sells them to him for the account of its individual customers. The commission broker acts as agent; the odd-lot dealer acts always as principal and in no other capacity. The odd lots which the dealer buys, he, in turn, sells either in 100-share lots or in odd lots. Similarly, the odd lots he sells are bought by him in the form of round lots and odd lots. In effect he therefore bunches odd-lot purchases and sales into units of 100 shares, for the purpose of trading out in the round-lot market.

The differential in the price-one eighth more or one eighth less than the round-lot price-is for the purpose of covering the dealers' expenses, including commissions to their brokers, taxes paid on roundlots sold, interest on capital, overhead in rental, equipment, and large staffs of employees, as well as the risks of price fluctuation inherent in

the work of trading in practically all the stocks listed on the New York Stock Exchange (except a group of highly inactive stocks that are segregated at one post).

This dealer system secures for the holder of a small lot of stock, sure, speedy, and accurate execution at a moderate cost in all kinds of markets, whether stagnant, normal, boom, or panic.

Mr. KENNEY. In other words, the odd lot is not bought and sold directly on the exchange, although the price of the odd lot is determined by the price of the market price of the security on the exchange. Mr. HETHERINGTON. That is true, except that the broker is a member of the stock exchange.

Mr. KENNEY. Yes.

Mr. HUDDLESTON. May I ask you in that connection whether the odd-lot dealer must be a member of the exchange?

Mr. HETHERINGTON. In all cases, in case of my own connections; yes, Mr. Chairman.

Mr. HUDDLESTON. Then how would this bill operate if the odd-lot dealer or the broker were not a member of the stock exchange?

Mr. HETHERINGTON. He can only operate on the stock exchange, or be connected with it, because the odd-lot dealer's commission is on the price paid, within that limitation.

Mr. HUDDLESTON. Then it would not be practical for the odd-lot dealer not to be a member of, or for the broker not to be a member of the exchange?

Mr. HETHERINGTON. I think that is a question, Mr. Chairman, that I answer further along, if I may be allowed to proceed.

The CHAIRMAN. Yes.

Mr. HETHERINGTON. The origin and the growth of the odd-lot dealer system have been based on successful fulfillment of needs.

Before the odd-lot dealer system reached a point of high organization, odd-lot orders were handled by the specialists in round lots and were inevitably the first to suffer whenever round-lot volume taxed the capacity of brokers. Odd-lot orders were troublesome to brokers as compared with round-lot orders as soon as round-lot orders became. plentiful. Even as far back as 1873 this was the case. It was at about that time that the odd-lot dealer system had its origin. A broker here and there undertook to relieve other brokers of the pressure upon them of their odd-lot orders and soon began to give special attention to the handling of odd lots, also to the buying and selling of odd lots for their own account. This market for odd lots came to be highly valued as an aid and convenience to the general commission broker and to his odd-lot client. The dealer service grew because it proved its utility.

I trust it may not be thought presumptuous to claim for the odd-lot dealer system the merit that may derive from its evolution out of need. It has supplied this need by developing, over the period of a half century, a system which protects the interests of the odd-lot public.

ADVANTAGES TO THE PUBLIC OF THE ODD-LOT DEALER SYSTEM

The odd-lot dealer system has achieved many results of fundamental value to the odd-lot public, that could be gained in no other

way.