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Markets existed therein before such securities were admitted to trading, and such markets would necessarily spring up again if such privileges were denied. When dealt in upon an exchange, the security enjoys a publicity which tends to lead the issuing company to follow the trend of public opinion. Moreover, the market action in any stock from day to day is under the supervision of the committee of arrangements and in the event of any movement injurious to the public, prompt action in calling for transcripts of members' accounts or in the proper case of suspending trading in the security is an effective control and remedy.

The theory of the exchange in the maintenance of its unlisted department may be stated as follows: When an active market in a security, which meets the qualifications, exists in New York, the public is better served by having that security dealt in on an exchange. The purchaser or seller on an exchange deals through a broker member acting as agent who makes contracts for his customer with other members, likewise acting as agents. A specified commission only is charged; the transaction is immediately made public by means of the ticker; purchases and sales appear throughout the country in the daily papers; each transaction is open to investigation and verification; each member is subject to the rules and discipline embodied in the constitution and rules of the exchange.

By way of contrast to transactions taking place on an organized exchange, a transaction outside of the exchange is generally conducted between the customer and one acting as a dealer or principal; that is, for himself. There is no specified rate of commission. Indeed, the dealer pays what he feels inclined to pay and sells for what he can get. The spread is often notoriously wide. The opportunity of verifying the transaction is not comparable to that on an exchange where the officers or a committee may call upon members to produce all records and to explain any transaction.

Moreover, quotations of the outside market are not as accurate and complete as those on an exchange and are given very little publicity. Indeed, outside of the great cities, it is doubted if the price range in securities other than those dealt in on the New York Stock Exchange or the New York Curb Exchange is given any notice whatsoever. Most newspapers carry transactions on these two exchanges, but no reports of outside markets. Where a security is not dealt in on an exchange, one who wishes to buy or sell the security may not turn to the morning paper and see the record of the actual transactions of the day before and the closing “bid and asked”; he must apply to an outside dealer to inquire what he will

give or what the customer must pay for the security in question. This situation must necessarily leave the customer more or less at the mercy of the dealer; it leaves him largely out of touch with realities.

There is, insofar as we know, no practice generally among dealers to have in their files extensive information in respect to the companies whose securities they are prepared to buy or sell. It is true that some brokers and investment houses dealing in securities in the outside market have organized statistical departments with information on file. In general, however, this applies only to the greater cities. As against this, the New York Curb Exchange has a very large amount of information on file which information is open for inspection by the public.

The average dealer does not pretend to do more than furnish general advice. Indeed, as a dealer, unless he be engaged in the distribution of new securities, he is hardly expected to advise, but he is at his office to make prices to those who wish to deal with him. Moreover, his advice is that of a principal looking out for his own interests and not that of an agent whose duty it is to furnish his customer with impartial advice. The interest of the dealer is in the profit he may make for himself acting as a principal; the interest of an agent or broker buying and selling securities for his customer on an exchange is in his commission, fixed by the exchange.

Another important factor to be considered in relation to the outside market as contrasted with the recognized exchanges is the lack of a control over the individual as against the control through an organized body. The outside dealer answers to no one other than his customer; the exchange member is, to the contrary, accountable for his conduct not only to his customer but to the exchange as well. Moreover, as frequently happens, the customer has little or no means of ascertaining the standing of the outside dealer and takes a very wide chance when he forwards his securities for sale or his money for purchase to one whom he may know only through advertisement. On the exchange, to the contrary, it is the duty of the committee on business conduct, assisted by its accountants, to keep in touch with and supervise the financial standing and business methods of its members and member firms.

The facts in respect to transactions on an exchange may be ascertained and compiled by the public authorities and others interested. We are confident that the Attorney General of this State would readily admit that his investigation of trading in these so-called listed” securities was facilitated by reason of the fact that they were traded in upon a recognized exchange. In the present Senate investigation, the subcommittee and its able counsel obtained valuable information as to the securities business, particularly as to its extent, by reason of having organized exchanges through which and to which inquiries might be directed to a known membership. No similar opportunity was open to it in respect to the vast amount of business which is done in the outside market. Indeed, the outside market has necessarily no extensive or adequate records.

It has sometimes been claimed that the public is deceived, when it reads the record of transactions on the curb exchange, into believing that all securities named are fully listed. As a matter of actual fact, as has been said above, and this is deemed of great importance, no security is dealt in on the curb exchange today which is not officially listed; that is to say, listed upon the official action of the exchange itself.

The exchange has urged that a clear demarcation be made in the press between these securities. Many newspapers distinguish in their reports between "fully listed” and “admitted to unlisted trading.” The difference is given on the ticker and in the publications of the exchange, including the exchange bulletin. But even though the public should be misinformed as to the difference between securities sisted and unlisted on the exchange, it may well be argued that the average investor is perhaps wiser in buying intelligently a seasoned unlisted security rather than placing his funds in the initial stages of a new enterprise fully listed upon the exchange.

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The exchange has continued to use the phrase "admitted to unlisted trading” only because it does not desire to deceive those who define "fully listed” as including only listing upon the application of the company issuing the securities.

Occasional objections have been voiced that the New York Curb Exchange admits securities to unlisted trading without the express approval of the company issuing the securities and at times retains a security on its list against the express opposition of such company. The overwhelming majority of companies, whose securities are admitted to unlisted trading upon the New York Curb Exchange, are either satisfied with the market that exists on the exchange or have no interest therein.

In the past, the exchange has itself too freely admitted securities to unlisted trading, particularly in cases where, at the time of admission, no active market in the security existed in the East or in New York. The exchange has recognized these mistakes and on its own volition, since January 2, 1933, has removed from dealing by reason of inactivity 696 issues of stock and 247 issues of bonds.

Whenever a complaint has come to the exchange from a company and a request made for removal of its securities from unlisted trading, the officials of the company have been invited to confer with the officers and committees of the exchange or to state their views in writing. Where this has not been possible, representatives of the exchange have gone to the companies to confer with their officials and obtain the facts. In cases where substantial and adequate reasons for removing a security from unlisted trading were presented, the exchange was glad to drop the security from the list. Often, when the operation of the unlisted trading department was explained to them, companies have withdrawn their requests to have their securities removed from trading.

Officers of companies occasionally base their request for removal upon the claim that the market upon the exchange does not represent or express real values--it is significant that such a reason is generally advanced when the tendency is downward—that fairer prices may be obtained when the security is dealt in outside an exchange where contact is close between the dealer and the company, its officials or holders of the security interested in seeing its price kept up. This presents, indeed, a challenge to an exchange.

A market on an exchange such as the New York Curb Exchange is an open, free market where buyers and sellers with knowledge of trading conditions and with actual bids and offers may employ an agent to meet agents for other buyers and sellers. It represents a broad market and a real market as against a market limited by the capacity of a few outside dealers to take and place the securities offered. It is a market familiar to the investing public of the entire country. It is a market which does not "fold up” when the pressure on dealers becomes too heavy, creating thereby a moratorium in the security with the resulting embarrassment to an owner who has to realize on his security.

The problem is presented as to which is better for the holders of prospective investors. With an exchange market they know each day, for better or worse, the actual conditions. In the outside market, however, they have no assurance, even if they are so fortunate as to know the quotations, that a nominally quoted market will, upon a test, turn out to be sustained, and thereby real. An exchange market, reporting daily, serves continuous notice to holders of securities of actual conditions and trends. The owner is warned; his financial standing, insofar as the particular securities are concerned, is revealed to him each morning. When he decides to act, the transaction is concluded and reported immediately.

He may call his agent to account before a tribunal which has before it the records and will protect him. But in an outside market, such transactions are personal; there is no supervision; no examination; no control.

The fact is occasionally stressed by company officials that a reorganization is imminent. The exchange has made it a point to consider the effect of public quotations in such a corporate emergency; but the problem remains to be answered as to whether or not the public fares better, when it is asked to exchange securities in a reorganization, if it relies on the one hand upon prices made by the company or by dealers acting for the company or its reorganization managers or, on the other hand, upon prices in the open market upon a national exchange. The former, that is, the outside market, and its prices may, by reason of its lack of publicity and control, be greatly to the advantage of the company; by reason thereof, its refinancing may cost less, its stockholders may fare better. But how about the bond holders and the new purchasers? In the last analysis, it is the new investor, the one who is out but who is invited in who should not be deceived but who should know the real public market.

A maturing bond may sell upon the exchange at 50; this is the price in a free market. This may not represent the ultimate value. This is, however, the present actual value. The issuing company may believe it difficult and expensive to induce an exchange or new capital on this basis. In an outside market a few purchases may lift the level 25 points. The exchange or purchase is then made on this higher basis. Is this, however, the value upon which the owner of the bond should make his decision or the public be invited to subscribe, or should the actual public market be the test? It is a prime essential of the new era that the owner or purchaser should be fully informed of all facts in relation to his holdings or to his prospective purchases.

Mr. KENNEY. In that regard, I take it that you are not opposed to public regulation of stock exchanges, as a matter of policy. You have referred from time to time to mistakes that have been made. I wonder if you would point out, during the course of your remarks, what mistakes you think might properly come under regulation by the Government, if you mean by mistakes, any abuses, or evils, I would be very glad to have you point them out, as you go along, or at some time, to make a brief statement with regard to that.

Mr. GRUBB. We all recognize there have been evils, and abuses, sir, and as the stock exchanges have discovered them, every exchange has tried to correct them to the best of their ability.

Mr. KENNEY. These abuses and evils you now mention are proper subjects, in your opinion, of Federal regulation?

Mr. GRUBB. I did not get that question, sir.

Mr. KENNEY. You stated that there were certain abuses and evils that were recognized by the stock exchanges, that there have been.

Mr. GRUBB. Yes, sir.

Mr. KENNEY. Now, do I understand that you feel that these abuses and evils are a proper subject for Government regulation?

Mr. GRUBB. We all recognize that; yes, sir.

Mr. KENNEY. Now, I wish you would point out, before you close, just what some of these abuses and evils, in your opinion, have been.

Mr. GRUBB. Well, that is, I think, those are similar, more or less to those that you have already heard; manipulation of pools, and high pressure of salesmanship, and tip sheets, and things of that sort.

Mr. KENNEY. All of which

Mr. GRUBB (interposing). And also, the fact that in a great many cases I mean, we have recognized these facts very clearly about certain of those abuses, and I think that we have corrected them.

Mr. KENNEY. And they might well be a subject of governmental regulation, in your opinion?

Mr. GRUBB. Under certain conditions. I think the question of Government regulation, as brought up by Mr. Whitney in reference to that committee that he suggested, could be followed

Mr. KENNEY. All right.

Mr. PETTENGIll. You think that it is all right to have the Government join in regulating everything that you want regulated, but nothing else, is that right?

Let me ask you a question, very frankly.
Mr. GRUBB. Surely.

Mr. PETTENGILL. Do you contend that your exchange organization is perfect at the present time?

Mr. GRUBB. I do not think any organization or any individual is perfect, sir. I think that we have all made mistakes.

Mr. PETTENGILL. Do you think that there are some evils in the business of the exchange of stocks and bonds at the present time?

Mr. GRUBB. There is nothing that I know of at the present, sir; no.

Mr. PETTENGILL. At present it is quite perfect? I think that is very interesting.

The Chairman. Before your time is out, which is in about 18 minutes, I would like to ask you or your attorney, some questions about Mr. Whitney's suggestions here. As I understand, you are not opposed to Federal regulation of stock exchanges?

Mr. GRUBB. I am not, sir, under certain conditions; no.

The CHAIRMAN. Well, what we would like for you to do, and I shall request Mr. Lockwood to file with us such things as you think ought to be done. We ought to know that. We ought to know and to have advice of counsel and yourself or someone connected with your exchange as to what you think should be done if we are going to have regulation at all.

Now, it seems that there is a shying from the Federal Trade Commission as the administrator of this act. I am frank to say that I think that there will be an act, and I think we might all just as well understand that now, an act of some sort, and what we are holding these long hearings for is to get information, because we are not experts, and we have gotten some information. I will say that, some information; but I want to ask you, specifically, about as to whether or not, or where, you think this regulation ought to be lodged, if there is going to be regulation.

Mr. GRUBB. Personally, sir, I think from my own standpoint and my own personal opinion, if the authority is vested in the Federal

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