Listing fees, Mr. Chairman, on the New York Stock Exchange, they represent approximately 20 percent of our gross revenue. At the AMEX, they represent 20 percent; the Pacific Stock Exchange, 10 percent.

The point I am trying to make, Mr. Chairman, is that one of the concerns of the subcommittee should be—and we will get to this in title IV, I guess-that whatever system you decide on in the clearing area, it must be the most efficient, most effective, and it must have an economic motivation, not a philosophical motivation. The only motivation that businessmen understand is economic.

By giving them control of the clearing operation and bringing it all together, there will be a built-in incentive to keep the cost of that operation as low as possible, and that cost saving will flow directly to the investors, whoever they are, by virtue of the fact that the costs will be as low as they possibly can be.

Mr. Moss. Without objection, the record will be held to include the additional material requested by Mr. Curtis.

[Testimony resumes on p. 1032.]

[The following material was received for the record:]

EQUAL OR UNIFORM REGULATION AND A CONSOLIDATED TAPE SYSTEM FOR LISTED

SECURITIES

"H.R. 5050 preserves many of the traditional distinctions between the exchange rules in the 1934 Exchange Act and the over-the-counter rules in the Maloney Act; while this distinction may still be acceptable, in the long run we believe that a single set of competitive rules should probably be applied to all markets.” (Thomas E. Kauper, Assistant Attorney General, Antitrust Division, Department of Justice, July 31, 1973)

The Securities and Exchange Commission outlined its concept of a central market system in a widely distributed Policy Statement On The Structure Of A Central Market System--the so-called SEC White Paper-issued March 29, 1973. The Commission summarized its view of the central market system as follows:

66

"... the central market system will improve our existing system by bringing together all of our existing markets so that they are equally regulated and visible to all, and so that at the same time their members will be encouraged to compete, resulting in a substantial benefit for investors.

"At the heart of the central market system . . . would be a comprehensive communications linkage between market centers, consisting of a real-time composite last sale reporting system and a composite quotation system displaying the bids and offers of all qualified market makers in listed securities."

As the industry moves closer to establishing a central market system, the issue of equal regulation looms increasingly larger. Today, Congress, the regu latory authorities and the major securities industry organizations are deeply concerned with establishing a viable central market system. And the Commission has clearly set forth the broad outlines for uniform regulation of participating markets to help assure that the central market system will operate effectively in the public interest.

The SEC's White Paper stressed the goal of complete disclosure of all transactions in listed securities in all markets, and called for uniform rules dealing with:

Anti-manipulative practices.

Proper use of exchange membership.
Short sales.

Responsibilities of market makers.

The New York Stock Exchange agrees that these are the major areas in which equal or uniform regulation must be achieved if a consolidated tape system is to operate most effectively in the public interest. And, indeed, there seems to be general agreement among the prospective central market participants

the rules and regulations governing trading in the nation's securities markets. However, agreement has been much more elusive with respect to the extent of uniformity, the mechanics of achieving it and, especially, proper timing.

In many instances, the existing rules and surveillance standards observed by one or more prospective participating markets are significantly more lenient than those established by other participants. As we understand the Commission's concept of uniform regulation, the thrust of the essential cooperative effort should not be to relax the highest existing standards or to reduce them to the lowest common denominator-but, rather, to upgrade the more lenient rules and standards to the highest practicable levels.

The Exchange fully agrees with this concept and is prepared to assist in every appropriate way in identifying the specific areas in which uniformity is both desirable and achievable.

Toward this end, we have closely reviewed the existing rules of the New York Stock Exchange in each of the four areas identified in the SEC White Paper as appropriate for uniform regulation.

Each of these areas-i.e., anti-manipulative practices, proper use of Exchange membership, short sales, and responsibilities of market-makers-is discussed separately in the following pages, both in terms of the recommendations in the SEC White Paper and in terms of existing New York Stock Exchange rules. (To facilitate a more complete review, we have attached, as a separate package, the text of all NYSE rules discussed in the following pages.)

This discussion is limited to major rules, developed over the years-either on the Exchange's own initiative or on the recommendation of the Congress or the regulatory authorities-which are the essential trading rules directed to protecting the public interest in a central market system environment. The sole purpose of this discussion is to provide a basis on which all of the concerned parties may be able to move forward toward the establishment of a measure of uniform regulation cooperatively administered by the appropriate regulatory authorities and the participating markets. As a pattern of uniform regulation begins to emerge, it will doubtless be necessary to establish additional rules which would further safeguard the public interest.

I. UNIFORM ANTI-MANIPULATION RULES

The SEC White Paper recommends adoption of a uniform rule generally governing manipulative practices, such as the rule proposed by the Advisory Committee on a Central Market System in its Interim Report to the Commission of October 11, 1972. The rule recommended by the Committee would provide that: No broker-dealer shall execute or cause to be executed, or participate in an account for which there is executed, a purchase of any listed security which is reportable in the composite transaction reporting system at successively higher prices, or a sale of any such security at successively lower prices, for the purpose of creating or inducing a false, misleading or artificial appearance of activity in such security or for the purpose of unduly or improperly influencing the market price for such security or for the purpose of establishing a price which does not reflect the true state of the market in such security.

The New York Stock Exchange fully endorses the proposed uniform antimanipulation rule which is exactly paralleled by Sections (3) and (4) of New York Stock Exchange Rule 435.

Rule 435 prohibits members, member organizations and allied members from engaging in trading practices which may be manipulative in intent or effect, including excessive trading, transactions at successively higher or lower prices, manipulative practices and circulation of rumors.

This basic anti-manipulation rule was adopted in 1935, after long consultation with the SEC. At that time, both the Exchange and the Commission recognized that it was desirable to anticipate and restrict specific practices which might result in manipulative behavior, and a number of rules were adopted to supplement Rule 435. The Commission described the package of anti-manipulation rules as "necessary and appropriate for regulation of trading on all national securities exchanges." Subsequently, the Exchange has adopted additional rules to further strengthen the safeguards against manipulative trading.

In developing the initial package, it was recognized that unregulated trading by members joined together in pools, syndicates or joint accounts had resulted in manipulation of the market. Three supplementary rules were adopted to

Rule 93 prohibits members from having connections with any pool, syndicate, or joint account which might create prices which would not fairly reflect market values.

Rule 94 restricts specialists and odd-lot dealers from having joint accounts to deal in the stocks in which they are registered with anyone other than member organizations or individual members. This means that every participant in such accounts is subject to Exchange regulation.

Rule 423 prohibits members from forming joint accounts which might create prices which would not fairly reflect market values, and to require Exchange approval of joint accounts.

Unregulated trading by members in puts, calls, warrants or options had also resulted in speculation with the effect of manipulating the market. The following rules were adopted to eliminate these practices:

Rule 96 curbs members' speculation by prohibiting a member from initiating on the Floor the purchase or sale of a stock in any account in which he or any participant in his firm holds or has granted a put, call, straddle or option.

Rule 102 curbs speculation by odd-lot dealers by prohibiting them from dealing in puts, calls, straddles, or options in any stock in which they are registered.

Rule 105 is designed to curb speculation by specialists by prohibiting them from participating in pools or dealing in puts, calls, straddles, or options in the stocks in which such specialist is registered.

It should be noted that the creation, earlier this year, of the Chicago Board Options Exchange has prompted several exchanges to consider whether existing rules in these areas should perhaps be changed to permit their members to trade actively in options. On August 1, the SEC, acknowledging these developments and also noting that at the Commission's request, various exchanges had previously adopted prohibitive rules, such as NYSE Rules 96, 102 and 105— asked for comment on whether specialists, Floor traders, market-makers and block positioners should now be permitted to trade in options.

Whatever action the Commission takes in revising or adopting rules in this area should, of course, be applied equally to all markets.

Prior to the adoption of restraints, it was theoretically possible for a member to use information not generally available to the public to manipulate the market to the advantage of his own account and those of relatives and friends. To eliminate this advantage and safeguard the interests of public customers, the following rules were adopted:

Rule 77 prohibits dealings and activities by members on the Floor which would adversely affect the market in a stock, such as buying or selling dividends.

Rule 78 prohibits prearranged trades which would create false activity in a given stock or group of stocks.

Rule 79A.30 prevents wide price variations between successful sales or groups of sales within a brief period of time unless it is first determined that the particular sales are justified.

Rule 92 requires members to transact customers' market or executable limit orders before initiating a transaction on the same side of the market for any account in which they have an interest.

Rule 95 prohibits a member from giving his relatives and friends an advantage over any public customer by initiating orders for those accounts on the Floor. Rule 97 prohibits member organizations, acting as block positioners, from engaging in rebate practices when liquidating positions; and from unduly influencing the value of a stock when making subsequent acquisitions for their own account once they have acquired a position as a result of facilitating a block transaction.

Rule 110 prohibits a member, when executing an order originated on the Floor, from congregating in or dominating the market in a stock or effecting transactions except in a reasonable and orderly manner.

Rule 410 (b) is designed to curb trading practices which could create a misleading appearance of activity in a stock. Prior to its adoption, members could enter successive orders in a stock causing the price to rise. The firm could then sell out at a profit to public orders attracted by the trading activity.

Rule 123A.40 prohibits a specialist from effecting a transaction for his own account that would have the effect of establishing the execution price for cus

II. PROPER USE OF EXCHANGE MEMBERSHIP

The SEC White Paper called for a uniform rule, applicable to all exchanges, regulating the proper use of exchange membership. The paper further explained the SEC's position on this uniform rule as follows:

We believe the implementation by all exchanges of a uniform rule regulating the proper use of exchange membership, such as Securities Exchange Act Rule 19b-2, to be an essential first step in the structuring of any central market system. Without such uniformity, securities transactions may continue to be directed to particular market centers on the basis of the extraneous factors that have contributed to the fragmentation of the securities markets over the last few years. A uniform membership rule will insure that competition in the central market system we envision will be predicated on such meaningful factors as best price, execution and service.

When the Commission adopted Rule 19b-2 to require that the principal purpose of an exchange member be the conduct of a public securities business (the so-called 80-20 Rule), the New York Stock Exchange promptly amended its Constitution and corresponding rules to conform.

However, it is widely recognized that more specific rules are required to tightly control and regulate the trading of members for their own accounts-and thus to enforce the common commitment of the Congress, the SEC and the Exchange that the interests of members be subordinated to the interests of the public.

In developing guidelines for the proper use of membership, the New York Stock Exchange has adopted the following rules designed to limit members' activities:

Rule 108 prohibits members from competing with public orders when initiating transactions on the Floor for the purpose of establishing or increasing a position for accounts in which they have an interest.

Rule 109 prohibits a member trading for his own account from putting his own interest before that of a public customer by using the customer's order to "stop" his own. Otherwise, the member would be able to guarantee himself a specific price and attempt to better his own transaction.

Rule 111 permits only those members who have been approved and subjected to close regulation by the Exchange to trade for their own accounts on the Floor of the Exchange.

Rule 112 requires that members' transactions effected on the Floor be generally beneficial to the market, and is designed to eliminate the possibility of conflicts between the interests of a member and those of his customer.

Rule 72 establishes procedures for sequencing orders to be executed on the Floor. The rule stipulates that orders be filled according to priority, parity, and precedence, to maintain continuous auction market in a security in which there are several unexecuted orders.

Rule 127 provides for the public to obtain the advantage of price discounts or premiums when large blocks of stocks are traded away from the current market price.

III. UNIFORM RULE ON REGULATION OF SHORT SALES

The SEC White Paper states that there should be a revised rule imposing uniform regulation on short sales in all markets, such as the one outlined by the Central Market System Advisory Committee in its Interim Report to the Commission of October 11, 1972. That proposed rule reads as follows:

(1) No registered broker-dealer shall execute an order as principal or agent to sell listed securities unless the order is marked short or long and unless, to the best of his knowledge, such designation is accurate.

(2) No registered broker-dealer may execute as principal or agent a short sale of a listed security at a price below the price of the last different transaction (i.e., a minus tick), or at that price if it is below the preceding different (zero minus tick) reported on the composite transactions reporting system.

(3) No registered broker-dealer shall knowingly be a party to a short sale of a listed security which would violate the provisions contained herein.

(4) The provisions of paragraphs (2) and (3) shall not apply to a short sale made pursuant to a firm offer to sell securities, properly times-stamped and recorded, even though in intervening report appears in the composite transaction (to which the seller is not a party) at a price above that recorded offer, so long as a

transaction pursuant to that offer would have been in compliance with the short sale rule when the offer was recorded.

Exchange Rule 440B parallels the requirements governing short selling now effective under SEC Rule 10a-1 and 10a-2 and SEC rulings to date; Exchange Rule 435 (6) applies to short sales of odd-lots.

The Exchange agrees that there is a need for a uniform short selling rule throughout a central market system. However, the proposed rule might actually permit a short sale on a minus tick on one exchange because the tape showed a plus tick in another market, or because a net sale in the third market showed a plus tick. Consider the following sequence of sales:

NYSE: 50%

Regional Exchange: 50%1⁄2

Both of these sales would appear on the consolidated tape and, under the rule as proposed, a short sale would be permitted on the NYSE Floor at 50% or 504both of which would be plus ticks on the tape while representing minus ticks from the last sale on the NYSE.

The Exchange believes that the execution of public orders to sell short should be determined by the price set by the interaction of public orders in the auction market. Accordingly, consideration should be given to requiring that the basis for short sales should be the primary auction market in which the security is traded.

IV. RESPONSIBILITIES OF MARKET MAKERS (REGULATION OF SPECIALISTS; ELIMINATION OF REGIONAL EXCHANGE EXEMPTION FROM SEC RULE 11b-1)

The SEC's White Paper states the Commission's intention to rescind the exemption from SEC Rule 11b-1 now granted to regional stock exchanges. The essential provisions of SEC Rule 11b-1 are as follows:

Regulation of Specialists

(a) (1) The rules of a national securities exchange may permit a member of such exchange to register as a specialist and to act as a dealer.

The rules of national securities exchange permitting a member of such exchange to register as a specialist and to act as a dealer shall include:

(i) Adequate minimum capital requirements in view of the markets for securities on such exchange:

(ii) Requirements, as a condition of a specialist's registration, that a specialist engage in a course of dealings for his own account to assist in the maintenance, so far as practicable, of a fair and orderly market, and that a finding by the exchange of any substantial or continued failure by a specialist to engage in such a course of dealings will result in the suspension or cancellation of such specialist's registration in one or more of the securities in which such specialist is registered;

(iii) Provisions restricting his dealings so far as practicable to those reasonably necessary to permit him to maintain a fair and orderly market or necessary to permit him to act as an odd-lot dealer;

(iv) Provisions stating the responsibilities of a specialist acting as a broker in stocks in which he is registered; and

(v) Procedures to provide for the effective and systematic surveillance of the activities of specialists.

Concurrent with the SEC's adoption of Rule 11b-1 in 1964, the Exchange amended or adopted a group of rules aimed at achieving compatibility with the SEC rule. At that time, the Commission stated that "the rules of the NYSE and the AMEX relating to specialists, including those rules described below which those exchanges proposed to adopt, meet the standards contained in the proposed 11b-1."

The following rules were amended or adopted at that time:

Rule 91 seeks to ensure that a customer receives the best available price when a member handling the order takes or supplies securities named in the order for his own account.

Rule 103 requires a member to register with the Exchange in securities in which he desires to specialize and permits the Exchange to cancel such registration in any stock if it determines that the specialist has not met the standards required of him.

Rule 104 sets forth the responsibility of a specialist to maintain a fair and orderly market with price continuity and reasonable depth. It also defines his