and not for the purpose of selling to somebody else outside as a dealer does. Usually he buys in some time during the morning and then sells out during the afternoon. He is a so-called "floor trader", and one of the most lucrative businesses in the world is to be a floor trader on the New York Stock Exchange. What he does is to buy on the inside for his own account, while everybody who is dealing on the outside is watching the ticker and paying a broker's commission. Now, this bill provides for the kind of segregation against which the stock exchange will put up the strongest argument, from their point of view, that you will hear down here.

This bill says no member of the stock exchange nor anybody not a member, who habitually carries on the business of a broker acting through a member of the stock exchange, may act as a dealer or underwriter.

Thus the bill affects not only the members of an exchange but also those brokerage houses which, as I told you, do not want to be members of an exchange, because they do not want to be subject to its restrictions, but who operate through a member of the exchange. None of those individuals who carry on a brokerage business on the outside nor any member of an exchange can be a dealer or an underwriter. Substantially, that is what the Twentieth Century Bund Reports recommended, too.

Now, there is one possible exception to this rule which has not been incorporated in the bill, as it perhaps should be. You might permit the odd-lot dealer, who has to be very close to the trading floor, because as you will remember he contracts to sell within a fraction of the price of the last transaction. That dealer operates upon such a close margin that possibly he should be permitted to be a member of the exchange, under regulations prescribed by the Commission, but otherwise, as we would like to see the bill drafted, only brokers can be members and anybody who habitually deals as a broker, through a member, can act only as a broker.

Now, there are three reasons why that segregation should be attempted:

In the first place, as recognized by the Glass-Steagall Act, you cannot expect disinterested service from a man on both sides of the fence. If a man is going to act as your broker and thus as your investment counsellor for that is what your broker practically is, you go to him for advice on securities as you go to your lawyer for advice on the law, he should not have something of his own to sell.

And every underwriter and every dealer has securities of his own. to sell, or some interest somewhere that he is watching. We talked the other day about the pool in which a very important member firm of the stock exchange had an interest and was tipping its customers constantly-not saying to get into the pool, but, "We think this is a good stock buy."

If you go to your own broker, who is also an underwriter and dealer, and announce to him that you want to buy something, you cannot expect an unbiased answer because he will either consciously push his own securities or will be so interested in them that he will unconsciously tend to advise you in favor of his own securities, although he seriously believes he is giving you the most disinterested advice in the world. That is just human nature.

The second reason for segregation is that the safety of customers' accounts with brokers should not be imperiled by the brokers operations for his own account as a dealer or an underwriter.

The two biggest failures in New York during the break occurred because the broker had himself all tied up in his own operations as dealer and underwriter. When he went to the wall, his customers lost, not because their accounts went bad, but because his own dealings went bad. Those were Prince & Whiteley and Pynchon.

The third reason for saying that all members of an exchange shall be brokers, and brokers only, is that you shall not have on the floor of an exchange, where most of the members are acting as brokers for you and for me, a big floating element that are trading on the inside for their own account and who follow the trend in such a way that they constantly are causing the market to fluctuate without relation to factors outside the market.

You have, for instance, on the New York Stock Exchange, about 100 very powerful floor traders out of a total of about 1,300 members. They all have large resources. They have an inside position. They know what is going on in the market long before you on the outside do. After those traders have been on the floor long enough, they grow antennae, so that they sense what the movement of the market is, and just follow it up and down, in and out, sometimes on very small margins, almost never carrying over the day. They take no risks. They just follow the trends of the market which they can see because they are on the inside.

The argument is often made that those traders working in and out on very narrow quotations, cause the sales to vary in eighths and quarters, whereas they might move in jumps of one or two points. That is a nice, artistic argument if all you are looking at is how exquisitely accurately the stock-exchange machinery can work but from the standpoint of the investing public, it does not make much difference that the market between sales moves from eighth to eighth.

What the investing public is interested in is the spread of the market over the day, and whether these traders really cushion the market when there is a tendency for it to drop, or whether they hold it down when there is a tendency to jump. They do not. They take no chances. They take no position against the market. They simply follow the market the way sea birds follow a ship, following the trend and picking up what they can on the way. They sense the market and follow the pools, whether the market is long or short. When the market is long, they are long. When the market is short, they are short. If there is a block of stock over hanging the market, they over-hang it too. They serve no purpose, in the long run, to make the market any better for the investor on the outside, but rather because they are quick and on the inside, they help to accentuate the swings of pools. They are naturally pool operators; very often you will find these floor traders the big pool leaders. This bill says that an individual cannot be on the exchange floor, cannot even be a member of an exchange unless he is acting as a broker for the public.

The only interest the public has in a stock exchange is that it should be a place where the outside public can buy and sell its stocks. There is no public interest to be served by giving an inside seat to a small group of men who are trading for their own account.

So far as this stabilization argument goes, there is no reason why men interested in trading on their own account should not trade on the outside through a broker, and pay a commission. You and I pay a commission for it.

Now, there is going to be terrific pressure on you to break down this suggestion, although it embodies one of the soundest principals of every day business.

I know that the stock exchange has already put in operation machinery by which everybody in the brokerage business, and his cousin, sister, brother, and aunt, will write a personal hand-written letter to every Member of Congress saying, "Suppose this segregation is correct in theory. Nevertheless, at the present time, the underwriting business is in the dumps, and there are a great many houses in New York, and a great many houses in the interior which are organized so that they combine all three functions. At the present time they cannot carry the employees they have on the pay roll of the underwriting business unless you let them have the backlog brokerage commissions."

Mr. HUDDLESTON. May I interrupt you there?

The CHAIRMAN. Mr. Huddleston.

Mr. CORCORAN. Yes.

Mr. HUDDLESTON. I hope that you will pardon a slight digression. We have two legal questions involved: The first is the power of Congress to regulate stock exchanges.

Mr. CORCORAN. Yes.

Mr. HUDDLESTON. That is the first.

Mr. CORCORAN. Yes.

Mr. HUDDLESTON. Now, assuming that power, have you any doubt of the power of Congress in the course of such regulation to require, we will say, this segregation that you are advocating.

Mr. CORCORAN. I do not have any doubt about that; no.

Mr. HUDDLESTON. In exercising the power to regulate, it must be a real "regulation".

Mr. CORCORAN. Yes.

Mr. HUDDLESTON. And I am wondering whether upon considering the matter, you would find a doubt that this is a proper exercise of the power to "regulate".

Mr. CORCORAN. No; because, sir, you have the power to regulate the exchanges and an essential part of the operation of the exchanges is the rules for the membership of the exchanges, which, of course,

this

Mr. HUDDLESTON (interposing). You think that this power to regulate the exchanges includes the power to say who shall be members of the exchanges?

Mr. CORCORAN. I should certainly think so, because that is a part of the machinery of the exchanges.

Mr. HUDDLESTON. If we may do that, then we could provide for illustration that nobody could belong to the exchange except a "floor trader."

Mr. CORCORAN. If you wanted to, I do not see why, constitutionally, you could not do it.

Mr. HUDDLESTON. That is the point that I wanted to bring out. Mr. COOPER. Mr. Chairman, may I ask a question?

45381-34

Mr. HUDDLESTON (presiding). Mr. Cooper.

Mr. COOPER. I have listened very attentively for a few days now to what you have had to say, and very evidently you are supporting this bill.

Mr. CORCORAN. Very evidently, sir.

Mr. COOPER. What I want to ask is this, Do you speak for the Reconstruction Finance Corporation?

Mr. CORCORAN. No, sir; absolutely not.

Mr. COOPER. What is that?

Mr. CORCORAN. The Reconstruction Finance Corporation has nothing to do with this bill.

Mr. COOPER. But you are with the Reconstruction Finance Corporation?

Mr. CORCORAN. I am with the Reconstruction Finance Corporation. Mr. COOPER. Did they authorize you to come here?

Mr. CORCORAN. They know I am here.

Mr. COOPER. Did they authorize you to come here?

Mr. CORCORAN. The General Counsel said I might come; yes. The chairman of the committee asked me to come down here and I cleared the matter. I am here at the request of the chairman of the committee.

Mr. COOPER. Who authorized you to take part in the drafting of the bill?

Mr. CORCORAN. That is something extracurricula.

Mr. COOPER. I know, but how did you come to do it?

Mr. CORCORAN. Who authorized me?

Mr. COOPER. Yes; who?

Mr. CORCORAN. Chairman Fletcher asked Mr. Landis of the Federal Trade Commission to draft a bill, and find someone to help, and Mr. Landis asked me to help him with the bill.

Mr. HUDDLESTON. Is that all, Mr. Cooper?

Mr. COOPER. That is all.

Mr. MERRITT. Mr. Chairman.

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. I understood you to say that there is a class of dealers who might fairly be excepted, and to be sure that I correctly understand you, I want to ask if this paragraph which I am going to read from a letter does not include that class [reading]:

Section 10 prohibits any stock exchange member or any person who, as a broker, transacts a business in securities through the medium of any such member, to act as a dealer in or underwriter of securities. This prohibition may have little effect on the ordinary stock exchange house chiefly concerned with the margin business in stocks. It will have a most serious effect on dealers, and particularly dealers like ourselves who have never had any margin accounts and whose interest is in high-grade bonds. If a dealer, through loss of membership on the exchanges, is forced to pay full commissions on all securities he buys and sells there and is denied the right to earn commissions himself, he will promptly disappear. My annual sales, for example, run between five hundred million and a billion dollars. In the past, syndicate participations and the distribution of new securities have never been more than a minor part of the business, nor have we ever originated any syndicate. Under recent and present conditions, we have no interest in the distribution or dealing in any new issues and always our main interest and principal activity has been in seasoned bonds of the highest grade. My gross profit averages between three eighths and one half of 1 percent. If I must pay the full one fourth of 1 percent commission for all I buy and sell on the stock exchange and lose the substantial commissions I have been earning for nonmargin business, my firm must retire from the dealer business, and I

cannot doubt that all or substantially all dealers will do likewise. I wonder if the proposed law cannot be so drawn that a distinction is made between bond dealers doing only a cash business in investment securities on a dealer and brokerage basis, and stock brokers doing a margin business on the exchange.

Mr. CORCORAN. No. The law as it is now drawn would not let that dealer stay on the exchange. It would say, It would say, "You are doing a business in buying and selling bonds. As an incident to that, of course, you have to buy for your own account and you are in a position, as a member of the exchange even though you do not take advantage of it at the present time, to accept brokerage orders for stocks as well as bonds."

Mr. MERRITT. But you said earlier--
Mr. CORCORAN. I said odd-lot dealers.

Mr. MERRITT. Odd-lot dealers.

Mr. CORCORAN. Odd-lot dealers. You see, the stock exchange deals only in hundred-share lots. If you want to buy 10 shares your stock exchange broker does not execute the order for you with another broker. There are three or four big odd-lot houses, particularly in New York, that deal not as brokers, but as dealers; that is, as merchants who sell goods from the "shelves." dealers accept your 10-share order and sell you 10 shares at the last market price per share for 100 shares, plus an eighth or a half, or a quarter, or some other spread that represents their profit for the risk.

These

To be able to sell you 10 shares at that given spread, an odd-lot dealer has to buy the shares for his own account and break them up. It is that dealer for whom we would make exceptions, because it is an advantage to such a small investor whom you do want in the market to let him buy in odd lots.

Mr. MERRITT. This man I speak of is substantially an odd-lot dealer. As a matter of fact-I know the man very well-as a matter of fact, he is an odd-lot dealer.

Mr. CORCORAN. Well, sir

Mr. MERRITT. He practically deals entirely in bonds, and not stocks.

Mr. CORCORAN. Well, that does not mean that he is an odd-lot dealer, sir.

Mr. MERRITT. I know that, but he does deal for corporations, insurance companies, and other investors.

Mr. CORCORAN. Insofar as odd-lot dealers are concerned, certainly they should be allowed to operate as members of the stock exchange; take orders and charge a spread. At least they should have a commission differential, and not be required to pay the full commission, or possibly any commission, so that they can serve the public as odd-lot dealers.

Insofar as that is concerned, of course, you realize that although the dealer in whom you are interested is acting only as a bond dealer, his membership on the exchange entitles him to do anything. He could, as a matter of fact, although he is not doing it, act as a commission broker on margin sales of stocks.

Mr. MERRITT. You also appreciate, if you put a man out of that business, you are not only hurting him, but you are hurting his