again at an insignificant loss and then claim, as a buyer, the difference between the lowest price at which the security sold within a 6-month period and the price that he paid for it, and, as a seller, the difference between the highest price reached within the 6-month period and the price at which he sold it. An illustration will make the example even clearer. Suppose I should buy 100 shares of Allied Chemical & Dye at 121 and should sell it again at 120, thereby losing $100; and, that within 90 days before and 90 days after my transaction this stock had sold at a low of 105 and a high of 155. If I should discover that somebody had engaged in one of the numerous transactions prohibited by section 8, I could sue him for $1,600, as the difference between the price at which I bought the stock and the lowest price at which it had sold. I could, likewise, sue him for $3,500 as the difference between the price at which I sold the stock and the highest price at which it had sold. In the aggregate I could recover $5,100 as my damages, although, in fact, my actual loss was only $100.

It is obvious that provisions of this character will be productive of endless litigation and innumerable blackmail or "strike" suits.

Section 9 of the bill contains three subdivisions. Subsection (a) forbids short selling except in accordance with the rules and regulations to be laid down by the Federal Trade Commission. Subdivision (b) prohibits stop-loss orders except in accordance with like rules or regulations, and subdivision (c) allows the Federal Trade Commission to prohibit the employment or the use of any contrivance or device which it shall determine to be detrimental to the public interest.

I have in the last 3 years spoken so often in regard to the necessity and usefulness of short selling that I hesitate to burden you with further statements on this subject. We have consistently maintained that short selling is an essential part of a free and open market in securities. We have collected exhaustive statistics in regard to the short position in all stocks listed on the exchange. These statistics have been widely published and prove conclusively the value and necessity of short selling. In every great crisis covering by short selling has assisted the market to recover. The most recent illustrations of this tendency of short sellers to buy when liquidation is heaviest, occurred in February and March 1933, just prior to the banking holiday, and again in July when the market suffered a very severe and rapid decline. In the 2 weeks preceding the 4th of March 1933, the short interest covered 412,000 shares of stock and it was a notable fact that the stock market remained active and strong right down to the 4th of March, when the closing of all the banks in the country necessitated the closing of the exchange. Last summer a violent break in prices occurred in the latter part of July and in that month the short interest declined by 445,000 shares. This furnished substantial buying power to the market in a very critical period. In the face of this record, short selling should certainly not be prohibited.

The prohibition of stop-loss orders would, in my opinion, facilitate the work of brokers and particularly the work of specialists on the floor of the exchange. However, I think it would deprive persons, who are not in close touch with the market, of a perfectly proper means of having their selling orders executed when certain prices are reached. There is no evidence that the existence of stop-loss orders tends to accelerate a decline or a rise in prices. In any event, the economic value of stop-loss orders should be carefully weighed

and no change should be made until the matter has been given further consideration.

The final subsection, giving the Federal Trade Commission unlimited power to make unlawful any device or contrivance which it may determine is detrimental to the public interest, is a surprising delegation of power, particularly as any violation of the rules or regulations of the Commission would be a criminal act which might result in heavy fines and imprisonment.

Section 10 of the bill purports to deal with segregation and limitation of the functions of broker, specialist, and dealer. In fact it prevents any member of an exchange and any person who as a broker transacts a business in securities through a member of an exchange from acting at all as a dealer in or underwriter of securities. The sweeping character of this prohibition can only be realized when reference is made to the definitions to which I referred when discussing section 3 of the bill. The unusually broad definition given to the words "broker" and "dealer" result, in this instance, in prohibiting a member of an exchange from buying or selling securities for his own account.

Even if some segregation of the functions of members of exchanges may be desirable and I would like to say parenthetically that the New York Stock Exchange has been studying that problem for nearly 2 years there is certainly no justification for such an arbitrary prohibition as the one contained in this section.

Mr. MAPES. I noticed in an article which you wrote that was published in Mr. Moley's magazine Today, you said that the English law required a person to be either a dealer or a broker. reason for that law in England?

What is the

Mr. WHITNEY. That is on the exchange, sir, in London. That really relates more to the specialist system. I would be glad to amplify that if you desire me to. In fact, I do refer to it here in my paper, in a couple of pages.

Mr. MAPES. Let me ask you, while we are interrupting, to what extent does the law in England regulate their stock exchanges?

Mr. WHITNEY. So far as I know, it is not regulated, sir, by the law, but that I cannot swear to.

Mr. MAPES. Is not the provision to which you referred, which requires a man to be either a dealer or a broker, a provision of law. Mr. WHITNEY. Not that I know of. It is a rule of the London Stock Exchange.

Mr. MALONEY of Connecticut: Mr. Chairman, I would like to ask Mr. Whitney if the effect of section 10 would not make it difficult for municipalities to dispose of their bonds? That is a part of the bill to which you just made reference Mr. Whitney.

Mr. WHITNEY. Yes, sir; I certainly do. It certainly would not allow members of the exchange to participate in, certainly, in the purchasing of bonds from municipalities and State governments, and unless they were only dealers

Mr. MALONEY of Connecticut. And they do do so to some extent now, do they not?

Mr. WHITNEY. Yes, sir; to a great extent.

Mr. MALONEY of Connecticut. And for that reason you think that part of section 10 will work an extreme hardship upon them?

Mr. WHITNEY. I think it will eliminate that particular type of financing; yes, sir.

The CHAIRMAN. You do not think that there should be any distinction as to brokers and dealers?

Mr. WHITNEY. I think, Mr. Chairman, that is a matter for great study. I am of the opinion that insofar as it affects members of the exchange who maintain offices outside of New York, it would be of infinite detriment to them, and to the investing public. I believe that most of such financial houses have a dual purpose of dealing in securities for their own account, as distributors of those securities, and doing a commission business. Under this act they may not do both, and I think it would have a tremendous effect upon them, be of tremendous detriment.

The CHAIRMAN. Just why?

Mr. WHITNEY. Because I think in a large measure, sir, they are the financial advisers in their particular localities. I do not think that they could possibly exist if they are not allowed to do both, because I do not think there is enough money in only the one business, and if you eliminate their doing both, then, to my way of thinking, you would do harm to those people who are interested in securities the millions throughout the country who must have some access to security markets, and security advice.

The CHAIRMAN. You think that if a man goes on the floor, he should be allowed to buy and sell for himself and buy and sell for other people at the same time?

Mr. WHITNEY. Under certain specified rules, sir, only.

The CHAIRMAN. You think that is all right, under certain rules? Mr. WHITNEY. Under certain rules; yes.

The CHAIRMAN. Well, of course, under certain rules, some of them might, but they would have to be very drastic and might not amount to anything.

Mr. WHITNEY. If I may explain, Mr. Chairman, I am going to cover that part with regard to the specialist. I think there is quite considerable confusion as to what he is allowed to do, and I will cover that a little while later, if I may answer then.

The CHAIRMAN. Yes.

Mr. MALONEY of Connecticut. Do you think that we will, Mr. Whitney, if we adopt this section to which I made reference, make it almost necessary for bond and security firms in towns of 100,000, or thereabouts, to close their offices?

Mr. WHITNEY. I do not see where there would be a sufficient amount of business for such firms to carry on, if they were prohibited from doing the two kinds of business.

Mr. MALONEY of Connecticut. Thank you.

Mr. WHITNEY. Certainly not in any such times as we have had in the last few years, or in average times; but on that score, sir, there are men appearing before you that are far more competent than I to speak on that.

The consequences of the enactment of this section would be very grave

The CHAIRMAN. It is only 5 minutes until a quarter of five, and I think we had better close here, Mr. Whitney.

Mr. Whitney, I must say that we are going to have to close with you and your experts by noon tomorrow, because we have others.

Mr. WHITNEY. Would you like for me to give you the suggestions that I have mentioned, now, Mr. Chairman?

The CHAIRMAN. I think that we will feel better if we get them in the morning, if you will give them to us then. You mean that you want to hand them to us?

Mr. WHITNEY. I want to read them.

The CHAIRMAN. Some of the members of the committee see your statement on the reporter's desk, there, and I think if you have a sufficient number of copies they would like to have them.

Mr. WHITNEY. I am going to give this to you.

The CHAIRMAN. We would be glad to have it now.

Mr. CROSSER. Yes, I would like to have it.

Mr. WHITNEY. They are coming down by air express, and should be here tonight, and if we could get your addresses, from the secretary of the committee, we will send them to you.

Mr. CROSSER. I thought that you had some copies of them.

Mr. WHITNEY. We do not have any more of them, but we have a few more coming down.

Is it your desire that I read these suggestions with regard to a program in reference to the exchanges that I told you I would have? The CHAIRMAN. Well, if we can have that, and then have the other this evening, that might help, if that is available.

Mr. WHITNEY. That is not available. This is very brief, only one page.

The CHAIRMAN. All right. Go ahead and read it now.

Mr. WHITNEY. Mr. Chairman, as I stated in my opening remarks, the New York Stock Exchange has constructive suggestions to make in regard to the pending legislation for the regulation of stock exchanges.

The purposes to be accomplished by such legislation are: First, the prevention of fraudulent practices affecting stock-exchange transactions; second, the prevention of the use of an excessive amount of credit for security speculation; and, third, the elimination of practices which, though not fraudulent, permit the manipulation of security prices.

The most important question in regard to any regulatory legislation is the determination of what body shall exercise the regulatory power. Obviously this body, whether it be called a commission or an authority, must include persons who are familiar with credit conditions throughout the United States and also persons who are fully conversant with the technical problems connected with the operation of stock exchanges. In addition, a majority of the members of such a body should be outstanding individuals who would represent the public. Having this in mind, we suggest the creation of a stockexchange coordinating authority to consist of seven members.

We suggest that this authority be composed of 2 members appointed by the President; 2 Cabinet officers, who might well be the Secretary of the Treasury and the Secretary of Commerce; 1 person appointed by the open-market committee of the Federal Reserve System; and 2 persons representing stock exchanges, 1 to be designated by the New York Stock Exchange and the other to be elected by the members of those exchanges in the United States, other than the New York Stock Exchange, that primarily offer a market place for securities. Such an authority would not only represent the interests of the public

but would have the benefit of the opinions and advice of two Cabinet officers, and through its connection with the open-market committee of the Federal Reserve System would be in close contact with credit conditions throughout the United States. It would also include men who had detailed technical knowledge of exchange operations.

We suggest that this coordinating authority be given plenary power to control the amount of margins which members of exchanges must require and maintain on customers' accounts; and further, that it should have plenary power to require stock exchanges to adopt rules and regulations preventing not only dishonest practices but also all practices which unfairly influence the price of securities or unduly stimulate speculation. Without attempting to define at this time, the scope of these powers, we believe that they should include the power to fix the requirements for the listing of securities; the control of pools, syndicates, and joint accounts and also options intended or used to influence market prices; the power to control the circulation of rumors or statements calculated to induce speculative activity; the use of advertising and the employment of customers' men or other employees who solicit business; to the end that all practices which may tend to create unfair prices may be eliminated.

This Authority should also have power to study, and, if necessary, to adopt rules in regard to those cases where the exercise of the function of broker and dealer by the same person is not compatible with fair dealing and to adopt rules in regard to short selling, if it should become convinced that regulation of this practice is necessary.

These suggestions represent the considered view of the New York Stock Exchange and I have been authorized to present them by the governing committee of the exchange. I can say confidently that the exchange will cooperate fully in attempting to prevent unwise or excessive speculation and abuses or bad practices affecting the stock market.

I appreciate the courtesy which the committee has extended to me in affording me this opportunity to state fully the position of the exchange in regard to this bill. I trust that the committee will feel free to ask for any information which it may desire from the exchange or its officials. I can assure you that all of the records of the exchange of every character and nature will be made fully available to you and, in addition, not only the officials of the exchange but all of its technical experts are at your disposal.

I did not realize, sir that this has been printed, and that these can be given to you now, if you wish them.

The CHAIRMAN. We would like to have them.

We are very much obliged to you, and we will meet tomorrow morning at 10 o'clock, promptly.

(Thereupon, at 4:45 p.m., the committee adjourned to meet the following morning at 10 o'clock, Friday, Feb. 23, 1934.)