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Mr. O'BRIEN. We were never successful in that, sir. We do not have the great banks in Chicago in the number that they have in New York. We tried to start a money post on the exchange for the accommodation of the brokers, but out our way, if you want to borrow money from a bank, you have got to have an account with that bank; and you must keep your deposit there. For instance, you must keep on deposit 10 percent of your loan. You must keep that in the bank, or they will ask you to bring it up. So that in reality if the call rate in Chicago is 5 percent, and you have to keep a 10 percent overlying balance, it brings your rate automatically to 52. That is a slight disadvantage, and we have no money market in Chicago. The banks supply the money.

Mr. PETTENGILL. The thing that I am interested in is seeing that we prevent another runaway market with other terrible crashes, and you think that the banks could control the situation, which they failed to do in 1928 and 1929.

Mr. O'BRIEN. Well, Mr. Pettengill, I am not trying to defend the banks, but 1928 and 1929, in my judgment, was an accumulation of what had been happening over a long period of time, that started about 1921, for if you will look at the market, more carefully, you will see that it started then, or 1923, and culminated in 1929. The country was stock-minded. I think everybody went a little bit crazy, brokers, bankers, and the public.

Mr. PETTENGILL. Yes; we agree with that.

Mr. O'BRIEN. Now, just what would cause a repetition of that, I do not know. That market was the result of the underbuilt conditions in this country following the war.

Mr. PETTENGILL. That is all, Mr. Chairman.
The CHAIRMAN. Mr. Merritt, you wanted to ask a question.

Mr. MERRITT. I think that the witness has covered what I had in mind.

The CHAIRMAN. Mr. Lea.
Mr. LEA. No questions, Mr. Chairman.
The CHAIRMAN. Mr. Kenney.
Mr. KENNEY. Yes; Mr. Chairman.

Mr. O'Brien, you referred to the margin rule on the New York Stock Exchange. I believe you said that a margin of 30 percent is required.

Mr. O'BRIEN. I understand that is true now, but the original rule, as I understand it was that they required adequate margins.

Mr. KENNEY. Yes. Well, it is fixed now at 30 percent, I understand.

Mr. O'BRIEN. I did not say so. I understand it is fixed at 30 percent.

Mr. KENNEY. What does that mean? Suppose I wanted to buy $10,000 worth of stocks, how much would I have to put up with the broker under that rule?

Mr. O'BRIEN. One third-I mean $3,000. That would be your margin.

Mr. KENNEY. That would be all that I would be required to put up?

Mr. O'BRIEN. Yes; but a margin means that that margin is kept good. In other words, you always have to keep that element of safety in that margin.

Mr. KENNEY. Then, how much would I have to put up when I purchase that $10,000 worth of stock; how much would be required?

Mr. O'BRIEN. $3,000.

Mr. KENNEY. And, if the stock went down a point, or 2 points that day, would I be required to furnish more margin?

Mr. O'BRIEN. No, sir; that would be too mild a fluctuation.

Mr. KENNEY. And, if the stock dropped before the end of the day, the broker would call upon me?

Mr. O'BRIEN. He would not for that.

Mr. KENNEY. How far could the stock fall without the broker calling on me for further margin?

Mr. O'BRIEN. It would not drop very far, sir.

Mr. KENNEY. Well now, is there any discretion under that rule given to the broker as to what margin he shall maintain after he receives the first requirement of one third margin?

Mr. O'BRIEN. Yes. The rule of reason.
Mr. KENNEY. And, that is all?
Mr. O'BRIEN. That is all.

Mr. KENNEY. So that as it stands now, even with the 30 percent requirement, there is flexibility?

Mr. O'BRIEN. Yes, sir.

Mr. KENNEY. And a man trading today on that basis, if he had $3,000 invested, would have an equity until such time as the stock dropped 25 or 30 points; is that so? Mr. O'BRIEN. Well

, he would have to maintain his equity. Mr. KENNEY. He would have an equity until the $3,000 was gone, would he not?

Mr. O'BRIEN. Well, the account would be open until the $3,000 was gone.

Take you, for instance. You come into my office and you buy $10,000 worth of stock, and you put up $3,000, and the market breaks a couple of points. It is a very dull market. We probably do not disturb you with a call, but if the turn of the market is weak, we would ask for additional margins. Suppose that you are out of town. We would have to use a little discretion.

Mr. KENNEY. Yes, but I have an equity until the market drops 30 points by the $3,000 on hand.

Mr. O'BRIEN. No, sir; that is 30 percent margin kept good. You have got to have 30 percent at all times, theoretically, but the rule of reason applies as to how much time you are to give a man to get additional margins and it varies at times, depending upon the ordinary conduct of the market.

Mr. KENNEY. Do you think that it is good practice to take that man's $3,000, when next day you are going to call on him for more money?

Mr. O'BRIEN. Well, why not?
Mr. KENNEY. Do you think that is a good practice?

Mr. O'BRIEN. He has the understanding, he has to keep his loan in proper shape.

Mr. KENNEY. In other words, under a requirement like that, a man puts up $3,000 and has no coverage whatever?

Mr. O'BRIEN. Yes, sir.
Mr. KENNEY. That is true, is it not?

Mr. O'BRIEN. Yes, sir; no, no; wait a minute. I did not understand your question. He has plenty of coverage, but he is supposed to keep that account in proper shape.

Mr. KENNEY. Suppose he does not? Mr. O'BRIEN. Suppose he does not? Mr. KENNEY. Yes. Mr. O'BRIEN. Then, he has got to bring it down to 30 percent. They may not have to sell all of his securities.

Mr. KENNEY. He might be notified the next day that he would have to put up more margins, and if he could not do it you would sell him out?

Mr. O'BRIEN. We would not say that we would sell him out.
Mr. KENNEY. Well, he has got to keep his account good, you say.

Mr. O'BRIEN. We would reduce his account by selling a part of it, and bringing it to a 30-percent basis.

Mr. KENNEY. In other words, sell him out to some extent?

Mr. O'BRIEN. Provided you gave him proper notice. Now, let me just get this idea clear. In the brokerage business, the last thing that a broker wants to do is to sell a man out. His customers are his stock in trade and he will do everything he can to protect the customer, and when the customer comes in and opens an account with $3,000, he definitely knows how the loan stands, and what he has got to do. He gets that understanding in advance.

Mr. KENNEY. Well, the customer puts up $3,000 and the stock goes down 2 or 3 points, and the broker sells him out. He does not sell him out for the benefit of the customer?

Mr. O'BRIEN. The broker does not sell him out.
Mr. KENNEY. Well, how long will he carry him?

Mr. O'BRIEN. He will not carry him very long if the market were going down. He might sell a part of the account.

Mr. KENNEY. Is it not a fact that he could carry him down to 20 points, or for 20 points, if he wanted to under the present rules?

Mr. O'BRIEN. No, sir; I do not think so.
Mr. KENNEY. What would prevent the broker from doing that?

Mr. O'BRIEN. I think his own business judgment would prevent him from doing it, first of all. It is not good for the customer to do that for him, nor is it good for his broker. That is just a commonsense rule.

Mr. KENNEY. I will refer to section 6 of the present bill before us.

If the customer wanted to buy $10,000 worth of stock he would be required to put up $6,000 under that section?

Mr. O'BRIEN. Yes, sir.
Mr. KENNEY. Now, suppose the customer did that.
Mr. O'BRIEN. Yes.

Mr. KENNEY. Had $6,000 up against $10,000 worth of stock and the next day the stock went down 2 or 3 points.

Mr. O'BRIEN. Yes, sir.

Mr. KENNEY. Then, the broker would immediately begin to notify him to put up more margin and if he did not do that, he would seil all or some part, in order to straighten out his margin; is that not so? Is that your interpretation of that?

Mr. O'Brien. My interpretation is a little different. My interpretation is that there is absolutely no leeway beyond 60 percent. You have got to put it in shape.

Mr. KENNEY. As a broker, would you take a man's account on that basis? Let us say that a man wanted to buy $10,000 worth of stock, would you accept his $6,000?

Mr. O'BRIEN. Certainly.

Mr. KENNEY. And the next day if the price of the stock went down a point, under this law, he would be immediately sold out? Mr. O'BRIEN. You would not sell it all out. Mr. KENNEY. Would you not have to sell it out? Mr. O'BRIEN. No. Mr. KENNEY. Or violate the law?

Mr. O'BRIEN. He would not have to sell it all out. All you would have to have would be 60 percent of the account.

Mr. KENNEY. Suppose that the customer did not want to sell.

Mr. O'BRIEN. Then he would have to protect, or we, under this act, as I read it, would have to bring his account to a 60 percent basis.

Mr. KENNEY. Now, under the act, or even under the 30-percent rule, the trader is trading against the legal margin, rather than the market price of the stock; is not that so?

Mr. O'BRIEN. I do not understand that question. I wish you would repeat it.

Mr. KENNEY. All right. A man buys $10,000 worth of stock.
Mr. O'BRIEN. Yes.

Mr. KENNEY. He puts up $6,000 and gets credit somewhere else for the balance, which is carried on the margin.

Mr. O'BRIEN. Yes.

Mr. KENNEY. Now, he has an equity of $6,000 in that stock which ought to entitle him to carry that stock some distance, at any rate; but even though he has $6,000 up, under this section, with such a margin requirement, if the stock fell a point, he would be required to unload, even thought the market price of the stock were still up around 90 and he had $6,000 in the stock; is not that so?

Mr. O'BRIEN. Well, he could not have $6,000 in the stock if the price had declined, if he put up $6,000.

Mr. KENNEY. Suppose it fell 5 points, he would have $5,500 in there and yet he would be sold out, would he not?

Mr. O'BRIEN. In using the term "sold out", you mean all or in what manner?

Mr. KENNEY. Would his broker carry him?

Mr. O'BRIEN. Under this law, he could not carry him except under a 60-percent basis, so what he would have to do, unless the customer put up additional money would be to bring that up to a 60percent basis. It would be liquid enough if the securities were put on 60.

Mr. KENNEY. In other words, nobody would ever be safe unless he put up about 85 percent of the stock; is not that so, under that law?

Mr. O'BRIEN. No, sir.
Mr. KENNEY. It is not so?
Mr. O'BRIEN. I do not think so.

Mr. KENNEY. Well, how much do you say that he would have to put up over the legal margin?

Mr. O'BRIEN. Sixty percent.

Mr. KENNEY. That does not protect him. You say that you have got to sell a part of his stock if the market goes down.

Mr. O'BRIEN. I know; but when a man buys on the margin, he expects that he has got to keep that margin good, whether a 60-percent or a 30-percent margin.

Mr. KENNEY. In other words, you simply mean that if a man puts up $6,000 and the stock goes 2 points down, tomorrow he has got to come back and put up $200 more?

Mr. O'BRIEN. Under the law.
Mr. KENNEY. And keep coming back?
Mr. O'BRIEN. Under the law.

Mr. KENNEY. If a man wanted to buy stocks and did not want to be troubled to keep coming back with more margin every time the market fell 2 or 3 points, he would have to put up a margin considerably in excess of 60 percent?

Mr. O'BRIEN. That is correct, and we believe-

Mr. KENNEY. Does it not occur to you that he might have to go as high as 85 percent?

Mr. O'BRIEN. He could go to whatever he thought necessary, whatever his judgment was as to what was necessary to prevent his receiving a call. I would not want to guess as to that.

Mr. KENNEY. Would there not be a greater danger under that rule than where no margin was required, because he would be gambling against this margin requirement every day. Mr. O'BRIEN. I believe that.

That is the objection we have to that, it has no flexibility, and we think it is excessive.

Mr. KENNEY. And the stock might go down 2 or 3 points, and you would call upon him immediately.

Mr. O'BRIEN. Yes.
Mr. KENNEY. In any part of the day?

Mr. O'BRIEN. Any part of the day. However, I do not think that it would be figured that close. I think that you would take the close of the day as the basis for your 60 percent, rather than the fluctuations previously.

Mr. BULWINKLE. Mr. Chairman
The CHAIRMAN. Mr. Bulwinkle.

Mr. BULWINKLE. Mr. O'Brien, in the last part of your statement you say:

Let the Government assist us by legislation to prohibit unethical practices and control unethical individuals whom we cannot reach.

What unethical practices now continue on any stock exchange?

Mr. O'BRIEN. That is just what I was talking about a while ago. There is a difference of opinion as to what is unethical, probably.

Mr. BULWINKLE. Well then, let me get down to that. What unethical practices continue on your own exchange?

Mr. O'BRIEN. Personally, we think we are amply covered.

Mr. BULWINKLE. Then, do you know of any unethical practices that continue on any exchange?

Mr. O'BRIEN. No, sir; no; I would not say that I do.

Mr. BULWINKLE. Well, not knowing of that, but just having an idea of it, what legislation would you have the Congress to enact to prohibit unethical practices?

Mr. O'BRIEN. That is rather a difficult question.

Now, if we could put in detail what are unethical practices and who practices those things, what consists of an unethical practice, we

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