Mr. MAPES. Take the alcohol stocks. That was within a 90-day period.

Mr. CORCORAN. You would not mind soaking them in the alcohol matter, would you?

Mr. KENNEY. Do you mean that literally?

Mr. CORCORAN. No, sir.

Mr. MAPES. Without any reference to the soaking feature of it, why should a man get more than he has been injured?

Mr. CORCORAN. At some point during the operation of a pool, or during the dissemination of false information, the purchaser who buys goes into the market. You know at what time he bought the stock and what he paid for it. You do not know on what date or at what price he might have bought the stock except for the dissemination of the information or the operation of the pool. There is no way of fixing that other date or price. The bill therefore just gives the purchaser the most advantageous price for him over a period of 90 days.

Mr. MAPES. Suppose he buys the stock at 100, senses that something is wrong and sells at 90, and it goes down to 40. Why give him the opportunity of recovering all of that difference, when he has not suffered that loss?

Mr. CORCORAN. There are two cases to distinguish. One case is where a purchaser actually sells and we know what his loss is. The other case if where he hangs on. In that case you never know his actual loss. There should be a distinction of that kind made.

Mr. MAPES. I can see where he hangs on that there might be justification for it, but of he sells out and he has not actually suffered, that is a different situation.

Mr. CORCORAN. I think you are quite right.

Mr. MAPES. I do not see why he should be allowed to recover so much more damages than he had suffered.

Mr. CORCORAN. Paragraph (e) fixes a limitation for suits of 2 years after the discovery of the violation.

Section 9, page 20: That forbids short-selling and stop-loss orders except in accordance with such regulations as may be prescribed by the Commission. Subsection (c) says, "Thou shalt not devise any other cunning devices."

This section 9 relates to matters which a great many people think ought to be absolutely forbidden. You heard a witness here say the other day that short selling should be legislated out of existence. The theory of this bill is that no one yet knows enough about short selling to know whether it should be legislated out of existence, or whether it might not be handled as a possibly useful tool of the market under regulations devised by the Commission.

The same thing is true about the stop-loss orders. Of course subsection (c) is a catch-all clause to prevent manipulative devices I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices.

Now, section 10 raises a problem on which there will be a great deal of discussion, that is the segregation of the functions of the broker, the specialist, the dealer, and the underwriter.

There are many houses-in New York, and throughout the country that combine three or four functions. They float an issue as an underwriter or act as members of underwriting syndicates. As such they

have a real interest in the market for particular securities and so that they will have a reputation to induce investors to buy other issues when floated by him.

Those same underwriting houses, as merchants, buy and sell stocks from and to the public for their own account for a merchandizing profit whenever they can get an opportunity. And those same houses act in a third capacity as brokers executing orders for a commission. There are certainly difficulties about having those first two functions combined with that of a broker. It is very hard for a man to sit on 3 sides of the fence at the same time, or even on 2 sides of the fence, particularly when as a matter of practice your broker acts not only as an agent who executes your own orders, but also as your investment lawyer to give you advice as to what securities to buy and sell.

Look at the alcohol situation again. There a stock-exchange house that was a participant in the pool thus acting as a dealer for its own account was sending out every day in "flashes" to its brokerage customers tips to buy the stock. The house was therefore acting in two capacities and it is awfully hard to serve your own interest and serve your customer's interest at the same time.

Now, the difficulty is that there is no underwriting at the present time, has not been for a long time and may not be for a long time to come, simply because the public will not buy.

Many underwriting houses without underwriting business are holding their staffs together by a "back log" of commissions from a sideline of brokerage business. As the Dickinson report said, in the abstract there is no question at all but that the functions of broker and dealer should be divorced but you have the immediate problem of what you are going to do if you break up the present organization of the brokerage underwriting and dealer business, at a time when of the two branches of the business, one is uneconomic, and the branch earning brokerage commissions is carrying the whole pay roll of both branches.

There is one other kind of mechanician of the stock exchange in whom you are particularly interested. That is the floor trader who buys a seat, goes on the floor and there trades in and out for his own

account.

Now, all member brokers on the stock-exchange floor are to some extent floor traders for their own account as well as brokers for the public; but there are a certain number of members-I understand from estimates I have heard about 100 out of thirteen hundred and some members listed-who are just trading on their own account.

You put an order through a broker. It gets on the floor, is executed and reported over the ticker. You put in that order on the basis of what you or your broker's office saw coming out over the ticker, which showed the last transaction. But the floor trader buys a seat on the exchange, sees transactions before they get to the ticker, and in his trading has a 6-minute jump on you by being on the floor. Mr. MAPES. He is called a dealer?

Mr. CORCORAN. He is a floor trader.

Mr. MAPES. What is the difference between him and a dealer? Mr. CORCORAN. He is on the exchange floor. A dealer is usually off the floor. He is a special kind of dealer, who actually stands on the stock-exchange floor and trades at the post

Mr. MAPES. He is a dealer but is not on the floor?

Mr. CORCORAN. The term "dealer" is broad enough to include this special kind of a dealer who trades on the floor, and other dealers, who deal off the floor.

Mr. MAPES. The dealer includes him.

Mr. CORCORAN. The term "dealer" includes the floor trader.

Mr. MERRITT. The floor trader acts only for himself, or buys and sells for others?

Mr. CORCORAN. Sometimes. He is a fully accredited member of the exchange and he can if he wants to, buy and sell for others as a broker. I saw some figures the other day, estimates, which came from Mr. John Flynn, who is working with the Fletcher investigating committee, to the effect that last year, I do not know how accurate they are, I am simply reporting something that was told to methat last year the floor traders affected about half of the transactions on the floor of the stock exchange.

The justification for throwing them off the floor is that there is no reason why any trading for himself should have a jump on the rest of the buying public by being on the floor and knowing what is going on whereas the rest of the public has to buy strictly from the ticker outside.

The argument that is put up for them is that because they are in and out, in and out, in and out, on the floor, and can keep up with the fluctuations the difference between sales funds to be the quarter of a point, or three eighths of a point, or whatever other minimum spread the floor transfer can operate on. The answer to that argument is that while the floor trader may keep the market within narrow limits from sale to sale, he certainly does not keep the market narrow over the day, because that would require him to take a risk in the market which he simply will not do. His profits depend upon his running along and playing with the trends and not getting caught taking positions.

This bill simply says that no member of the exchange and nobody else doing a brokerage business through a member of the exchange can be anything but a broker. It goes the whole way in segregating brokers from dealers. The Twentieth Century Report went the whole way too.

The CHAIRMAN. We will go on again tomorrow at 10 o'clock.

have a real interest in the market for particular securities and so that they will have a reputation to induce investors to buy other issues when floated by him.

Those same underwriting houses, as merchants, buy and sell stocks from and to the public for their own account for a merchandizing profit whenever they can get an opportunity. And those same houses act in a third capacity as brokers executing orders for a commission. There are certainly difficulties about having those first two functions combined with that of a broker. It is very hard for a man to sit on 3 sides of the fence at the same time, or even on 2 sides of the fence, particularly when as a matter of practice your broker acts not only as an agent who executes your own orders, but also as your investment lawyer to give you advice as to what securities to buy and sell.

Look at the alcohol situation again. There a stock-exchange house that was a participant in the pool thus acting as a dealer for its own account was sending out every day in “flashes" to its brokerage customers tips to buy the stock. The house was therefore acting in two capacities and it is awfully hard to serve your own interest and serve your customer's interest at the same time.

Now, the difficulty is that there is no underwriting at the present time, has not been for a long time and may not be for a long time to come, simply because the public will not buy.

Many underwriting houses without underwriting business are holding their staffs together by a "back log" of commissions from a sideline of brokerage business. As the Dickinson report said, in the abstract there is no question at all but that the functions of broker and dealer should be divorced but you have the immediate problem of what you are going to do if you break up the present organization of the brokerage underwriting and dealer business, at a time when of the two branches of the business, one is uneconomic, and the branch earning brokerage commissions is carrying the whole pay roll of both branches.

There is one other kind of mechanician of the stock exchange in whom you are particularly interested. That is the floor trader who buys a seat, goes on the floor and there trades in and out for his own

account.

Now, all member brokers on the stock-exchange floor are to some extent floor traders for their own account as well as brokers for the public; but there are a certain number of members-I understand from estimates I have heard about 100 out of thirteen hundred and some members listed-who are just trading on their own account.

You put an order through a broker. It gets on the floor, is executed and reported over the ticker. You put in that order on the basis of what you or your broker's office saw coming out over the ticker, which showed the last transaction. But the floor trader buys a seat on the exchange, sees transactions before they get to the ticker, and in his trading has a 6-minute jump on you by being on the floor. Mr. MAPES. He is called a dealer?

Mr. CORCORAN. He is a floor trader.

Mr. MAPES. What is the difference between him and a dealer? Mr. CORCORAN. He is on the exchange floor. A dealer is usually off the floor. He is a special kind of dealer, who actually stands on the stock-exchange floor and trades at the post

Mr. MAPES. He is a dealer but is not on the floor?

Mr. CORCORAN. The term "dealer" is broad enough to include this special kind of a dealer who trades on the floor, and other dealers, who deal off the floor.

Mr. MAPES. The dealer includes him.

Mr. CORCORAN. The term "dealer" includes the floor trader.

Mr. MERRITT. The floor trader acts only for himself, or buys and sells for others?

Mr. CORCORAN. Sometimes. He is a fully accredited member of the exchange and he can if he wants to, buy and sell for others as a broker. I saw some figures the other day, estimates, which came from Mr. John Flynn, who is working with the Fletcher investigating committee, to the effect that last year, I do not know how accurate they are, I am simply reporting something that was told to methat last year the floor traders affected about half of the transactions on the floor of the stock exchange.

The justification for throwing them off the floor is that there is no reason why any trading for himself should have a jump on the rest of the buying public by being on the floor and knowing what is going on whereas the rest of the public has to buy strictly from the ticker outside.

The argument that is put up for them is that because they are in and out, in and out, in and out, on the floor, and can keep up with the fluctuations the difference between sales funds to be the quarter of a point, or three eighths of a point, or whatever other minimum spread the floor transfer can operate on. The answer to that argument is that while the floor trader may keep the market within narrow limits from sale to sale, he certainly does not keep the market narrow over the day, because that would require him to take a risk in the market which he simply will not do. His profits depend upon his running along and playing with the trends and not getting caught taking positions.

This bill simply says that no member of the exchange and nobody else doing a brokerage business through a member of the exchange can be anything but a broker. It goes the whole way in segregating brokers from dealers. The Twentieth Century Report went the whole way too.

The CHAIRMAN. We will go on again tomorrow at 10 o'clock.