Mr. WHITNEY. Executing orders, or trading if they wish. We call it trading, whenever he executes an order. That is making a contract. Perhaps that would be the better way of expressing it.

Our rules are very specific that only members may execute orders or make contracts on the floor of the exchange.

Again, the fact of the responsibility resting upon a person elected to the exchange and having the responsibility finally of any contract that he enters into, again risking as I said before his money. If it were a clerk, upon whose responsibility would his actions rest? Mr. WOLVERTON. Mr. Chairman.

The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. Mr. Whitney, does the specialist have power to trade for his own account and if so, on what terms?

Mr. WHITNEY. As I have just described, sir, he may trade. He may not trade if he has orders at a price to buy, he may not buy at that price, until his orders have been executed. If he has a market order to buy, or to sell, he may not trade for his own account. If he has a market order to buy, he may not trade for his own account until that order has been executed, and vice versa.

And in trading for himself, if it is on orders entrusted to him—in other words, if he buys from a seller whose order he has, he must, as I have just described, bid and offer in the open market, so that anybody may intervene and, after doing that, he must establish the fair price and he must have the approval of the broker who has given him the order, representing the customer, and approving that the price is fair, as against the prevailing market then existing.

Mr. WOLVERTON. Do you feel that the present rules and regulations of your exchange prevent him from taking any undue advantage of his position?

Mr. WHITNEY. I do, sir.

We have studied this question for years, to find out anything that would improve the system as it existed. Men have gone abroad and studied the various other systems and we know of no way, sir, where the public could be better served by any better system that we can find out.

Mr. WOLVERTON. I think it was recently revealed in the hearings before the Senate committee, that a certain individual was able to make something over $138,000 as a specialist dealing in a particular stock. Do you know whether that was made possible by reason of his position?

Mr. WHITNEY. If I remember that particular individual was long, so many thousand shares of stock when he had tremendous orders to sell, which would imply that it was his judgment, as against what was shown in the orders he had on hand, and was not to anybody's disadvantage. I think it was also shown that when the break occurred in July, that particular specialist took some 10,000 shares in order to open the market, on orders, in his stock, and on that particular stock then almost immediately dropped another 20 points, and he lost $58,000 and again $45,000, which almost equalled what he had previously made.

Mr. WOLVERTON. The net result, as I understand is, that he had made $138,000 in 3 months on that particular stock and I am anxious to know whether that was made possible by reason of the knowledge he had gained as a specialist in that particular stock.

Mr. WHITNEY. No, sir; if that is the net price, I would not say that that was made possible because of his knowledge as a specialist. It was because of his own individual ability to interpret the trend of the market.

Mr. MERRITT. Mr. Chairman

The CHAIRMAN. Mr. Merritt.

Mr. MERRITT. Is it your view that section 10 should be eliminated, or can it be altered to advantage?

Mr. WHITNEY. As in my suggestions of last night, I think it is the subject for very serious study; to have it as it now reads, I think it should be eliminated, but I think naturally there is a point of view on many subjects connected with the operation of the exchangeMr. WOLVERTON (interposing). That study should be made by the special committee you suggested?

Mr. WHITNEY. That is my thought.
Mr. HUDDLESTON. Mr. Chairman-
The CHAIRMAN. Mr. Huddleston.

Mr. HUDDLESTON. Mr. Whitney, may I ask, are orders to buy or sell "at the market" handled by specialists?

Mr. WHITNEY. At times, sir, yes, when the floor brokers representing firms are unable to execute them themselves. I think it is a fair thing to say that it very often happens that I will go in with a market order to buy or to sell to a specialist in a particular stock and I will find then that the market is so broad, that I cannot execute it. I have got to unite and I cannot afford to do that; the market is so broad, that I cannot execute the order immediately, because it would be deterimental to my customer. I then leave the order with the specialist to execute to the best advantage of my customer and that is done very frequently.

Mr. HUDDLESTON. Would a specialist be permitted to buy on his own account, when he was handling an order to sell "at the market"?

Mr. WHITNEY. Yes, sir; if the broker who entrusted the selling order to him approved of his purchase of the stock from that order. He would not be allowed to sell for his own account while handling that specific order.

Mr. HUDDLESTON. In that kind of a case, his interest might conflict with that of the customer.

Mr. WHITNEY. But, sir, he cannot take that stock unless it is justified by the prevailing market, by bidding and offering, and at an eighth differential, and thereafter confirming with the broker who gave him the selling order, and who represents the customers and getting the approval of that broker that it was a fair price in conformation with the prevailing market.

Mr. KENNEY. Mr. Chairman

The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. The specialist's books have been common property in certain circles, at times, have they not?

Mr. WHITNEY. At the discretion entirely of the broker, of the specialist.

Mr. KENNEY. Many of the specialists have been associated with firms having membership on the exchange, have they not?

Mr. WHITNEY. I do not think I quite understand you.

Mr. KENNEY. Associated.

Mr. WHITNEY. Associated in what way; partners?

Mr. KENNEY. Not as partners, but having their offices together. Mr. WHITNEY. Oh, I believe so; yes.

Mr. KENNEY. And many tips have emanated from that reason from the specialist's books, a tip that went out to the public?

Mr. WHITNEY. That might be possible.

Mr. KENNEY. That has been frequent, has it not?

Mr. WHITNEY. I have truly no knowledge of that fact. It might certainly be possible, but a tip is not always correct.

Mr. KENNEY. I realize that.

Mr. MARLAND. Mr. Chairman-
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. One more question. Mr. Whitney, your rule prohibits a specialist in the market disclosing his books.

Mr. WHITNEY. Except to a governor of the exchange acting in an official capacity, yes, sir.

Mr. MARLAND. Would it not be a more reasonable rule if a specialist were required to disclose his books, or his orders to sell, to any prospective purchasers, showing that he has a certain amount of certain securities to sell, with the range of the prices at which he has orders to sell? Would it not make a better market if a prospective buyer had that information made available to him through his brokers?

Mr. WHITNEY. Mr. Marland, that has been allowed up to February 13, at the discretion of the specialist, but that he might not, in any case, divulge stop-loss orders or stop orders to any inquirer nor could he divulge from whom he had orders.

That matter has been under great discussion for a period of years and we definitely decided some 2 or 3 or 4 months ago that some rule should be adopted in that regard to make it perfectly definite just what the specialist should be allowed to do, rather than allowing him complete discretion, with the exceptions I have noted.

The first suggestion was that he should be allowed to disclose the book for one point below the bid price, and one point above the offering price; but after a very general discussion by the governors of the exchange and with the advice of many outside of the governing committee, discussions with specialists, and people interested in the running of offices, they felt that the best rule would be not to allow any diclosure whatsoever other than mere quotations of the market when asked.

Mr. MARLAND. In almost every other line of business the customer who wishes to buy goods has the information as to how much goods are available and at what prices. Why not have a free market for securities, permitting the customer to have that information?

Mr. WHITNEY. He may have the information, sir, as to how many shares are offered at the price quoted by the specialist or how many shares are wanted at the bid price quoted by the specialist. That may be given, but beyond that point, the bid and offered price and the amount wanted and offered at those prices, our rule prevents the giving of that information.

Mr. MARLAND. I am not so sure the customer is entitled to know how many offers there are on that side of the books, but I feel a customer for stocks should know how many shares are offered and at what range. You disagree with that.

Mr. WHITNEY. Yes, sir; I think I do from the point of view that there is the possibility of abuse that in giving that information some

may use it in ways-that outsiders may use it in a way—that would be to the detriment of the market, and those that are inquiring may or may not be entitled to such information as they might be entitled to as against some other inquiry, and therefore we felt it best to prevent any disclosure except as I have outlined.

Mr. MARLAND. Just this particular question, and that rule operates in this way: It gives the specialist information that no one else possesses, and which he might under certain circumstances use to his own advantage.

Mr. WHITNEY. In perfect frankness, sir, I do not know how. He may sell stock for his own account or he may buy stock for his own account against the orders on his book, but he must bid and offer in the open market before doing it, and any other broker who has an order, or for his own account, may intervene, and buy or sell the stock when bids are made by the specialist, and he must get the definite approval of the broker who is representing the customer that the price given is a fair price and conforms to the then existing market before the contract is confirmed.

Mr. MARLAND. Is he a trader permitted to trade on his own account?

Mr. WHITNEY. Yes, sir.

Mr. MARLAND. Do you think that that information is not valuable to him as a trader?

Mr. WHITNEY. I would like for you to ask that question of those that are more particularly specialists in stocks.

For some 15 or 20 years I have been a specialist in bonds, and I do not think from my own experience that is an advantage You can never tell, sir, what other orders are going to come into the market, and you definitely run a risk when you take any for your own account or sell any for your own account, and I do not see, under present rules, where the specialist is operating to his advantage, talking about not individually possible cases that may exist, but in the long run, and to the disadvantage of the public; but I honestly believe very definitely he is a source of tremendous benefit to the public in making markets for them.

Mr. MARLAND. I agree. I think that he is more or less a benefit, but I think he is a very expensive one.

Mr. LEA. Mr. Whitney, is it not pretty much a question as to whether or not he acts with fidelity to his customers? Is that not the important test?

Mr. WHITNEY. Absolutely. There is no question about it.

Mr. LEA. And if the broker who represents the customer protects the customer, the mere fact that he has got the order and gives it to the specialist should not mean, then, that the customer would not have ample protection?

Mr. WHITNEY. Would not?

Mr. LEA. Would have ample protection. In other words, the broker can protect his customer if he is disposed to do it, with the specialist; is that true?

Mr. WHITNEY. Yes, sir; and I just cannot see where the broker is not going to protect his customer, because, as I said yesterday, it is the customer who gives him the business. If that customer felt he was being misused, he can write the exchange, and the specific case

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will be investigated, and if we find a price has been given to which the broker was in approval and should not have been in approval, there will be a correction as to that price demanded by the exchange.

Under our rules, every order is time-stamped, and we have the tape stamped, as well, by a time stamp, and we can investigate specifically as to each minute, and do so thousands of times per year as a result of just such complaints, and that can always be done where they are brought in to us.

Mr. LEA. Would you agree, if the specialist acts in the dual capacity of agent and owner, that in that case where he acts as an owner or purchaser himself, his relationship to the stock should be disclosed to the customer or the customer's agent?

Mr. WHITNEY. Yes, sir; it is disclosed absolutely to the customer's agent. There is no question about that. The specialist does not send a report to the customer's agent that "I have sold for your account" so many hundred of shares, and he, the specialist, being the purchaser. If he is the purchaser, he must send for the broker who has the order of the customer and who gave it to the specialist, or the representative of that broker, and say to him, "I have bought from you at" such and such a price, "so many shares", and then if the representative of the broker approves and agrees, a contract is made between the two. Mr. PETTENGILL. Mr. Chairman

The CHAIRMAN. Mr. Pettengill.

Mr. PETTENGILL. But, in view of the camoraderie existing among men, which prevails even among Members of Congress, just what protection does that mean to the customer? That is, to have the broker approve the price the specialist obtains for the customer?

Mr. WHITNEY. Well, in the first place, as I have said, he has an absolute, absolutely the right to make objections, if he feels he has not been fairly treated, and how it can be conceived that one is to carry on a business without giving proper service to the other person, possibly giving an advantage to some one else to the detriment of one's customers, and expecting those customers to continue to do business with one is, to my mind, inconceivable. It could not exist in any other business, and why should it in the stock business?

Mr. PETTENGILL. Well, the specialist has exclusive knowledge with reference to the facts disclosed on the books, but the broker does not in turn transmit that information back to the customer, back in Dubuque, Iowa?

Mr. WHITNEY. Mr. Pettengill, this is a selling order we are talking about, let us say. The customer has 100 shares of Steel to sell at 58, limit. That is on the specialist's book to sell. That is the price at which the customer wishes to sell. The stock sells by bids and offers in the open market and the specialist buys it at 58. He is required to take that stock that was on his book, and send for the broker. Then it is confirmed, and in that case there is no possible question as to the interest of the customer, because he elected to sell his stock at 58. The only possible occasion that could come under your question is when the selling broker representing the customer had given a market order to the specialist.

Mr. PETTENGILL. Does not that happen often?

Mr. WHITNEY. It does happen, but far less frequently than the cases of the limited orders.