today. Mr. Allshue, realizing that he would not have today an opportunity to present to you his statement, prepared a brief memorandum, to which is attached a document describing the workings of the committee on stock listing requirements of the exchange as they exist today, and the action of the changes in listing requirements and policies of the committee which have been made since 1926.

With your permission, I will submit for the convenience of the committee, a copy of this memorandum and document. It goes into the subject very completely, into the progress that has been made, and the details demanded by the New York Stock Exchange as to corporation listings.

Mr. HUDDLESTON. How extensive is that material?

Mr. WHITNEY. That is a covering letter, Mr. Chairman, and a bound volume, I should say, of about 15 pages.

Mr. HUDDLESTON. I suppose that it would be better to file it with the clerk rather than print it in the record.

Mr. WHITNEY. Very good, sir.

With your permission, I would like to have you hear from Mr. Arthur F. Hetherington, a partner of the New York Stock Exchange firm of De Coppet & Doremus, one of three large odd-lot dealers, house members, of the New York Stock Exchange.

Mr. HUDDLESTON. We will hear Mr. Hetherington.

STATEMENT OF ARTHUR F. HETHERINGTON, MEMBER OF NEW YORK STOCK EXCHANGE FIRM OF DE COPPET & DOREMUS, NEW YORK CITY

Mr. HETHERINGTON. Mr. Chairman, I wish to thank the committee for the privilege of presenting the following statement on behalf of the odd-lot dealer system of the New York Stock Exchange. Let me explain that an odd lot of stock is a denomination of shares less than 100. I shall take the liberty of reading the headings of my paragraphs as well as the context.

THE ODD-LOT DEALER SYSTEM OF THE NEW YORK STOCK EXCHANGE IS A PRIMARY FACTOR IN DISTRIBUTING SMALL LOTS OF STOCK TO THOUSANDS OF SMALL HOLDERS THROUGHOUT THE UNITED STATES

Eighty-eight percent of the number of stockholders of 48 representative American corporations, at the end of 1931 (the last year when these figures were compiled) were holders of less than 100 shares of stock.

If a somewhat lesser percentage, let us say 80 percent, is applied to the estimated total number of holders of stock in American corporations, the number of holders of small lots-that is, of odd lots, or less than 100 shares-is indicated as reaching the enormous total of 14,000,000.

Although an exact census of the number of these holders of small or odd lots of stock does not exist, this approximation reveals that a phenomenon of tremendous social-economic significance has occurred in the United States.

A vast army of its citizens has become part owners of its corporations, great and small. This huge assembly of small stockholders is composed of workers in the railroad, telegraph, telephone, and other

companies, of white-collar workers, laborers, of professional men and women; also of the customers of these corporations, the consumers of their products, the small householders of the land.

In no other nation of the world, has this remarkable sharing of capitalistic ownership been spread to the masses of the people. In no other land, does this basis exist for the further spread to the people of the intrinsic wealth of the country. It is as important a bulwark against communism as are savings bank deposits and insurance policies.

But at the same time it is a striking presage of a broader distribution of the country's wealth to the people.

The odd-lot dealer system of the New York Stock Exchange has not only been an instrument of primary importance in achieving this distribution. It has been and now is the means of maintaining for these small lots of stock a market of a breadth and safety that no other system thus far devised has been able to attain.

Yet the proposed National Securities Exchange Act of 1934 would put this odd-lot dealer system completely out of business.

PROVISIONS OF THE BILL BEFORE THIS COMMITTEE WHICH WOULD DESTROY THE ODD-LOT SYSTEM OF THE NEW YORK STOCK EXCHANGE

It is our understanding that the chief objective of the Congress and the President in the proposed legislation, are to secure the elimination of any practices considered to be against the public interest and to eliminate, so far as it may be possible, unnecessary, unwise, and destructive speculation.

I shall describe briefly the odd-lot dealer system, its evolution, operation, character, and achievement. I hope to be able thereby to show that neither of the objectives just stated will be advanced in the slightest degree by legislating the odd-lot dealer system out of existence.

On the contrary, legislation against the odd-lot system would be a definite blow against the public interest.

The destruction of the odd-lot dealer system would be accomplished by section 10 which makes it unlawful for any member of a national securities exchange to act as a dealer in securities.

Under section 3, any person engaged in the business of buying and selling securities for his own account is a dealer. As the sole business done by the odd-lot dealer firms is to buy and sell securities for their own accounts, it would appear that if these provisions become law the only recourse of the odd-lot dealers is to go out of existence.

Another provision of the bill which threatens the existence of the odd-lot dealer system is that which prohibits short selling with exceptions as provided by the Federal regulatory commission. As will be explained later, the odd-lot dealer is forced to be either short or long of every stock in which he deals. He has no volition. It is, therefore, evident that without the privilege of being short of stocks, the oddlot dealer is unable to carry out his vastly important function of providing a market for the small investor. Further discussion of this important subject will be given later.

Does the bill carry the intention of ending the odd-lot dealer system?

The interpretation of the two sections previously quoted (not including that dealing with short selling) may be based upon inac

curate phrasing of the provisions. If this is the case, if it is not the intention of the sponsors of this bill to destroy the odd-lot dealer system, we pray this committee to clarify and to do so specifically.

It would seem, however, that the drafters of the bill did not intend to outlaw the odd-lot dealer (as we have just pointed out may be done by section 10) because section 18 (c) indicates that the continuance of the odd-lot business is intended. This section, 18 (c), specifically gives the commission the power to prescribe rules and regulations for the odd-lot dealer. There would be no need for prescribing rules and regulations for the odd-lot dealer if it had been intended that he should be outlawed.

If it is the intention of the framers of this bill to destroy the odd-lot dealer system, we crave your earnest consideration of the following facts.

Mr. KENNEY. Would you mind explaining how the odd-lot system works?

Mr. HETHERINGTON. I do that, I believe, Mr. Kenney, further on. Mr. KENNEY. Very well.

Mr. HETHERINGTON. The odd-lot dealer system is virtually an exchange within the exchange, for the purpose of giving the small investor the benefit of the market which otherwise would be available only to large investors.

The working of the odd-lot dealer system is as follows:

Let us assume that a customer of a stock exchange commission brokerage firm desires to sell 10 shares of Steel. He gives his broker an order to sell 10 shares at the market. As the unit of trading on the New York Stock Exchange is 100 share, this 10-share order cannot be executed in the usual way.

The odd-lot order to sell 10 shares of Steel is sent by the commission brokerage firm, not to its own broker on the floor of the exchange, but to the broker representing the odd-lot dealer. When the odd-lot broker receives the order, he will buy from the commisson firm 10 shares of Steel at a price one eighth of $1 lower than the price at which the next 100-share lot of Steel sells. If the next 100-share lot sells at 59, the odd-lot broker will buy 10 shares from the commission firm at 58%. The commission firm will charge its customer the usual commission for handling the order and deduct the stamp taxes from the proceeds. When the individual customer buys 10 shares of Steel, he pays one eighth of $1 more than the price of the next sale of a 100-share lot, plus taxes.

The commission brokerage house buys odd lots from the odd-lot dealer and sells them to him for the account of its individual customers. The commission broker acts as agent; the odd-lot dealer acts always as principal and in no other capacity. The odd lots which the dealer buys, he, in turn, sells either in 100-share lots or in odd lots. Similarly, the odd lots he sells are bought by him in the form of round lots and odd lots. In effect he therefore bunches odd-lot purchases and sales into units of 100 shares, for the purpose of trading out in the round-lot market.

The differential in the price one eighth more or one eighth less than the round-lot price is for the purpose of covering the dealers' expenses, including commissions to their brokers, taxes paid on roundlots sold, interest on capital, overhead in rental, equipment, and large staffs of employees, as well as the risks of price fluctuation inherent in

the work of trading in practically all the stocks listed on the New York Stock Exchange (except a group of highly inactive stocks that are segregated at one post).

This dealer system secures for the holder of a small lot of stock, sure, speedy, and accurate execution at a moderate cost in all kinds of markets, whether stagnant, normal, boom, or panic.

Mr. KENNEY. In other words, the odd lot is not bought and sold directly on the exchange, although the price of the odd lot is determined by the price of the market price of the security on the exchange. Mr. HETHERINGTON. That is true, except that the broker is a member of the stock exchange.

Mr. KENNEY. Yes.

Mr. HUDDLESTON. May I ask you in that connection whether the odd-lot dealer must be a member of the exchange?

Mr. HETHERINGTON. In all cases, in case of my own connections; yes, Mr. Chairman.

Mr. HUDDLESTON. Then how would this bill operate if the odd-lot dealer or the broker were not a member of the stock exchange?

Mr. HETHERINGTON. He can only operate on the stock exchange, or be connected with it, because the odd-lot dealer's commission is on the price paid, within that limitation.

Mr. HUDDLESTON. Then it would not be practical for the odd-lot dealer not to be a member of, or for the broker not to be a member of the exchange?

Mr. HETHERINGTON. I think that is a question, Mr. Chairman, that I answer further along, if I may be allowed to proceed.

The CHAIRMAN. Yes.

Mr. HETHERINGTON. The origin and the growth of the odd-lot dealer system have been based on successful fulfillment of needs.

Before the odd-lot dealer system reached a point of high organization, odd-lot orders were handled by the specialists in round lots and were inevitably the first to suffer whenever round-lot volume taxed the capacity of brokers. Odd-lot orders were troublesome to brokers as compared with round-lot orders as soon as round-lot orders became plentiful. Even as far back as 1873 this was the case. It was at about that time that the odd-lot dealer system had its origin. A broker here and there undertook to relieve other brokers of the pressure upon them of their odd-lot orders and soon began to give special attention to the handling of odd lots, also to the buying and selling of odd lots for their own account. This market for odd lots came to be highly valued as an aid and convenience to the general commission broker and to his odd-lot client. The dealer service grew because it proved its utility.

I trust it may not be thought presumptuous to claim for the odd-lot dealer system the merit that may derive from its evolution out of need. It has supplied this need by developing, over the period of a half century, a system which protects the interests of the odd-lot public.

ADVANTAGES TO THE PUBLIC OF THE ODD-LOT DEALER SYSTEM

The odd-lot dealer system has achieved many results of fundamental value to the odd-lot public, that could be gained in no other

way.

Four of these results are of outstanding importance:

First. The first is the establishment of a basic fixed relationship to the round-lot price, at a modest differential of one eighth more or one eighth less than the round-lot price. Before the present highly organized odd-lot system became fully operative, odd-lot price suffered irregular and heavy discounts from round-lot prices.

The odd-lot price differential is small as compared with the differential the buyer of small amounts of commodities is often compelled to pay in comparison with the buyer of large amounts. The buyer of an odd lot, for example, trades with the odd-lot dealer at the rate of only one eighth of a point more per share, plus taxes, than the buyer of 10,000 shares; whereas the buyer of a small measure of a commodity, such as coal, is often charged a very great price difference, as compared with the buyer of a large quantity.

Second. The second important result the odd-lot-dealer system has achieved in prompt and efficient service to the odd-lot public in a business of immense details. This requires highly developed odd-lot organizations.

Consider briefly the amount of detail necessary. Each day, the odd-lot dealers handle as many individual trades as are made in round-lots on the entire stock exchange.

This obviously involves an immense amount of labor, in the execution of orders and in the office work of bookkeeping and of splitting up, transferring, and delivering stock.

The odd-lot dealers have demonstrated their fitness for holding the public trust involved in the dealer system. The firms dealing in odd-lots are represented on the floor of the stock exchange by over 125 members of the exchange who devote their services exclusively to the business of one of their respective dealer firms. In normal times, some of these firms employ from 600 to 1,000 clerks. In active times, the employees of one odd-lot-dealer firm numbered 1,500.

The burden of these expenses could be carried only by a large volume of business. This is purely a production proposition and any material reduction in the volume of the dealers' business would make the employing of this large staff of clerks and brokers a financial impossibility.

I think perhaps, Mr. Chairman, that answers the question you had in mind. The volume of the business is very, very large.

Mr. HUDDLESTON. I understood you to say that the pending bill would destroy the odd-lot dealer's business because the odd-lot dealer had to be a member of the exchange. I am wondering whether it would be possible that the odd-lot business could be done through a broker or someone who was represented on the exchange.

Mr. HETHERINGTON. Well, the odd-lot dealer deals with brokers. who handle their business who are members of the exchange. It would seem impossible for that to be done, Mr. Chairman. They are brokers in a sense that many of the exchange brokers are considered, but they are not brokers in the sense that they are not principals except that they act for the odd-lot dealer.

Mr. HUDDLESTON. I understand that. But what I am wondering is whether the odd-lot dealer might take care of his business through someone who was represented on the stock exchange.

Mr. HETHERINGTON. Well, I think that the size of the business would practically make that impossible, Mr. Chairman.