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F o r r e l e a s e on d e l i v e r y T h u r s d a y , May 25, 1972. R e m a r k s by William McChesney Martin, J r . at t h e U n i v e r s i t y of Connecticut's G. M. Loeb A w a r d s Luncheon P l a z a Hotel New York City 12 noon, May 25, 1972. The m a i n t h r u s t of t h e r e p o r t on t h e s e c u r i t i e s m a r k e t s which I submitted to the Board of G o v e r n o r s of t h e New York Stock Exchange l a s t s u m m e r was the i m p o r t a n c e of c r e a t i n g a national exchange m a r k e t s y s t e m to provide an auction m a r k e t , r e g a r d l e s s of geographic location, for each s e c u r i t y qualified for l i s t i n g , and r e o r g a n i z a t i o n of t h e Board of G o v e r n o r s of the New York Stock Exchange to reflect in its g o v e r n a n c e the needs of a m o d e r n c o r p o r a t i o n s e r v i n g the public. Significant p r o g r e s s is being m a d e on both f r o n t s . On r e t u r n i n g to Wall S t r e e t after 30 y e a r s 1 a b s e n c e , it b e c a m e c l e a r to m e that a m a r k e t organized to p r o v i d e equal and r e s p o n s i b l e s e r v i c e to m o r e than 31 million A m e r i c a n s , and one whose p a r t i c i p a n t s could be expected to m o r e than double a s we m o v e f r o m the t r i l l i o n dollar to t h e quadrillion dollar economy, m u s t be nationwide in scope. Maximum liquidity with c e n t r a l i z e d d i s c l o s u r e of all executions of buy and s e l l o r d e r s and o t h e r m a t e r i a l facts is e s s e n t i a l . After t r a v e l i n g f r o m c o a s t to c o a s t and seeking the views of all s e g m e n t s of the financial community I b e c a m e convinced that the auction m a r k e t continues to be t h e f a i r e s t and b e s t suited to p e r f o r m t h i s service. F u l l e r d i s c l o s u r e than we p r e s e n t l y have and a s c e r t a i n a b l e r e s p o n s i - bility for all t r a d e s a r e t h e k e y s t o n e s on which t h e foundation m u s t be laid. Through t h e y e a r s t h e New York Stock Exchange h a s devloped such a market. More than half the common stocks publicly t r a d e d on all the f r e e -2- world m a r k e t s a r e l i s t e d on it. And during m y t e n u r e a s p r e s i d e n t t h e c o r n e r of Broad and Wall S t r e e t s was a communication n e r v e c e n t e r which caused o r d e r s a u t o m a t i c a l l y to g r a v i t a t e in its d i r e c t i o n . Today two new f o r c e s - - i n s t i t u t i o n a l i n v e s t o r s and c o m p u t e r s - - h a v e changed t h e e n t i r e s e c u r i t i e s i n d u s t r y . Both of t h e s e f o r c e s have m a t u r e d a p a r t f r o m the New York Stock Exchange and t h e r e is now s e r i o u s question as to whether the p r i m a r y equity m a r k e t will continue to be an exchange m a r k e t with concepts of listing and m e m b e r s h i p r e q u i r e m e n t s and r e s p o n s i bilities. An auction m a r k e t of the c u r r e n t type p r e s u p p o s e s one in which b r o k e r s a r e m o r e likely to be acting as agents than a s p r i n c i p a l s and t h e basic question now is whether this m a r k e t will gradually b e c o m e one in which the public m u s t p e r f o r c e deal a l m o s t exclusively with p r o f e s s i o n a l s as in so many E u r o p e a n m a r k e t s . Many t r a n s a c t i o n s in s e c u r i t i e s l i s t e d on the New York Exchange a r e now executed on v a r i o u s other Exchanges and in the t h i r d and fourth markets. If this o c c u r s under s i m i l a r r u l e s and r e g u l a t i o n s it m a y constitute competition which m a k e s for a b e t t e r m a r k e t , but w h e r e it o c c u r s b e c a u s e of unequal r e g u l a t i o n s , which among other things do not r e q u i r e full d i s c l o s u r e and equal r e s p o n s i b i l i t y of p a r t i c i p a n t s , I submit that it u n d e r m i n e s and i m p a i r s the depth, b r e a d t h and r e s i l i e n c y of the m a r k e t . Wherever I visited I was s t r u c k with t h e difficulties differences in d i s c l o s u r e of information and differences in a c c e s s to m a r k e t s have m a d e for t h e public and -3fiduciaries to obtain p r i c e s which they can confidently defend a s being the b e s t available at the t i m e . During five months of painstaking work and observation I noted many undisclosed t r a n s a c t i o n s , or t r a d e s , w h i c h w e r e r e p o r t e d long after the fact, which, in m y judgment, w e r e m a d e to o r d e r for t h e manipulator and t h e o p e r a t o r . T r a d e s of t h i s type over a p e r i o d of t i m e i m p a i r liquidity and put the little m a n at t h e m e r c y of t h e professionals. Certainly no one doubts t h a t t h e i n t e g r i t y of m a r k e t s is at the c o r n e r s t o n e of public confidence. All of our m a r k e t s a r e now subject to s u p e r v i s i o n under t h e S e c u r i t i e s Acts and the operating c r i s e s of the p a s t few y e a r s have been and continue to be reviewed by C o n g r e s s i o n a l c o m m i t t e e s . It is doubt- l e s s just a m a t t e r of t i m e until we have i m p o r t a n t r e v i s i o n s in t h e c u r r e n t law and in all probability e n t i r e l y new s e c u r i t i e s legislation. Some people y e a r n for a r e t u r n to t h e "good old days 11 when selfregulation in the p u r e s e n s e , without any s p e c i a l Government s u p e r v i s i o n , was the o r d e r of the day. This is n e i t h e r p r a c t i c a l nor d e s i r a b l e in light of the r e c o r d over r e c e n t d e c a d e s . C u r r e n t l y t h e S e c u r i t i e s and Exchange C o m m i s s i o n i s justified in seeking m o r e a u t h o r i t y and substantially l a r g e r a p p r o p r i a t i o n s for a d m i n i s t r a t i v e p u r p o s e s . To s e r v e the i n t e r e s t s of t h e public and t h e nation, which depend on the s e c u r i t i e s m a r k e t s to r a i s e the capital n e c e s s a r y to finance t h e economy, as well a s the i n t e r e s t s of the s e c u r i t i e s i n d u s t r y , a new national c e n t r a l -4- m a r k e t s y s t e m should be developed a s r a p i d l y as p o s s i b l e . I a m gratified that this p r o p o s a l s e e m s to b e a c c e p t e d g e n e r a l l y and t h e E x c h a n g e s , with t h e b l e s s i n g of t h e S. E. C. and th.6 cooperation of many who a r e now n o n m e m b e r s , a r e actively working to achieve it. Many details involved in c r e a t i n g a single consolidated exchange t a p e m u s t still be worked out but t h e r e is no question about i t s feasibility and few question its d e s i r a b i l i t y . The work of BASIC under t h e l e a d e r s h i p of John Meyer and H e r m a n Bevis and the broadening of the N. Y. S. E. C e n t r a l Certificate Clearing Corporation, and t h e ingenious new a u t o m a t e d t r a d i n g s y s t e m , " A m Code, M offered a s a prototype of a future national exchange by t h e A m e r i c a n Stock Exchange, a r e all evidences of this p r o g r e s s . And now let m e say a few things about c o m m i s s i o n s . Determining what c h a r g e s ought to b e , whether on a fixed or on a negotiated b a s i s , is complicated by the r e q u i r e m e n t s of c u s t o m e r s for s e r v i c e , r e s e a r c h , and advice. The b u s i n e s s of the s m a l l i n v e s t o r has n e v e r b e e n profitable p e r se in c o m p a r i s o n with l a r g e i n v e s t o r s and t h e popular belief that negotiating lower c h a r g e s on big o r d e r s will lead to lower c h a r g e s to the s m a l l i n v e s t o r is in my judgment f a l l a c i o u s . C u r r e n t c h a r g e s for agency t r a n s a c t i o n s a r e v e r y low c o m p a r e d t o the d e a l e r profit on net t r a n s a c t i o n s o v e r t h e counter and I a m inclined to believe that in the long r u n totally negotiated r a t e s will p r o v e costly to -5- investors. I ara fully a w a r e that t h i s is a judgment which can only b e p r o v e d by t i m e and e x p e r i e n c e , but it is soraething which should be carefully p o n d e r e d . It is my hope that after careful study and r e v i e w , t h e S e c u r i t i e s and Exchange C o m m i s s i o n and t h e Exchanges will halt the e x p e r i m e n t a t i o n with negotiation at the $300, 000 l e v e l and, in any event, not go lower than $100, 000. Let us not forget that for m i l l i o n s of individual i n v e s t o r s t h e r e will be no negotiation. They will e i t h e r pay the p r i c e t h e i r b r o k e r d e m a n d s or t h e y will not t r a d e . In a r e v i e w of m y r e p o r t l a s t October, Mr. Gordon H e n d e r s o n , w r i t i n g for The Review of S e c u r i t i e s Regulation published by Standard and P o o r ' s , s t a t e s b e t t e r than I did exactly what I was t r y i n g to point up. Accordingly, I a m going to quote d i r e c t l y f r o m that r e p o r t : " T h e m a i n question we m u s t face i s whether our p r i m a r y equity t r a d i n g m a r k e t will continue to be an exchange m a r k e t , with its r e l a t e d concepts of fixed c o m m i s s i o n r a t e s , listing s t a n d a r d s , m e m b e r s h i p r e s p o n s i b i l i t i e s , and s p e c i a l i s t s - - a n auction m a r k e t s t r u c t u r e in which o n e ' s b r o k e r is m o r e likely to be acting a s agent than p r i n c i p a l . Or will a c o u r s e be followed that c a u s e s t h e p r i m a r y m a r k e t to t a k e on m o r e of the c h a r a c t e r i s t i c s we p r e s e n t l y a s s o c i a t e with the over the counter m a r k e t negotiated r a t e s , m i n i m a l 'listing 1 stand- a r d s , and a m a r k e t - m a k e r - d e a l e r o r i e n t a t i o n ? -6- n we go. I t m a y m a k e a g r e a t d e a l of difference which way It is i m p o s s i b l e to be c e r t a i n , but t h e r e is at l e a s t a p o s s i b i l i t y that if we go t h e over t h e counter r o u t e t h e consequences will be a s follows. The t r a d i n g m a r k e t s m a y be dominated by block t r a d i n g between l a r g e institutions and block-positioning m a r k e t m a k e r s . Smaller investors may find it i n c r e a s i n g l y difficult to t r a d e in t h e s e m a r k e t s , with the p o s s i b l e r e s u l t that the country of ! p e o p l e ! s c a p i t a l i s m 1 m a y e x p e r i e n c e a s h r i n k a g e in t h e p e r c e n t a g e of individuals owning equities d i r e c t l y , r a t h e r t h a n t h r o u g h institutional intermediaries. P r i c e and block-positioning competition between b r o k e r - d e a l e r s m a y lead to t h e d e m i s e of many s m a l l e r b r o k e r a g e f i r m s - - w i t h t h e consequence that t h o s e who favor an over the counter type m a r k e t b e c a u s e they cons i d e r the m i n i m u m c o m m i s s i o n r a t e s t r u c t u r e a n t i c o m p e t i t i v e might p r o d u c e , by its elimination, a c o n c e n t r a t i o n in economic power which m a y p r o v e far m o r e a n t i c o m p e t i t i v e than t h e minimum commission rate structure. u T h e d e c i s i o n s we m a k e on i t e m s of m a r k e t s t r u c t u r e can t h e r e f o r e have f a r - r e a c h i n g c o n s e q u e n c e s not j u s t for t h e b r o k e r a g e community but for our economy a s a whole, o . " -7- It is easy to s e e g h o s t s , and to r a i s e unjustifiable f e a r s , whenever changes in a t i m e - h o n o r e d p r a c t i c e a r e p r o p o s e d but our m a r k e t s have been so c l e a r l y the b e s t in t h e world that it behooves us to think through a l l our moves to be s u r e we a r e not i m p a i r i n g t h e i r vitality. Not long ago I testified b e f o r e the Senate Subcommittee on S e c u r i t i e s on institutional i n v e s t o r s and m a d e c l e a r m y view that institutions should not be p e r m i t t e d to join exchanges or engage in t h e b r o k e r a g e b u s i n e s s . It is i m p o r t a n t , in my jud j m e n t , to keep a line between t h e b r o k e r a g e b u s i n e s s and other b u s i n e s s e s , just a s in t h e field of banking it i s i m p o r t a n t to distinguish between c o m m e r c e and banking. A mutual fund i s a v e h i c l e for i n v e s t m e n t and is not in t h e b r o k e r a g e b u s i n e s s , or at l e a s t should not be. I r e a l i z e t h e line is difficult to d r a w and, in t h e c a s e of banking, t h e F e d e r a l R e s e r v e Board h a s b e e n given t h e power to define what a c t i v i t i e s a r e r e l a t e d to banking. In t h e field of s e c u r i t i e s I think t h e S e c u r i t i e s and Exchange C o m m i s s i o n should be given s i m i l a r a u t h o r i t y with r e s p e c t to t h e allied a c t i v i t i e s of b r o k e r s . In debating t h e question of institutional m e m b e r s h i p , much m o r e t i m e and effort have been spent on t h e s i z e of c o m m i s s i o n s and how t o r e d u c e t h e m than on the m o r e i m p o r t a n t f a c t o r s of m a r k e t i m p a c t . Very l i t t l e a t t e n - tion has been paid to t h e p o s s i b l e c o n c e n t r a t i o n of power and the p o s s i b i l i t y of a m a r k e t completely dominated by d e a l e r s dealing for t h e i r own account and eliminating t h e agency r e l a t i o n s h i p between b r o k e r s and c u s t o m e r s . -8- In S e p t e m b e r t h e New York Stock Exchange appointed a C o m m i t t e e , c h a i r e d by Cornelius Owens, to r e v i e w m y r e c o m m e n d a t i o n s to r e o r g a n i z e its g o v e r n a n c e . They m a d e a r e p o r t which was approved by the Board of the Exchange and e n d o r s e d by the m e m b e r s , and now is in p r o c e s s of being consummated. 1. The vote of the m e m b e r s h i p was 852 to 109, m o r e than 8 to I a m v e r y p l e a s e d with t h e r e p o r t of t h e Owens C o m m i t t e e and although it did not follow my plan exactly, and indeed I did not expect it to do so, it a c c e p t s all t h e m a j o r p r e m i s e s and i s , in m y judgment, a m i l e s t o n e in adapting t h e organization of the Exchange f r o m what h a s frequently been d e s c r i b e d as a "club 11 to that of a t r u l y m o d e r n c o r p o r a t i o n s e r v i n g t h e public i n t e r e s t . F u r t h e r p r o g r e s s will now depend on t h e c h a r a c t e r and competence of the new paid b o a r d c h a i r m a n and t h e quality and c a l i b e r of the 10 outside public g o v e r n o r s . To t h o s e who have followed the h i s t o r y of t h e New York Exchange, its development and i t s g r a d u a l evolution into t h e f o r e m o s t m a r k e t p l a c e in our country, t h i s is a r e m a r k a b l e a c h i e v e m e n t . When I look back on the p r o g r e s s that h a s been m a d e over t h e p a s t y e a r and the quality of the thinking going on in the i n d u s t r y with r e s p e c t to institutional m e m b e r s , c o m m i s s i o n s , the r o l e of the little m a n and the s m a l l b r o k e r , I feel well r e w a r d e d in my efforts in making the r e p o r t . Obviously, t h e r e a r e a n u m b e r of t h i n g s , such a s b r o a d e r a c c e s s to m e m b e r s h i p and a m o r e independent method of electing outside d i r e c t o r s which, w e r e I doing it on -9- my own, I would do now. But none of t h e s e is fundamental and can await further d e v e l o p m e n t s . Ultimately I a m convinced we will develop a f e d e r a l s e c u r i t y s y s t e m p a t t e r n e d after t h e one we have for banking in the F e d e r a l R e s e r v e S y s t e m , and p e r h a p s t h e r e will be an industrywide b o a r d of a l l t h e Exchanges acting under t h e s u p e r v i s i o n of t h e S e c u r i t i e s and Exchange C o m m i s s i o n . This lies in the future but I a m fully convinced that we a r e well on the r o a d to majjor i m p r o v e m e n t s in t h e o r g a n i z a t i o n , s t r u c t u r e , utility, and m a n a g e ment of our s e c u r i t i e s m a r k e t s . - 0 -
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