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A Report, With Recommendations
William McChesney Martin, Jr.

Submitted To
The Board of Governors of the New York Stock Exchange

August 5, 1971



The Public Interest


Development of a Central Market System


Reorganization of The New York Stock Exchange .


Capital Requirements and Related Matters


Specialists and Block Positioners


Unequal Regulation of Markets


Institutional Membership


Money Management By Member Firms


Negotiated Commissions


Exemption From Anti-trust Laws


Role of the Small Firm


Foreign Brokers


Elimination of the Certificate


Communication Technology






Early this year, against a background of crisis in the securities
industry, former Chairman Bernard J. Lasker and the Board of
Governors of the New York Stock Exchange unanimously
requested me to undertake a thorough study of the Constitution,
rules and procedures of the Exchange. To assist in this
undertaking, a committee of industry leaders, not now serving on
the Board, was designated to advise, and they have been more than
generous with their time and interest. None of the members of this
committee is responsible either individually or collectively for the
views expressed in this Report. The committee was composed
of: Messrs. James W. Davant, Paine, Webber, Jackson & Curtis;
Walter N. Frank, Walter N. Frank & Co.; James Crane Kellogg,
Spear, Leeds & Kellogg; Gustave L. Levy, Goldman, Sachs & Co.;
Clifford W. Michel, Loeb, Rhoades & Co.; Donald T. Regan,
Merrill Lynch, Pierce, Fenner & Smith, Inc.; and Henry M. Watts,
Jr., Mitchel, Schreiber, Watts & Co. I have also been ably assisted
in my work by Mr. Donald A. E. Beer, an independent consultant,
and Mr. George A. Jensen, legal counsel, a member of the firm of
Peper, Martin, Jensen, Maichel and Hetlage of St. Louis, and by a
very efficient secretary, Miss Geraldine Nahra.
In making this study, I sought the views of all segments of the
financial community both inside and outside of the securities
industry. It became clear very early that neither the study nor my
recommendations could be confined to the New York Stock
Exchange, and that the securities industry as a whole must be
encompassed. Consequently, I have visited with regional securities
exchanges from coast to coast, the Investment Bankers
Association, the Association of Stock Exchange Firms and
numerous other organizations and groups. I have reviewed dozens
of pertinent reports treating the major issues and examined most
of the new communication systems. During the five months
devoted to this study, I have had conferences with several hundred
In this Report, I have not attempted to set forth detailed
analyses with supporting data. The issues have been extensively
documented elsewhere. My recommendations and conclusions are
intended to identify goals to be pursued in the public interest,
without precluding modifications. I would emphasize the fact that


some changes may be appropriate within the major thrust of the
When I accepted this task, it was clearly understood that the
public interest would be the paramount consideration in
appraising the issues.
The Public Interest

The public interest dictates that the primary purpose of a
securities market is to raise capital to finance the economy.
Without continuous capital formation, our economy could not
grow or prosper. It could not provide job opportunities for our
growing labor force. It could not sustain a rising standard of living.
It could not generate economic opportunities so vital to the health
of our free enterprise system. It could not assist government in its
programs to lessen social problems such as poverty, pollution and
crime. By contributing to the mobilization of capital, a stock
exchange serves the entire population.
In fulfilling this principal role, a stock exchange must also serve
those who have already committed their capital to finance the
economy. It must enable them to reconvert their securities into
cash whenever their needs require. Investor confidence in the
ability to resell securities on fair terms is critical.
Public confidence depends in large measure on the
environment which surrounds a public market. Full disclosure,
responsibility and financial soundness of the industry participants
are necessary. A multitude of sources of information and opinions
about stock values will contribute to proper pricing. Protection of
the priority of public orders is important. When stock certificates
are immobilized or eliminated, confidence will depend even more
than now on financial soundness of brokers and their agency
relationship with their customers.
The organization and operation of a securities market must
reflect the difference between securities on the one hand and
commodities, products and/or services on the other. Securities
represent capital. Capital is an indispensable ingredient of every
business and industry. The strategic and critical role of capital

means that collapse or distortion of the securities industry could
injure many of its customers and the economy of the nation.
Ownership of common stock is shared by 31 million Americans
directly and by many more millions indirectly through their
participation in pension funds, mutual funds and insurance. The
public has financed the United States economy. This makes it
imperative that the market should be designed to serve the public,
to serve the small investor equally as well as anyone else.
Naturally, a market organized to provide equal and responsible
service to more than 31 million Americans must be nationwide in
scope. It must maintain maximum liquidity. It must provide a
continuous, fair and orderly market with centralized disclosure of
all executions of buy and sell orders and other material facts. In
my judgment, the auction market is best suited to perform this
Historically, the New York Stock Exchange has offered such a
market. Since its founding in 1792 under the Buttonwood Tree, it
has performed its function so successfully that today the stocks
listed on the New York Stock Exchange represent more than half
of the total market value of all common stocks publicly traded on
all the free world markets.
In recent years, the old familiar patterns in the securities
industry have been disrupted by the appearance of two new
forces: institutional investors and computers. By mobilizing
capital, the institutional investors have acquired the power to
influence the way markets are made. Computers, because of the
communication systems they make possible, offer the means to
improve radically the way markets operate. Both of these forces
have developed apart from the New York Stock Exchange.
Together, they have had a pronounced impact on the New York
Stock Exchange's performance as the principal market.
The result has been that many transactions in securities listed
on the New Y6rk Stock Exchange have been executed on various
other exchanges, and in the third and fourth markets. This
dispersion of trading from a central auction market is a
fragmentation of that market. This fragmentation has been lauded


by some who contend that competition between markets is
desirable. But for competition to be beneficial, it must exist under
similar rules and in the same arena. Competition between markets
has not been beneficial because it has depended upon unequal
regulation which, among other things, has not required full
disclosure and equal responsibility of participants. Differences in
disclosure of information about activity in these markets and
differences in access to these markets have made it increasingly
difficult for the public and fiduciaries alike to obtain the best
prices available at any given time.
As inflation and inflationary expectations rose in recent years,
the securities industry was ill-prepared for the unexpected
syndrome of go-go speculation for short-term performance.
Volume exploded, prices soared, then later plunged, and
distortions became alarming as paper jammed the system. The
system was in disarray; it could not stand the strain.
The inevitable breakdown in operations followed. Because the
business was more than could be handled, trading days were
shortened, and later Wednesday closings were adopted. Burdened
with onerous sales costs and plagued with inadequately designed
computer facilities, some member firms failed. Others refused to
take public orders. Naturally, investors' confidence was shaken.
Grave injury to the public was narrowly averted by hastily
organized financial rescue operations..
The crisis receded with the help of both the commission
surcharge and a rising market. In order to insulate the public from
financial injury, Congress created the Security Investors Protection
Corporation to be financed by assessments on the members of the
industry and backed by the Federal Government.
In retrospect, it is clear that the Securities and Exchange
Commission, the New York Stock Exchange and all the other
markets and exchanges were caught off guard and were unprepared or unable to cope with the situation. Clearly, what has
happened in the past five years calls for reexamination and
improvement in the machinery of administration and selfregulation. In response, Congress is in the process of preparing for
hearings that seem destined to lead to a new securities act.

If the ills of the industry and its weaknesses are allowed to
survive, they are bound eventually to retard new capital
formation. The consequences will not be favorable for the
Development of a Central Market System
To serve the interests of the public and the nation, as well as
the interests of the securities industry itself, a national exchange
system must be developed to provide a single, national auction
market for each security qualified for listing. Such a system would
integrate the New York Stock Exchange, the American Stock
Exchange and the regional exchanges. Because of their geographical locations and their identification with local needs, the regional
exchanges have a vital role to play in making a truly national
system. To accomplish this, the structure of the market mechanism must be redesigned and modernized. The characteristics of
this national auction market should include the following:
1. A market which provides maximum opportunity for public
buyers and sellers to effect trades directly through their
agents, as opposed to a market in which the public must
trade with dealers trading for their own account;
2. A market in which the activities of broker-dealers, specialists and other professionals are uniformly defined and
regulated and subordinated to the interests of the public;
3. A market which provides fair commission rates to all
4. A market which permits equal access for a maximum
number of broker-dealers and their customers, regardless of
geographical location; and
5. A market which provides for equal access by all investors to
material information about both the market itself and the
securities traded in that market, including centralized
reporting of price and volume of all trades.
The creation of such a national exchange system would provide


one market for each listed security. There could be two or more
divisions within this national exchange system. The present listing
requirements of the New York and American Stock Exchanges
might provide appropriate listing requirements for two such
divisions. Whether all securities which meet the listing requirements for a particular division of the national exchange system
should be required to be listed for trading in that division should
be considered. Securities which are not listed on any division of
the national exchange system would be traded in the over-thecounter market. Securities should be traded either in a single
division of the national exchange system or in the over-the-counter
market, not in both markets.
Suitable regulations will be required to coordinate the overthe-counter market with the national exchange system and to
protect the integrity of each.
A committee of experts, including representatives from the
major exchanges, should be appointed by the Securities and
Exchange Commission and charged with the planning and design
of a national stock exchange system which meets the requirements
set forth above. New legislation will be required in order to
implement such a system.
Reorganization of The New York Stock Exchange

The New York Stock Exchange has, to some extent, all of the
characteristics prescribed above for the proposed national exchange system. To improve its present role, the New York Stock
Exchange should be reorganized. This reorganization should
proceed promptly and not await formation of the proposed
national exchange system. The principal objectives should be:
1. To give proper recognition in the governing board of the
Exchange to its quasi-public nature and the respective
interests of the public, the companies listed on the
Exchange and the members of the securities industry
2. To provide broad access to the public auction market for all

brokerage firms which meet necessary standards and will be
subject to equal regulation.
3. To create an organization which, through the public
representation on its governing board and the authority and
independence of its management, will strengthen selfregulation and answer the prevalent criticism that member
firms of the New York Stock Exchange cannot be expected
to discipline themselves.
4. To permit and encourage the principal officers and partners
within the member firms to serve on the governing board
without respect to business background, e.g., the floor, the
back office or the New York metropolitan area.
5. To transfer voting power from the individual members to
the member firms and to provide a means for its redistribution so that each member firm could have voting power
more closely related to its investment and its share of
exchange transactions.
6. To change the present seats into shares, without destroying
their market value.
In accordance with the foregoing objectives, the following plan
of reorganization is recommended:
1. Form of Organization — The Exchange would be a
2. Board of Directors — The Board of Directors would consist
of twenty individuals plus a voting Chairman whom the
Board would elect. Ten directors would be elected by vote
of the member firms from the officers, partners and
proprietors of the member firms, and ten directors would
initially be elected from the public by vote of the member
firms. Initially, two special nominating committees should
be appointed by the present Board of Governors of the
New York Stock Exchange. One committee should consist
of seven public representatives. This committee, after
considering the recommendations of representative listed
companies and of organizations such as the Investment


Company Institute, the American Bankers Association and
associations of insurance companies, would nominate the
ten public members of the first Board of Directors of the
reorganized Exchange. It is recommended that two of the
ten initial and successor public directors should be persons
from the public recommended by the Securities and
Exchange Commission. The other committee should consist
of seven members of the Exchange and, after consultation
with members and other interested persons and organizations, would nominate the ten member firm representatives
to be elected to the first Board.
a) Public Directors — The public members should include
representatives of the companies listed on the Exchange
and representatives of all segments of the investing
public, including financial institutions, such as mutual
funds, banks, trust companies and insurance companies.
After the first election, to assure their continuing
independence, the ten public directors would elect their
own successors. The term of office of each of the ten
public directors would be three years. The terms should
be staggered so that approximately one-third of the
public segment of the Board would be elected annually.
No public director should be permitted to serve more
than two terms of office.
b) Member Firm Directors — The ten directors elected by
the member firms would serve as a nominating committee for the selection of candidates to succeed them.
The member firms would also have the right to
nominate member firm directors from the floor. Successor directors should be elected by the member firms
through cumulative voting rights. To ensure minority
representation through cumulative voting, the term of
office of the ten member firm directors would be one
year, and no member firm director could serve more
than six terms.
c) Function and Responsibility — The Board of Directors
would be a policy-making body with authorities and

responsibilities comparable to those of the Board of
Directors of a business corporation. Like most business
corporations, the Board's authority should include,
subject to the right of the shareholders to over-ride the
Board, the power to amend the Constitution and Rules
of the Exchange. None of the board members, other
than the Chairman, would be directly involved in the
day-to-day administration of the Exchange. (Some of
the self-regulation of the Exchange would continue to
be the responsibility of representatives of the member
firms. For example, there should continue to be a
committee for the floor of the Exchange which would
be comprised of member firm representatives on the
floor.) All directors should be reimbursed for all
expenses incurred in performing their duties, and the
public directors should also be compensated for their
time and responsibility.
3. Officers - The principal officer of the Exchange would be
the Chairman of the Board of Directors who would be the
chief executive officer of the Exchange. The Chairman
would be elected by the Board of Directors and would be a
full-time paid employee who would be required to sever
any ties with any member firm of the Exchange or any
other business. As chief executive officer, the Chairman
would have all of the customary powers and responsibilities
of the chief executive of a business corporation. He would
preside at all meetings of the Board of Directors or of the
shareholders. Subject to the approval of the Board of
Directors, the Chairman would appoint a president (who
would be his chief operating officer) and all other necessary
4. Conversion of Seats and Voting — The present seats on the
Exchange would each be converted into ten shares. All such
shares would be owned and held by and in the name of the
member firms (which could be corporations, partnerships
or individuals doing business as member firm sole proprietorships). Each share would entitle the owner thereof to
one vote on all matters voted upon, with cumulative voting


rights for the election of the ten non-public members of the
Board of Directors.
5. Member Firms — Ownership of one share would make the
owner thereof eligible to become a member firm of the
Exchange with the right to deal in all securities listed on the
Exchange in accordance with the rules of the Exchange, but
the ownership of ten shares would be required to enable a
member firm to place a representative on the floor of the
Exchange or to be a clearing member of the Exchange. All
member firms would be required to meet the same
standards and would be governed by the same rules. Floor
representatives of member firms would be required to meet
specified standards and to comply with the rules of the
Exchange, but this would not relieve member firms of their
responsibility. A member firm would be required to own
ten additional shares for each additional representative on
the floor of the Exchange. The initial purchase of any
shares in the Exchange by a person who was not then a
member firm would be subject to such purchaser meeting
all of the requirements of the Exchange for membership
and would subject such purchaser to all appropriate rules
and regulations of the Exchange. Since all shares of the
Exchange would be owned by the member firms, there
would be no need for any device such as an a-b-c
agreement. This would not preclude an individual from
having any type of agreement desired with a member firm
with respect to his acquisition of shares from such member
firm, but no shares in the Exchange would be transferred to
any such individual unless such individual met all of the
requirements for becoming a member firm.
6. Transfer of Shares — Member firms of the Exchange could
transfer shares of the Exchange among themselves, thereby
increasing or decreasing their respective voting rights and
amount of representation on the floor of the Exchange,
subject to the following:
a) Any member firm which desired to clear transactions on
the Exchange or to maintain a representative on the
floor of the Exchange would be permitted to purchase

and hold ten shares irrespective of any other limitation
or restriction.
b) To the extent that a member firm's percentage of share
ownership exceeded its percentage of total member firm
business with the public, it could, if it desired, sell the
excess shares, but could not purchase additional shares;
to the extent that a member firm's percentage of share
ownership was less than its percentage of total member
firm business with the public, it could, if it desired,
purchase additional shares, but could not sell any shares.
The exact formula for the determination of minimum
and maximum shareholdings will require further detailed definition, but the aim should be to limit voting
power by the amount of business done with the public.
It may be desirable to require a new member firm to
purchase additional shares, up to a total of ten, as such
firm's percentage of total member firm business with
the public exceeds its percentage of share ownership.
c) A specialist firm would be required and limited to
purchase and hold that number of shares necessary (on
the basis of ten shares for each representative on the
floor of the Exchange) to enable such specialist firm
adequately to perform its duties in accordance with the
applicable rules of the Exchange. Thus, the number of
shares which a specialist firm could purchase or sell
would depend upon the number of persons it needed on
the floor to provide adequate service for the securities
d) The number of shares which could be purchased or sold
by an odd-lot dealer would also be determined by and
limited to the number of floor representatives such
odd-lot dealer requires in order to provide adequate
e) Registered floor traders and $2 brokers not affiliated
with any other firm would be considered member firms,
and each would be required to own neither more nor
less than ten shares.


As a result of the foregoing, all shares in the Exchange would
be owned and voted by the member firms in the Exchange, and,
except in the case of an individual doing business as a member
firm, shares would not be owned by individuals. The representatives of member firms on the floor of the Exchange would be
designated by the member firms, subject to approval by the
Capital Requirements and Related Matters

Many member firms of the New York Stock Exchange need
additional capital to meet present and future requirements. The
basis on which this capital will be acquired is very important. The
events of recent years have demonstrated dramatically the
importance of permanent equity or "cash" capital, and the need
for permanent capital cannot be over-emphasized. The trend in
recent years toward the corporate form of doing business by
member firms is desirable and should be encouraged because it
tends to build capital through retained earnings and to attract
capital on a permanent basis. Public ownership of member firms is
a sound development which may in the future supply a substantial
part of the growing capital needs of the securities industry.
The amendments to the Exchange's capital rules adopted by
the Board of Governors on July 15, 1971, are intended to correct,
over a period of time, most of the deficiencies which became
apparent in the stress of the past few years. There should be
continuous review of the capital needs and the capital rules and
rigorous enforcement of these rules. Consideration should be given
to improving or replacing the "aggregate indebtedness to capital
ratio" as the yardstick for measuring the adequacy of capital.
Consideration should also be given to increasing further the
requirements for entry into the securities business, particularly
those affecting the amount and permanence of initial capital.
The need for tremendous amounts of capital to finance the
day-to-day operations of the industry precludes any arbitrary or
sudden change in the present use of free-credit balances. Much of
Wall Street could not operate today without these balances.
However, it would be reasonable to impose gradually a segregation

requirement with respect to a percentage of properly defined
credit balances which would require investment in unencumbered
short-term United States Government and Government-agency
The segregation of customer securities is another aspect of
member firm operations where improved regulations and vigorous
uniform enforcement is required.
Greater emphasis should also be placed upon the development
of improved accounting and auditing procedures with uniform
reporting. This will require a joint effort by the Securities and
Exchange Commission, the accounting profession and the
Specialists and Block Positioners
A market with liquidity is one in which the investor can readily
convert his securities into cash at a price close to the last sale. On
the New York Stock Exchange, liquidity has depended ultimately
upon the specialist system which is designed to absorb the
frequent imbalance between buy and sell orders. The increasing
institutionalization of the market has placed heavy demands upon
the specialist system. The growth of the block positioners has
helped provide the liquidity demanded by the institutions. A high
degree of understanding and cooperation is necessary between the
specialists and block positioners to maintain a market with good
There has been a great deal of criticism of the role and
function of specialists. However, no better system of maintaining a
continuous and responsible market has been suggested. The capital
resources of specialists, however, should be increased to meet the
requirements of today's trading, and methods should be developed
to encourage and enable specialists to improve performance of
their functions in instances where securities are offered in
unusually large volume.
Allocating specific securities to specialists and maintaining
effective markets in them are the direct responsibility of the
Exchange. The allocation procedure must, at all times, reflect the


ability to provide effective markets in the public interest.
Allocations of securities, which are valuable franchises, should be
governed by clearly defined performance criteria against which all
specialists should be judged. Once such criteria are established,
specialists would have the incentive to meet them, and as a result,
effective regulation of the specialist system would become an
easier task. Authority with respect to the allocation of newly
listed securities and the reallocation of presently listed securities
should ultimately be vested in the staff of the Exchange, subject
to review by the Board of Directors. Effective regulation of the
specialist system requires the transfer of this authority to the staff
of the Exchange.
In general, better administration of rules and regulations
pertaining to specialists is needed. More, rather than fewer,
specialists and market makers are needed, who are better
capitalized, with clearly defined responsibilities and subject to
uniform regulations.
Block traders, who have recently assumed an increasingly
important role in the market, present a problem of growing
urgency. Block trading, unless prudently conducted, can substantially frustrate public participation in the market and the
orderly operation of the market. Rules and regulations specifying
the qualifications for those firms which may act as block
positioners and defining their obligations to the public marketplace should be developed, and a closer working relationship
between block positioners and specialists should be required.
Unequal Regulation of Markets
Unequal (different) regulation exists both within the listed
market among the exchanges and between the listed market and
the over-the-counter market.
Under the Securities Exchange Act of 1934, each registered
national securities exchange has the power to adopt its own rules,
subject to the jurisdiction of the Securities and Exchange
Commission. As might be expected, there is a substantial lack of
uniformity in the rules adopted by the various exchanges. In

general, the rules of the two largest exchanges, the New York
Stock Exchange and the American Stock Exchange, are the same,
but rules of the regional exchanges differ in extremely important
respects from those of the New York Stock Exchange and,
sometimes, from one another. As a result, some of the important
areas where there is now unequal regulation among the exchanges
are as follows:
1. Regulation of specialists, including restrictions on the
solicitation of orders from financial institutions as provided
in Rule 113 of the New York Stock Exchange;
2. Institutional membership on the various exchanges;
3. The use of reciprocal commission splitting arrangements,
including instances where the result on some regional
exchanges is a rebate or discount to an institutional
4. Off-board trading by members which is very limited in the
case of the New York Stock Exchange under Rule 394;
5. Requirement to print all executions on a tape; and
6. Restrictions on short sales of odd-lots.
If each of the exchanges listed and traded different securities,
these differences in rules might not be of any great consequence,
but where securities are listed and traded on more than one
exchange, various kinds of differences in regulation can, and do,
result in undesirable practices. Regulatory restraints imposed by
the New York Stock Exchange, for example, are circumvented by
the execution of trades in listed securities on regional exchanges
with more permissive standards.
The foregoing differences in regulation must be resolved. New
legislation by the Congress will undoubtedly be required to
achieve complete uniformity. The best solution would be to
include the major regional exchanges in a national exchange
system which would have the same rules for all members. In order
to prevent further fragmentation of the market pending new
legislation and the creation of the national exchange system, it is


recommended that the Securities and Exchange Commission take
appropriate action to resolve all differences in regulation to the
extent possible within the scope of its jurisdiction.
The listed markets and the over-the-counter markets in the
United States are very different from each other and to an extent
require substantially different regulation. Most of the securities
traded in the over-the-counter market are not listed on any
exchange, and, because of the relatively small number of shares
outstanding or in the hands of the public, are not suitable for
trading in an auction market. The difference in regulation between
the two types of markets does not of itself cause a problem with
respect to those securities. In recent years, however, the volume of
trading in the over-the-counter market of securities listed on
exchanges (the so-called "third market") has been increasing and
the difference in regulation becomes important. It is difficult to
assess the effect of such third-market trading of listed securities on
the quality of the present public auction market, but there is no
doubt that the growth of the third market presents a danger to the
maintenance of fair and disclosed pricing and to the regulatory
system. If the transactions now being executed in the third market
were executed on the Exchange, they would unquestionably
enhance the depth and liquidity of the central public auction
market, and, when a national exchange system is created, such
transactions should be effected in that market.
Institutional Membership
All of the arguments on both sides of the question of
institutional membership have been weighed and considered.
Public discussion of the subject has been confused by the
concentration upon the question whether institutions should be
entitled to access to Exchange membership so that they may
benefit by saving commissions. Appropriate commission charges
for institutional orders are a separate question.
The question of institutional membership involves several
considerations. One is the concentration of economic power which
might result from institutional membership. Another is that
institutional membership could lead to a market dominated by

dealers dealing for their own account and tend toward the
elimination of the agency relationship between broker and
customer. A third, and perhaps paramount consideration, is the
necessity of recognizing and preserving the difference between the
securities business and other businesses. This separation should be
maintained not only to facilitate regulation, but also because of
the unique role that the public exchange auction market plays as a
very sensitive part of the mechanism of the free enterprise system.
Accordingly, it is recommended that the primary purpose of every
member organization and any parent of any member corporation
should continue to be "the transaction of business as a broker or
dealer in securities" as presently provided in New York Stock
Exchange Rule 318. This rule, in effect, prohibits membership by
banks, trust companies, insurance companies, mutual funds and
other institutions. It should be noted that the purchase of 25% or
less of the voting securities of a member corporation by an
institution is not prohibited.
If institutions are denied membership in the New York Stock
Exchange, as herein recommended, member firms of the New
York Stock Exchange should be required to divest themselves,
over a reasonable period of time and in a manner which will
protect the interests of the shareholders of such funds, of any
direct or indirect ownership or control of management or advisory
companies of open or closed-end management investment companies, and any investment advisory contracts between member
firms and such companies or their managers also should be
prohibited in order to avoid the use of such contracts to effect
control of the operation of such companies.
Money Management By Member Firms
Unavoidable conflicts of interest arise when money management and brokerage functions are combined within a single
profit-making firm, regardless of whether a fee is paid for
investment advice. It is believed, however, that these conflicts of
interest have been reasonably well handled by the member firms.
Serious consideration has been given to the frequent suggestion
that the clearest solution to the whole problem of money


management would be to separate all management and brokerage.
However, giving investment advice, historically, has been an
inherent and logical part of the brokerage business. Accordingly,
except for the prohibition previously recommended with respect
to open or closed-end management investment companies, member firms should be permitted to engage in all other forms of
money management, but they should be prohibited from crediting
commissions against any fee charged for investment advice.
Negotiated Commissions
Setting commissions has been one of the most difficult
problems in the industry, and it has caused constant differences
between member and non-member brokers and the exchanges. The
difficulties of determining a fixed commission schedule are major,
but so-called negotiated commission rates may cause equal
The term "negotiated rates" is only accurate in some cases. For
the millions of individual investors, there will be no negotiation.
Brokers will determine their own rates, and the individual investor
will either pay them or will not trade. Undoubtedly, there will be
"price leadership." Large member firms with nationwide facilities
will fix rates based on their own volume and costs. Smaller brokers
will have to follow these rates to a large extent.
Only in the case of very large investors, usually institutions, is
there likely to be any negotiation. Even here, special rates for
particular customers are likely to be more frequent than negotiated rates. Commission charges for institutional orders can be
given appropriate treatment within a fixed commission structure.
The resolution of this problem does not of itself require
negotiated rates.
The question is whether the industry will be better able to
function in the public interest if its commission rates are fixed and
specified by the Exchange and the Securities and Exchange
Commission, or if they are to be determined by each member
subject to the sanctions of the anti-trust laws. This is the focal
point on which this issue should be resolved.

The success with which capital has been raised to finance the
economy in the United States is due in part to the dispersion and
local activities of a multitude of broker-dealers. Fully negotiated
rates may cause a substantial concentration of the securities
business in a few large firms. Because of the strategic importance
of the securities industry to the operation of the free enterprisecapitalistic system, control of this industry cannot be permitted to
be concentrated in the hands of a few persons or firms. Such a
concentration of power could not be tolerated even on the
grounds of efficiency.
Negotiated rates may not have this effect. They may only serve
to eliminate the inefficient, poorly managed broker-dealers. No
one knows the answer to this question, but an abrupt change to
fully negotiated rates would be imprudent at a time when the
industry needs continued earnings to accumulate and attract
capital. The experiment now under way with negotiated commissions on transactions above $500,000 requires experience and
analysis before the Securities and Exchange Commission and the
exchanges proceed further.
Exemption From Anti-trust Laws
Under the Securities Exchange Act of 1934, Congress has
delegated regulatory responsibility to the national securities
exchanges that register under the Act. The Securities and
Exchange Commission is given broad supervisory and regulatory
powers over the registered exchanges. Although the Exchange Act
specifically contemplates collective action by exchanges and their
members in establishing and enforcing rules, no express exemption
from the anti-trust laws is provided. The legislative history of the
Exchange Act sheds no light on this matter. It should be noted,
however, that at the time that Congress was enacting the Exchange
Act, the applicable court decisions suggested that stock exchanges
were not in interstate commerce, and, therefore, it may have been
thought unnecessary to provide specific anti-trust exemption.
It was not until 1963 that the question of reconciliation of the
Exchange Act and the anti-trust laws was first considered by the
United States Supreme Court. The Court held that actions taken


by an exchange to effectuate self-regulation were subject to
anti-trust challenge where the Exchange Act made no provision for
Securities and Exchange Commission review. The Court expressly
left open the question as to the extent of anti-trust protection
afforded by the existence of the Securities and Exchange
Commission. This 1963 case is the only decision by the Supreme
Court on this question. The recent decision by the Seventh Circuit
Court of Appeals held that even where an exchange's selfregulatory activity was subject to overall supervision of the
Securities and Exchange Commission, and the Securities and
Exchange Commission had the power to order changes in an
exchange's rule, an exchange was nevertheless subject to anti-trust
liability unless it could affirmatively show that the particular rule
challenged was "necessary to make the Exchange Act work."
The Court decisions to date leave the question of anti-trust
exemption for exchanges far from clear. Consequently, exchanges
face the choice of either regulating at their peril, or not regulating
at all. This is an untenable position for the exchanges which are
required to regulate their members under the Securities Exchange
Act of 1934. This dilemma is an obvious deterrent to effective
self-regulation which must be remedied.
A reorganization of the New York Stock Exchange substantially along the lines of the plan herein proposed will properly
reflect the Exchange's quasi-public nature and qualify it for
exemption from the anti-trust laws. Accordingly, it is recommended that the Exchange ask the Congress to enact legislation
granting all registered national securities exchanges certain immunity under the anti-trust laws. The scope of the immunity
granted to the exchanges should be coexistent with the scope of
the Securities and Exchange Commission's control of the exchanges under the Exchange Act, so that no action or omission by
a registered national securities exchange in performing any of its
duties of self-regulation under the Exchange Act which are subject
to review by the Securities and Exchange Commission could give
rise to any claim under the anti-trust laws.
Role of the Small Firm
The role of the small brokerage firm should not be overlooked.

It has contributed to the health and strength of the economy by
raising capital to finance new ventures and by serving the needs of
small investors scattered across the nation, in short, by broadening
economic opportunity. In the course of the many changes which
will inevitably take place in the securities industry, care should be
taken not to cause the elimination of efficient small firms.
Foreign Brokers
Purchases of securities of United States companies by foreign
nationals is a welcome infusion of capital which should be
encouraged. It helps this country's balance of payments.
Consideration should be given to revising New York Stock
Exchange Rule 314.14 so that broker-dealers controlled by
nationals of countries that accord similar privileges to United
States broker-dealers would be eligible to become members of the
New York Stock Exchange if they comply with the same
standards for membership that are required of domestic brokers.
The rules prohibiting institutional membership would also apply
to foreign controlled broker-dealers.
Elimination of the Certificate
The state of the art of computer communication technology
now greatly exceeds applications in the securities markets. A
major obstacle to efficient utilization of the available communication technology is the stock certificate. Delays and difficulties in
the transfer of stock certificates have already contributed to the
collapse of many firms and were among the major factors
responsible for curtailment of trading hours in 1968. Universal
cooperation towards a single solution to this common problem is
the only sensible approach.
To alleviate the certificate problem, the New York Stock
Exchange should continue to expand its depository (CCS), which
is already serving its members, and to cooperate with the Banking
and Securities Industry Committee (BASIC) so that it can
establish an expanded nationwide comprehensive depository as
early as 1973. This is the optimum interim solution. Its success


depends on universal participation and support by all brokerdealers and their customers. Broader participation and scope
should be sought promptly. Development must proceed along lines
which will be fully compatible with future elimination of
certificates once they have been fully immobilized.
Total elimination of the stock certificate, which has been
advocated by Mr. William J. Casey, Chairman of the Securities and
Exchange Commission, should be the eventual objective to be
reached as soon as possible. A period of five to ten years will
probably be required to do this. Public confidence, numerous state
laws and inadequate standardization of transfer agents are complicating factors. Elimination of the certificate is a matter of such
over-riding importance that it deserves action by the Congress.
Elimination of the certificate will not eliminate the paperwork
associated with securities ownership, but it will greatly increase
the industry's capacity to handle a larger volume of business. It
should also significantly reduce member firms' operating costs and
permit an eventual reduction in commissions.
Public confidence depends largely on an environment of
financial soundness. Today, financial soundness is heavily dependent upon commissions as the major source of revenue. When
certificates become immobilized or are eliminated, the relationship
between the public customer and his broker will change drastically
for most. Brokers will act as custodian for the "book entry"
record of all of each customer's security holdings. A continuing
management relationship will replace the intermittent agency
relationship so common today. A new revenue structure to
reimburse brokers may become advisable to reflect the new
Elimination of the certificate will not be plausible until there is
greater coordination between all the various entities involved in
the process of transferring the certificate record of ownership
from one owner to another. Lack of such coordination contributed to the long delays in delivery of stock to the public in
recent years. If the certificate is going to be eliminated eventually,
the public must have assurance that ownership records will be

transferred accurately and promptly. This problem deserves
further study.
It is hoped that all action towards a solution to the certificate
problem will be fully coordinated with the progress already made
in the interest of achieving a single national solution at the earliest
possible time.
Communication Technology

At one time, the floor of the New York Stock Exchange used
new communication systems to make itself the largest market, as
well as the leading market of the world. In recent years, the
revolution in computer communications has largely passed the
floor by. While others are utilizing modern communication
equipment and networks to serve their customers, the members of
the New York Stock Exchange have postponed improvements and
preserved outmoded manual systems on the floor. The largest
customers have responded by going where their needs are served
better. But the public has little choice. They must rely on the
facilities of the New York Stock Exchange. As the market has
become increasingly fragmented, the New York Stock Exchange
can no longer guarantee to the public either the best execution or
full disclosure of price and volume for all sales in its listed stocks.
One area in which the New York Stock Exchange can
re-establish leadership is in the development of a single "consolidated exchange" tape which is technologically feasible today. It
should be undertaken immediately to provide complete disclosure
of material information to all investors. Price and volume for every
transaction in any stock listed on the New York Stock Exchange
should be reported on this consolidated tape at the time of
execution regardless of where the trade took place, whether on the
New York Stock Exchange, on a regional exchange, in the third
market, in the fourth market, or anywhere else. It is logical that
the New York Stock Exchange should initiate plans to create this
tape for all stocks listed on the Exchange. It will undoubtedly
require Securities and Exchange Commission coordination and
regulation to require complete reporting of the appropriate
information by each source. There appears to be no reason why


this consolidated tape cannot be activated by the middle of next
year as a first step towards full disclosure in an integrated central
market system. This would be an appropriate time to abandon
quoting prices in eighths of a dollar and to adopt tenths as the unit
of price changes.
The farsighted cooperation of the New York Stock Exchange,
the American Stock Exchange and the Association of Stock
Exchange Firms in the development of SECTOR, a nationwide,
bulk communication network, lays the ground-work to support
member firms' modern communication systems on an economical
basis. The consolidation of certain computer facilities of the New
York Stock Exchange and the American Stock Exchange will
provide maximum economy in their use. Development of the
"locked-in trade" and the "specialists electronic book" will help
members serve all of their customers in the "total communication" environment which is just around the corner. Application of
computer communication systems to the New York Stock
Exchange will be essential to prepare it to serve as an integral part
of the future national exchange.
In the past, access to an exchange market for securities was
restricted to physical presence at a single geographical location.
The floor of the New York Stock Exchange was designed and
structured to create an auction market in which full disclosure and
clearly defined responsibility could be enforced because of the
physical limitations on participation. In the future, modern
communications systems will permit access to an exchange market
for securities regardless of geographical location. Access to the
communication system will become synonymous with access to
the Exchange. NASDAQ suggests the possibilities. It challenges the
New York Stock Exchange to improve on what has gone before.


Many of the recommendations made herein can be implemented by the New York Stock Exchange acting alone, others
require action by the Congress, the Securities and Exchange
Commission or the other exchanges either acting alone or together
with the New York Stock Exchange. The following is a brief
outline of the principal recommendations in each category:
Recommendations To Be Implemented By The New York Stock
Exchange Alone:
1. Reorganization of the New York Stock Exchange.
2. Continuous review and emphasis on the financial soundness
of member firms.
3. Additional regulation and improvement of the role of the
specialists and the block positioners.
4. Prohibition of institutional membership and prohibition of
member firm management of mutual funds.
5. Prohibition of crediting commissions against any
charged for investment advice.


6. Greater use of modern communication systems.

Recommendations To Be Implemented By The Congress, The
Securities and Exchange Commission And The Other Exchanges
Either Acting Alone Or In Concert With The New York Stock
1. Development of a national exchange system providing a
national auction market for each listed security.
2. Consideration of increased requirements for entry into the
securities business by broker-dealers.
3. Adoption of appropriate segregation requirements with
respect to free-credit balances.


4. Resolution of the differences which result in unequal
regulation and the elimination of the third market,
preferably through the development of a national exchange
5. Additional time to be given to the experiment with
negotiated rates before any further change is made.
6. The enactment of legislation granting anti-trust exemption
to the exchanges coexistent with Securities and Exchange
Commission oversight.
7. A coordinated effort to eliminated the stock certificate.
8. Development of a "consolidated exchange" tape.
The securities industry may be on the threshold of another
period of great expansion. The number of shareholders and the
volume of trading may more than double in the next ten years if
the character of the market is oriented in favor of the public. The
challenge is to reorganize and to improve the securities industry so
that it will serve the public and the national economy better. The
principal thrust should be the creation of a national exchange
system and reorganization of the New York Stock Exchange. The
utmost effort and cooperation will be required from all of the
exchanges, the National Association of Securities Dealers, the
Securities and Exchange Commission and the Congress to
accomplish this.


Litho in U.S.A.