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Toward a Central Market System: Wall Street's Slow Retreat into the Future
Published online by Cambridge University Press: 19 October 2009
Extract
Structural reforms of a fundamental nature now under way in Wall Street have been proclaimed so often of late as to become commonplace. The fact that many of these changes are not welcomed by established and influential persons who make their living in or around Wall Street is not news. What may be news, however, is that neither of these facts is particularly new.
- Type
- Reform of Financial Institutions and Markets: A Progress Evaluation
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- Copyright
- Copyright © School of Business Administration, University of Washington 1974
References
1 Securities and Exchange Commission, Institutional Investor Study Report.(Hse. Doc. 92–64, Pts. 1, 8), p. 25; emphasis added. (Hereafter referred to as IIS.)
2 An indication of the size of the market for NYSE stocks can be gained by noting that the market value of stocks listed on that Exchange amounted to approximately $887 billion at year-end 1972, more than ¾ the estimated market value of all U.S. Corporate shares, some 2–½ times the magnitude of the nation' $350 billion market for publicly held U.S. Government debt, and nearly 4–½ times the size of the roughly $200 billion market for corporate bonds on that date. Although NYSE-listed companies accounted for a miniscule fraction of the total number of U.S. corporations, they held more than 38 percent of all corporate assets and generated more than 42 percent of gross revenues and 90 percent of total corporate net income during 1969, the latter figure being up from 75 percent the year before.
Sources: 1973 NYSE Fact Book, p. 32; SEC 39th Annual Report (1973), pp. 148, 161; Federal Reserve Bulletin (January 1974), p. A42; SEC Institutional Investor Study Report (Pt. 7), p. 312; Bankers Trust Company, Credit and Capital Markets (1974), p. T26.
3 There are 1,366 seats on the New York Stock Exchange. The maximum price ever paid for such a seat in this century amounted to $515,000 in 1968 and 1969. NYSE Fact Book (1973), p. 58.
4 Sobel, Robert, The Big Board (Free Press, 1967)Google Scholar, and The Curbstone Brokers (Macmillan, 1970, esp., Chapters 2 and 3.
5 Sobel, Curbstone Brokers, pp. 17–19.
6 Other than control over access to, membership or prohibitions on dealings by members in rival markets.
7 Sobel, Curbstone Brokers, p. 48.
8 Ibid., Chapters 3 and 4.
9 Notably including the Hughes Committee on Speculation in Securities and Commodities (appointed by the Governor of the State of New York 1909); the Pujo Subcommittee's Money Trust Investigation (Subcommittee of the Committee on Banking and Currency, U.S. House of Representatives, 1912–13); and the Pecora Committee's Investigation of Stock Exchange Practices (Committee on Banking and Currency, U.S. Senate, 1933–34).
10 As in the case of the Hughes Committee's Report. Sobel, Curbstone Brokers, p. 132.
11 Growth of institutions in the stock market since 1960 derives largely from increased trading activity. Institutional holdings of common and preferred stock have grown from only 26.7 percent of the total outstanding in 1960 to 29.1 percent by year-end 1972. Institutional trading, however, grew from 38.7 percent to 68.2 percent of total public volume on the New York Stock Exchange between 1961 and 1971, and is believed to exceed 70 percent today. NYSE Fact Book (1973), p. 54; SEC Annual Report (1973), p. 148; Garrett, Ray Jr., “Our Changing Capital Markets” (Address to Commonwealth Club of California, San Francisco, May 8, 1974).Google Scholar
12 Haack, Robert W., “Competition and the Future of the New York Stock Exchange” (Address to Economic Club of New York, New York, November 17, 1970).Google ScholarIIS, Pt. 4.
13 Over the postwar period off-board trading in NYSE stocks as a fraction of dollar volume on the Exchange grew from an estimated 7.4 percent in 1945 to 15.5 percent in 1965, then spurted to 26.1 percent by 1971. All indications are that it has continued to grow since that time. SEC Annual Report (1971), and Statistical Bulletins (February 1972 and March 1972). “NYSE Competitive Position,” NYSE Special Membership Bulletin (February 10, 1971). Farrar, Donald E., “The Coming Reform on Wall Street,” Harvard Business Review (September–October 1972).Google Scholar
14 IIS, Pt. 8, p. 87.
15 Securities and Exchange Commission, Statistical Bulletin (February 1972, March 1972).
16 IIS, Pt. 8, p. 95.
17 See footnote 12 above, Haack, etc.
18 When the practice of customer-directed “give-ups” was discontinued by amendment of NYSE Constitution, Art. 15, Sec. 1.
19 The most important of which were the sale of mutual fund shares, reciprocal demand deposits, and research. During 1968, 62 percent of investment company brokerage commissions were paid to sellers of fund shares and 87 percent of free commissions generated by bank trust departments were paid to depositors. IIS, Pt. 4, Chapter 13, especially Sections B.5–7 and pp. 2288, 2294.
20 Comments of the U.S. Department of Justice on Securities Exchange Ret release No. 8239, April 1, 1968.
21 IIS. Securities Industry Study Report (Subcommittee on Commerce and Finance, Committee on Interstate and Foreign Commerce, U.S. House of Representatives, August 23, 1972). Securities Industry Study Report (Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs, U.S. Senate, February 1973).
22 E.G., Moses v. Burgin, 445 F.2d 369 (1st Cir. June 4, 1971). Cert.den.sub. nom. Johnson v. Moses, 404, U.S. 994 (December 12, 1971).
Kurach v. Weissman, 49 F.R.D. 304 (S.D.N.Y., 1970).
Proxy material of Mass. Investors Trust and Mass. Investors Growth Stock Fund (dated July 20, 1971), notice of Settlement Hearing re. Gross v. Moses, 67 Civ. 4186; Edelman v. Brown, 71 Civ. 2162 (August 1971).
Securities and Exchange Commission, Memorandum in Opposition to Proposed Settlement of Gross v. Moses, 67 Civ. 4186; Fdelman v. Brown, 71 Civ. 2162 (August 1971).
Remarks by Baker, Donald I., Antitrust Division U.S. Department of Justice, “Banking and Bigness: and the Search for a Better Tomorrow” (Federal Bar Association Convention, Washington, D.C., September 17, 1970).Google Scholar
SEC Statement (February 2, 1972) IIS. Pt. 4, Ch. 13.
23 Not all NYSE leaders supported the retention of fixed minimum brokerage commission rates during this period. See, for example, testimony by Robert Haack, John Whitehead, and Donald Regan before the Senate Subcommittee, op. cit., and in other forums as well.
24 E.G., Securities and Exchange Commission, Study of Unsafe and Unsound Practices of Brokers and Dealers (Ese. Doc. No. 92–231, 1971); and Baruch, Hurd, Wall Street: Security Risk (Acropolis, 1971).Google Scholar
25 E.G., through repeal of NYSE Rule 113 and a companion American Stock Exchange Rule 190, which prohibit specialists from dealing directly with institutions.
26 Letter from Ray Garrett, Jr. to Hon. Harrison A. Williams, Jr., in Hearings on S.2519, (before the Subcommittee on Securities, Committee on Banking Housing and Urban Affairs, U.S. Senate, November 12–14, 1973), pp. 175–192. Address by Robert W. Haack, “Competition. ”
27 Such as fixed minimum brokerage commission rates, a monopolistic specialist system and rules such as NYSE Rules 113, 318, and 394 that operate to drive competitive forces into outside markets.
28 Levy, Gustave L., Address before the Dean's Council Dinner, UCLA Graduate School of Management, Los Angeles, May 14, 1974.Google Scholar
29 See, for example, Hearings on S. 2519.
30 Hearings on S. 2519, pp. 56, 186–188; and Garrett, Ray Jr., “From Here to Modernity,” (Address to Securities Industry Association, White Sulphur Springs, W. Va., May 10, 1974), pp. 11–12.Google Scholar
31 Garrett, “Modernity,” p. 10.
32 See, for example, Hearings on S. 2519, pp. 53–56, 66–68, 119–121.
33 Martin, William McChesney Jr., The Securities Markets: A Report, with Recommendations (New York Stock Exchange, August 5, 1971).Google Scholar
34 See, for example. Study of the Securities Industry (Hearings before the Subcommittee on Commerce and Finance, Committee on Interstate and Foreign Commerce, U.S. House of Representatives, Pts. 1–9, 1971–72), and Securities Industry Study Report (1972), and Hearings before the Subcommittee on Securities, Committee on Ranking, Housing and Urban Affairs, U.S. Senate, 1971–73, and Securities Industry Study Report (1973).
35 Securities and Exchange Commission, Statement on the Future Structure of the Securities Markets (February 2, 1972); and Policy Statement on the Structure of a Central Market System (March 29, 1973). Securities Industry Study Report (by the House Subcommittee, August 23, 1972, and by the Senate Subcommittee, February 1973).
36 Statement of Policy (by the Board of Governors of the New York Stock Exchange, San Francisco, March 1, 1973). (Reprinted in Hearings on Fixed Rates and Institutional Membership, Subcommittee on Securities, Committee on Banking, Housing and Urban Affairs, U.S. Senate, March 15, 1973, p. 437.) A position since reversed, causing the SEC during November 1974 to initiate hearings under S19b of the Securities Exchange Act to force the various exchanges to eliminate such rates (Securities Exchange Act Release No. 11073, October 24, 1974). Although the Commission's hearings are expected to be concluded and its order issued prior to May 1, 1974, possibly extended judicial review under the Administrative Procedure Act (5 USC SS551, et. seq.) may well prevent implementation of the order as originally anticipated, by Mayday 1975.
37 See footnote 35, above. Securities and Exchange Commission, etc.
38 Ibid; and letter by James J. Needham to Harrison A. Williams, Jr., in Hearings on S. 2519, pp. 516–517, in which Chairman Needham makes clear that third-market participation as market makers on exchanges would be barred by invoking NYSE Rule 113 and obtaining comparable rules on other exchanges. Rule 113 prohibits Exchange specialists from dealing with institutional customers.
39 S. 3126 passed the Senate by voice vote on May 28, 1974. Wall Street Journal (May 29, 1974), p. 4.
40 Hearings on S. 2519, pp. 175–192.
41 Securities Week, October 14, 1974, pp. 1, 2.
41a Securities Week, October 28, 1974, p. 2.
42 Specifically, the Commission in its “Multiple Trading Case” struck down a rule by the NYSE limiting trading by its members in New York listed stocks on regional exchanges. In the Matter of the Rules of the New York Stock Exchange (10 SEC270, 1941).
43 Securities and Exchange Commission, Report on Rule 394 (September 14, 1965; reproduced in Study of the Securities Industry, Pt. 6, Subcommittee on Commerce and Finance, Committee on Interstate and Foreign Commerce, U.S. House of Representatives January 26–28, 1972), pp. 3293–3371.
44 See, for example, Securities and Exchange Commission, Report of Special Study of Securities Markets (Hse. Doc. No. 95, Pt. 2, July 17, 1963), p. 910.
45 Most recently during Hearings on S. 2519.
46 Phillips, Almarin, “Regulatory Reform for the Deposit Financial Institutions: Retrospect and Prospects” (Western Finance Association, Las Vegas, June 11, 1974).Google Scholar
47 Hearings on S. 2519, p. 66. Economies to be obtained by all parties from improvements in the post-trade completion system are sufficiently large to place this area of activity, at least for the present, outside the area of combat.
48 Hearings on S. 2519, p. 66.
49 NYSE Research Report, “incentives to Exchange Membership in a Central Market System” (November 12, 1973), p. 20. Reproduced in Hearings on S. 2519, pp. 456–497, reference occurring at p. 476.
50 Efforts to strengthen the competitive positions of regional exchanges during (and following) the transition to a central market system, currently are focused on efficiencies in clearance and settlement obtainable through regional depositories and clearance systems. In addition, some regional exchanges have attempted to improve their market making by tying their specialists through NASDAQ to the third market, and permitting third-market makers to act as auxiliary specialists on the exchange's trading floors.
51 Securities and Exchange Commission, Report of the Special Study of Securities Markets (Use. Doc. No. 95, Pt. 2, 1963), p. 12.