Mr. PAINTER. $2 to $3 million?

Mr. SPORKIN. I think $3 million is high. I think it was more around $2 million which was financed by NASD itself.

Now, I am not a computer man or systems man, but I am trying to give you the best I can from being in this business for a long period of time. If you had a NASDAQ system which could be adapted to execute transactions, and, as I see execution, it would execute with a locked-in trade, which everybody agreed last week is the important thing so you know you have a trade, you don't have to go back and try to find out whether you did or did not have a trade.

Mr. PAINTER. You are implying that NASDAQ could be so adapted?

Mr. SPORKIN. Yes, the NASDAQ system is now set up so that you can now quote securities and communicate between firms. I don't know how much it would take to turn that into an execution type of system, at least for over-the-counter end of it, that would mean that broker A could communicate with broker B. He could get the quote, and, second, he could say, "We buy."

They would both then put an input into this terminal which would be linked to the main computer in Connecticut, where both sides of the transaction would be stored.

Now, unless that transaction locked, it would be immediately sent back to the broker and reported: "You don't have a trade," or, "You do have a trade," so immediately you would know whether you have a good trade.

You tie that into the NCC development that they are going to have and you, in addition to NCC, you now have these depositories that have developed through CCS and what have you.

So, if you had NCC, with a depository system which would, in effect, immobilize the certificate, plus a transaction effecting system which could be easily adapted, I believe, from the system you now have, you may well be going 75 to 80 percent down the line with developing a system.

Now, I would pose this question to the technical people here and ask them if what I am saying makes any sense or not as to being able to adapt what you already have at cost which would be, perhaps, onetenth of the cost that we are talking about, and do it quickly?

Mr. PAINTER. Does any panelist have any comments to make to Mr. Sporkin's remarks?

Mr. WEINBERG. I agree with the concept Mr. Sporkin has described, and in addition to NASDAQ, there are other examples.

The First National Bank of Boston has developed a transfer system which can operate either with or without the existence of physical certificates.

They have now instituted, in conjunction with the Boston Stock Clearing Corporation certificateless transfers for a local Boston company, a publishing house. We find these kinds of systems have been developed, A good many of the necessary elements for a certification system already exist. I don't think we have to start from scratch in developing a brand new certificateless clearing system. I think it should build on what already exists.

Mr. PAINTER. Is the Commission encouraging this development which you describe, Mr. Sporkin?

Mr. SPORKIN. Absolutely. We are not only encouraging it, I think the record ought to be clear on that-that right from the beginning of these problems we were working with these people very, very closely, bringing them all together, trying to get as much consensus as we possibly could. We had industrywide meetings. We had at least four or five of these. We had the NASD people in, I can't recall how many times, but innumerable times. We worked with AMEX people and their studies, and so we have been working very closely because we realize this is the answer, you have to have, to be able to process this data, there is no question about it.

Mr. PAINTER. Of course, you have directed your remarks essentially to over-the-counter systems. In your opinion, isn't there still a problem of developing an interface with the various systems which are being developed by the exchanges?

Here you have the New York Stock Exchange, the Midwest, the Pacific coast, and so forth. Do you envisage the need to develop a national system?

Mr. SPORKIN. The only reason why I tried to keep it in the over-thecounter area is because we know that system is presently there, and I didn't want to interfere with the present hearings that are taking place at the Commission now. Once that determination is made as to what the securities market is going to look like, I believe then that the existing systems can be adapted to take care of them all.

The other thing that I think you have to keep in mind is that overthe-counter clearing now is the least advanced of the other systems, so if you can make your tremendous strides in that area, you have really taken care of a great deal of the problems because that is the most rudimentary type of system that we now have.

So any way you want to look at it, if you get the over-the-counter area going, you have made tremendous accomplishments. I think the others will fall into line as soon as the basic determinations are made as to the market structure, on which you are having hearings the Commission is having hearings and the Senate is having hearings.

Mr. PAINTER. And you don't see that there is any serious reason to be alarmed at the possibility that somewhere along the line, say, 2 or 3 years from now, we might be faced with differing systems that just did not interface with one another?

Mr. SPORKIN. I think that at some point in time that they might not mesh or you are going to get to the point where they may be impeding

each other.

Mr. PAINTER. But then will it be too late?

Mr. SPORKIN. Well, I think we haven't reached that point at this time, and I think that there will have to be a resolution at an early point, and I think there will be a resolution.

I personally have been a very pessimistic person when it comes to the industry and its ability to get out of its back-office problems. I think the chairman knows that from the conferences we had when we really had problems. I feel a little bit optimistic now, quite frankly. I think we are coming out of it in the sense of getting the system, and I am not one who in this area has felt that optimism was called for or could be justified I think prior to this time, but I really see possibilities for a system developing.

Mr. PAINTER. And you see a significant amount of cooperation among industry groups. We hear talk from time to time that some groups in

the industry are pulling in differing directions, and there is even talk at times of vested interests in developing one system over another system.

Do you think that this talk has any foundation in fact or would you characterize the industry today as a more cooperative effort rather than a pulling in differing directions?

Mr. SPORKIN. It is not as cohesive as I think I would like to see it in arriving at the solutions. I do believe, however, that where you are going to find that the brokerage community, itself, is going to be faced with these costs and there is only one brokerage community, when they see the costs involved, I think that decision is going to be made, and I think it is going to be made fairly promptly.

I think you mentioned the point of having to clear through five different entities in a back office. I just don't think the brokerage community eventually is going to permit that to go on. They are going to have to come in with a unified system. I don't think there is any question about that.

Mr. PAINTER. When you speak of the brokerage industry, you recall Mr. Rowen of our staff made a comment last week that at least his impression was that there was a dichotomy between the suppliers of the services and the users of the services. By that he meant, I believe, that in speaking with those who are using the services, the brokerdealers, there was quite a feeling that there should be some Federal coordinating authority to make decisions and to implement them, and to bring about a national system of clearance and settlement, whereas, when you talk to those who are supplying the services, the clearing corporations, there was no such feeling.

Have you had any occasion to reflect further on this? What is your view?

Mr. SPORKIN. As I think I mentioned, the users of the service certainly are going to realize that they are going to need a unified system, and I think that is going to do it. I don't think the suppliers are going to be able to dictate what is going to happen if the users feel that they need it.

I think it is a simple question of the users just saying, "No, we are not going to permit this to go on," and remember the suppliers are, in effect, organizations of users, so that you have a direct relationship there, and the users are going, I think, to make the decision here.

But I think you are going to have to have systems and you are going to have systems fully developed and, once they see these systems are developed, then the choice is going to be made, and I think it is going to come about. And I don't think, as I mentioned, as Mr. Weinberg mentioned, I don't think you will have a recreate the wheel here. I think you have some things going which you can use.

Mr. Moss. At this time I think we will adjourn for the day and reconvene here at 10 o'clock tomorrow morning.

The schedule on the floor of the House is debate on a major education bill, and the Members, most of them, will want to be present there. At this point the committee will stand adjourned until 10 o'clock tomorrow morning.

(Whereupon, at 12:15 p.m., the subcommittee adjourned, to reconvene at 10 a.m., Wednesday, October 27, 1971.)

STUDY OF THE SECURITIES INDUSTRY

WEDNESDAY, OCTOBER 27, 1971

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCE AND FINANCE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to recess, in room 2123 Rayburn House Office Building, Hon. John E. Moss (chairman) presiding.

Mr. Moss. The subcommittee will be in order.

When we adjourned yesterday, Mr. Painter was developing some information for the use of the committee, and at this point, Mr. Painter, you may proceed.

STATEMENTS OF STANLEY SPORKIN, ASSOCIATE DIRECTOR, ENFORCEMENT, DIVISION OF TRADING AND MARKETS, SECURITIES AND EXCHANGE COMMISSION; ELI WEINBERG, PARTNER, LYBRAND, ROSS BROS. & MONTGOMERY; H. CLIFFORD NOYES, REGIONAL VICE PRESIDENT, NORTH AMERICAN ROCKWELL INFORMATION SYSTEMS COMPANY; ROBERT R. MALLER, SENIOR VICE PRESIDENT, UNITED STATES TRUST COMPANY OF NEW YORK; AND BERNARD O'CONNOR, VICE PRESIDENT AND GENERAL MANAGER, UNITED STATES BANKNOTE CORPORATION

Mr. PAINTER. Thank you, Mr. Chairman. Before I proceed with the questions which I was asking yesterday, I would like for the record to ask one further question of Mr. O'Connor.

Mr. O'Connor, yesterday we were talking about the machine readable certificate, and I believe that you gave us a figure as to the number of certificates which the machine could process during one day. What was that figure?

Mr. O'CONNOR. I think I mentioned that the rate of reading per character was in the range of 15 to 25 characters per second, which should give a reading capability of 3,500 to 4,000 certificates a day per person per shift.

Mr. PAINTER. The point which I wanted to clarify for the record is this: If I were feeding one of these stock certificates through a machine, how long would it take the machine to process it; how many seconds or how long would it take?

Mr. O'CONNOR. Well, on the basis of a hundred characters, you probably recall I mentioned there were two things we did not know at this point; namely, what the industry wanted to read on the certificate and, (1613)

67-228-72-pt. 3-20

second, the OCR industry does not know what they want to do with the information after they read it. Those are two basic questions that we have presented over the last couple of years.

Now, using our basic format, which has provision on one line for 100 characters, if my information is correct and it can be verified by the Rabinow Engineering Division, who prepared this machineit would take approximately 7 seconds to read a certificate. Mr. PAINTER. It would take 7 seconds to read a certificate?

Mr. O'CONNOR. That is right.

Mr. PAINTER. So, let us see; how many certificates, then, in 1 minute? That would be roughly eight or nine a minute. Comparatively speaking, this is relatively slow, is it not, when you have a man standing there? It would seem to me to be a terribly tedious task for a man feeding certificates. This would be his job-just feeding these through, and it would take 7 seconds for each one to go through? This is the way the whole system would work, and I just wonder whether it is fast enough.

Mr. O'CONNOR. You have to keep in mind a few points. First of all, one person can operate more than one machine. Second, the machine can be so constructed, as I am advised by Mr. Rabinow, to have a carrier whereby these certificates could be put like three on line to go off in some sort of continuity without any break of doing it on a one-andone situation; you would keep feeding it. The operator could handle two machines, and, also, most importantly, keep in mind that this is the low-cost machine for the low-volume user. There are other machines, the statistics of which I can't recall, that can do astronomical speeds of reading.

Mr. PAINTER. These would be more expensive machines?

Mr. O'CONNOR. That is correct. So we are talking in a framework of the volume user justifying a machine of a higher price as against the small user using the low-cost machine. And, as I mentioned yesterday, the development of this low-cost machine closed the loop, so to speak, on the price areas because when OCR was first looked at as to being economically feasible for certificate reading 3 years ago, when we began work with the Rabinow Engineering Division on this lowcost reader, the price of then-existing machines was high. Now it has been brought down by this what is now really called remote terminal reader.

So we have closed the loop. The analogy: You want a Cadillac or a Pinto. You can still get transportation.

Mr. PAINTER. Yes, I was trying to clarify this point for the record, because it was brought to my attention that there was a 7-second reading speed. This has been thought by some in the industry to be a criticism of the process because it takes, at least in the opinion of some, a relatively long period to read just one certificate. But, as you say, one man can operate more than one machine and this, in effect, doubles the reading time.

Mr. O'CONNOR. Yes, and I think it is important to retain the thought that we are talking about a spectrum of machines of price and reading capability.

Mr. PAINTER. I just wanted to clarify that point. If there are no comments by any of the panelists—yes, Mr. Maller.