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It is true that under the 1934 act Congress delegated its regulatory responsibility and clothed the SEC with broad supervisory and regulatory powers over the registered national exchanges.
But, even as the Martin report points out, though the act specifically contemplated corrective action by exchanges and their members in establishing and enforcing rules, no express exemption from the antitrust laws is provided.
The Martin report mysteriously tells us that it is court decisions, which in its view leaves the question of antitrust immunity for exchanges unclear, that makes urgent the need for such an immunity.
The report argues that since the exchanges are required by the 1934 act to regulate their members, unclear court decisions present them with an untenable choice of either regulating at their peril, or not at all.
The court decisions, however, are in fact, much more clear than the Martin report suggests. In 1963, the Supreme Court considered the question of reconciliation of the Exchange Act with the antitrust laws.
In Silver v. New York Stock Exchange, 373 U.S. 341 (1963), the Court held that actions taken by an exchange to effectuate self-regulation were subject to antitrust challenge where the Exchange Act made no provision for SEC review.
Though the Court seemed to leave open the question of the precise extent of antitrust protection afforded by the existence of SEC review, on March 29 of this year it denied certiorari in New York Stock Exchange v. Thill Securities Corporation, 433 F. 2d 264 (1970), which held that even where an exchange's self-regulatory activity was subject to overall supervision by the SEC, and the SEC had the power to order changes in an exchange rule, an exchange was nevertheless subject to antitrust liability unless it could affirmatively show that the particular rule challenged met the rigid standard announced in Silver: It had to be “necessary to make the Exchange Act work.”
It is my belief that the exchange is today engaged in a number of anticompetitive practices that cannot be deemed “necessary” to the working of the act. I would like to touch on some of these briefly this morning, just to raise them to your attention.
First is the issue of commission rates, currently fixed by the exchange, rather than determined by principles of free market competition. There is no compelling reason, other than the economic self-interest of the insiders, for this practice to continue.
Commission rates should be fully competitive, not fixed. This is a viewpoint shared by the Department of Justice, which recently argued
in the long run competitive commission rates would substantially benefit investors without adversely affecting the securities industry, and that appropriate steps should be taken to phase in such rates.
If the legitimate goals of the Exchange Act are fair dealing on exchanges and the protection of investors, it hardly follows that price fixing is necessary to their achievement. And, quite simply, if it is not "teressary," it is subject to the Sherman Act, just as any other agreement in restraint of trade.
Current restrictions on exchange membership also raise serious antitrust questions. Assistant Attorney General Richard W. McLaren
recognized this in a speech before the Investment Bankers Association of America, over 2 years ago. Mr. McLaren warned that:
A “private club” approach to exchange membership appears to be shortsighted as well as contrary both to the purposes of the Securities and Exchange Act of 1934 and the principles of the antitrust laws.
Yet, the fact is that restriction on the number of memberships on the New York Stock Exchange exists. Membership, I believe, is now set at 1,366 seats. Since many exchange members do not of course, use the actual facilities of the floor restriction on the number of members cannot be justified on the basis of space limitation.
Rather, the motives seem bluntly and disturbingly anticompetitive. Seats have sold for as high a price as $500,000, although the price today is lower. But why should seats be sold like New York City taxicab medallions, because of limited numbers of them?
Restriction preserves the value of seats on the basis of their scarcity. Since the principal benefit enjoyed by many exchange members is access to the membership exchange rate, a seat, in effect, represents access to a price-fixing scheme. What we have is a trade association engaging in price fixing and selling selective memberships.
The antitrust laws, of course, have always required associations to accept into their membership all who meet objective qualifications applied evenly. The London Stock Exchange, for example, has no set limit on numbers. Its primary concern is with good moral character and financial stability.
Restriction on membership, moreover, by limiting access to the inside rate structure, operates to prevent brokers' customers from obtaining the favorable rate, and thus freezes them as captive customers of the exchange members.
Those most directly boycotted by these exchange restrictions are banks, trust companies, mutual funds, and other institutions, which are currently barred from membership by exchange rule 318.
The Martin report, recommending continuation of the ban on institutional membership, tells us the question involves several overriding considerations. The report talks of the importance of recognizing and observing the difference between the securities business and other businesses, and warns against the centralization of economic power, and a market dominated by dealers dealing for their own account that might result from institutional membership.
But surely boycotts, that only lead to the creation of a monolithic exchange with exaggerated powers, provides no bulwark against centralization of power.
An October 16, 1971, editorial in Business Week magazine bears directly on this point. According to Business Week:
Any workable solution to the problems of the securities industry must deal realistically with the institutions. The New York Stock Exchange's rule barring these big investors from membership—and from the resulting savings on commissions-has been the main reason for today's fragmented markets. A single market system that shuts the institutions out has no chance of working.
"Fragmented markets” refers to the other exchanges accepting institutions, and vast amounts of business going to those exchanges outside of the New York Stock Exchange and American Exchange, thus fragmenting the market.
The regional exchanges the Pacific Coast, the Midwest and the Philadelphia-Baltimore Washington Exchanges-currently permit institutional membership. The SEC is now endeavoring to prevent these exchanges from admitting these institutions to membership. A long drawn out battle impends.
The issue of institutional membership is complicated even futher by recent reports that proposed exchange rules now being considered by the board of governors would permit member firms to sell life insurance.
For one thing, these rules surely suggest that the exchange is not always as concerned with preserving the difference between the securities business and the other areas of finance as the Martin report would have us believe.
Second, serious antitrust issues are raised by any attempt of the exchange to compete directly with insurance companies while not permitting them to compete with exchange members in the securities market.
I wish to focus attention on rule 394 of the exchange, which prohibits exchange members from engaging in off-board trading in listed securities except under the extremely complicated and very difficult requirements of 394(b).
As many as 30 years ago, gentlemen, in the Multiple Trading case, 10 SEC 270 (1941), the Securities and Exchange Commission instituted a proceeding aimed at a 1939 exchange resolution which threatened to expel member firms who dealt as principals on regional exchanges. The Commission found this attempt to discipline a violation of the Exchange Act.
But the Commission has been more hesitant in taking much needed action against 394, an effective boycott in antitrust terms.
According to a Justice Department memorandum submitted to the SEC:
The New York Stock Exchange's practice of restricting members from seeking bids from off-board market makers has been almost continuously before the Commission for the last six years. It began with increasingly restrictive interpretations of the original Rule 394 which became in effect a flat prohibition against Off-board trading. This was supplemented in 1967 by Rule 394 (b) which provided an exception-involving permission by floor governor, notification of other members, and possible displacement of the non-member's bid by the specialist or other members. An impossible condition to carry out.
The 1968 hearings included extensive testimony criticizing the operation of Rule 394 (b). The thrust of this testimony was that 394 (b) had been very slightly used largely because of the complexity, delays and inconvenience of the procedure-all of which discourage members from seeking off-board bids even where better markets are available.
During the course of the SEC rate structure hearings—and this is very important, gentlemen-the fact was made public that the SEC in 1965 conducted an investigation of rule 394.
I am told that approximately 2,000 pages of transcript were taken in this investigation and that, in addition, nontranscribed interviews were conducted with a variety of financial institutions and experts who were closely familiar with the issues.
I am informed further that extensive documentary material was obtained from the New York Stock Exchange and other exchanges pursuant to subpena.
Those individuals who testified on the record were given an opportunity to obtain copies of their own transcript, but none of these have been made public. The SEC staff study—approximately 200 pages in length-summarizing the factual information obtained, has not been made public. It is so marked “Confidential.”
Here it is. Very few people have it. I have one copy, and another gentleman in this room has it. The president of the New York Stock Exchange has it, the president of the American Exchange has it, several lawyers have it, and yet it has not been made public. It should be made public.
You gentlemen should have that, and you gentlemen should read carefully this document, which is condemnatory of the exchange because of its action with reference to off-board trading.
It is very anomalous, gentlemen. An action was brought in the U.S. District Court for the District of Columbia under the Public Information Act over a year ago. The question could be decided on motion papers-no trial. It could be decided in 5 minutes. Yet, there is no decision from that court, and it is over a year ago that the matter was presented.
Why? I would like to know why. That judge has not given his decision yet. It could be done in 5 minutes. It requires just the reading of the documents for and the documents against, and they are not voluminous.
Mr. STUCKEY. Mr. Chairman.
Mr. STUCKEY. Mr. Chairman, are you submitting the transcript you have for the record ?
Mr. CELLER. I am not.
Mr. STUCKEY. Would it be possible to have it submitted for the record?
Mr. CELLER. It was given to me in confidence, but I read it, and this committee should have it, and every member should read it. Then you will be able to formulate a logical conclusion as to what you should do with reference to 394, the rule that prohibits members from trading off the exchange.
Mr. STUCKEY. If you are not submitting it for the record, could it be made available to the members?
Mr. CELLER. There is one certain portion that will be made a part of the record, and I am going to read it.
The summary and conclusions of the study were made available to the New York Stock Exchange. Those conclusions lead one to believe that rule 394 is designed to preserve the power of New York Stock Exchange members to impose double commissions on trade effected through the exchange. The interest of investors or getting best execu tions on the exchange seems to be of distinctly secondary importance
According to the summary and conclusions:
(T) he operation of Rule 394 appears in many cases to have thwarted rathe than furthered the purposes of the Exchange Act, a result which appears to have important implications under the antitrust laws.
Of additional significance, the summary and conclusions add: The purpose and effect of the prohibition against members trading for their own account and executing agency orders for public customers off the floor of the Exchange is to inhibit competition of the member firm and nonmember dealer with the specialist * * * (T) he evolving restrictive interpretations of Rule 394 were the direct result of competitive markets being made by nonmembers. In addition, *** Rule 394 reflected decision by the Exchange that all nonmembers be required to pay a minimum commission on the execution of any order to which they were a party; this decision was enforced through requiring all executions to be done on the floor of the Exchange irrespective of whether the nonmember was using the member as its agent. Prior to such time, member firms executed orders off the floor—particularly in crosses between nonmembers, buyers and sellersin which the Exchange member obtained only one commission for acting as intermediary in the trade. Other major securities exchanges both in the United States and elsewhere take a less restrictive view of their minimum commission rate schedules, the obligation of an Exchange member to obtain the best execution for its customer, and the categories of persons required to pay commissions.
In plain language, this means simply the imposition of double commissions, to the disdvantages of the public and in violation of the antitrust laws.
Finally, though the summary and conclusions concede that there may be some beneficial results flowing from a policy of centralization of executions on an exchange floor, it is expressly noted that:
(0)n balance, the disadvantages seem to outweigh the advantages, and neither the Rule nor the current interpretations seem to be a sine qua non for a healthy market operated in the public interest. It simply goes too far and encompasses too much.
All indications, then, are that the exchange, not insulated from antitrust liability, has consistently violated antitrust principles.
Thus, at the same time that the exchange seeks congressional immunity, it stands before the bar of public opinion as malefactor. We have no proof other than pretense and sham and folderol that it does not still remain, and intends to remain, intolerably, a law unto itself.
That in fact is the great danger inherent in the Martin report, labeled by one scholar "a classical prescription for monopoly."
Mr. Martin has suddenly confronted us with a single nationwide market, armed with antitrust immunity, restricting entry and exclusively trading every listed stock. It thus directly eliminates competition from the third and fourth markets, and prevents the trading of the same security on more than one exchange.
The effect of this stock auction would be the development of a national exchange system in which individual securities are allocated to a particular exchange. Off-board trading, either on other exchanges or over the counter would be prohibited.
The New York Stock Exchange and American Exchange presumably would be granted exclusive franchises for trading of securities of national importance. Regional exchanges, accordingly, would either disappear or subsist on purely regional listings. The third market would be eliminated.
It has been said: (T)his is too big a country to have one railroad, one airline, one automobile manufacturer, let alone one stock exchange. This country has prospered because, among other things, we have avoided unnecessary centralization of power. Now is not the time to turn our backs on that wisdom.
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