Secondary Distribution

After many weeks of cogitation and cautious explanation, the New York Stock Exchange last week raised a phrase of Wall Street's vocabulary from obscurity to national import and significance. The phrase: Secondary Distribution. Basic in the Exchange's structure has been the principle that members receive commissions, but pay no commissions to their employes, for business in Big Board stocks and bonds. Also basic has been the general rule that no member has a listed security ''for sale." A member might advise a stock, might buy it in the open market for a customer, but might not buy it with the intention of reselling it privately. To these principles an exception was made in 1924 when the Exchange adopted a rule that, with special permission, a member might pay commissions to salesmen on listed securities acquired in any way other than from the company itself. Few firms ever took advantage of this exception. In October the Exchange saw reasons which made wide application of the special rule desirable. Chief reason was the shrinkage of the Exchange's daily turnover, so reducing members' incomes that they were having to reduce their office personnel, dispense with faithful, valued employes. The Exchange set about clarifying the entire procedure by which members may acquire securities and pay their employes a commission for reselling them. Last week the situation was explained to members and a capable Exchange committee made ready to listen to the case of any member desiring to engage in the practice politely but correctly called "Secondary Distribution." There are several conditions under which a member may wish to distribute secondarily. For example: a bank may have a large block of a certain stock acquired at high prices. The bank is well aware that to sell the stock in the open market would cause it to drop further, hurting the bank's customers who still have loans on the stock. Perhaps the stock is selling at $27. The bank may now offer an option on, say, 20,000 shares to a brokerage firm at $26. The firm receives permission from the Exchange to redistribute that security. Knowledge that those 20,000 shares no longer overhang the market, plus a little inside buying, may send the stock to $31. The firm's salesmen will then go forth and sell the stock to the public--dentists in Dubuque, porters in Portland--at the new market price. These sales will be made on an investment basis, preferably to persons not likely to throw it back on the market for some time. The bank profits by getting rid of the stock. The firm profits by the $4 difference between buying and selling price, less commissions to salesmen. Critics who are loudest in their objections to the new plan charge that, since redistributing firms will support their stocks during the process of redistribution, another artificial phase will be added to the Exchange's famed "free and open market." They warn that specialists on the Exchange, angry at the loss of potential business, may confound price movements. They say that, theoretically at least, the Exchange may no longer boast its historic attitude: "No Securities For Sale." They warn that if stocks collapse after being sold at prices formally approved by the Exchange, the public will lose all faith in the country's most famed market.

Boosters for the plan insist that the market will be in a better position when overhanging stock is thus distributed to the public. They point to the fact that the Exchange is aware of the plan's bad points, hence will demand much information from firms desiring to redistribute securities. The Exchange has the power to refuse permission, to limit the time during which a security may be distributed, even to withdraw permission. When the "doorbell-ringing" campaign starts to sell Big Board securities on a commission basis, the Special Committee on Secondary Distribution will rank as one of the most potent, responsible committees in Wall Street.

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