Target for Blunderbuss

Last week the Senate raised its great blunderbuss of investigation and prepared to fire a $50,000 broadside upon the buying and selling practices of all U. S. stock exchanges. Broad though the range of the inquiry was, most Senators realized that its real target was short sales on the New York Stock Exchange. From President Hoover down, many a U. S. citizen has long believed that such sales maliciously depress the market, add to hard times.

The investigation starting this week will be made by the Banking & Currency Committee, chairmanned by Senator Peter Norbeck, onetime South Dakota well-digger. A stanch believer that short sellers are vicious and their influence destructive, Senator Norbeck went about his new task enthusiastically last week. When asked what effect his inquiry would have on the stock market, he almost yelled:

"I don't know and I don't care!"

While Wall Street knows that Senator Norbeck will do his best to throttle short sales, that Senator Carter Glass will aid and abet him, it hoped for judicial treatment from Connecticut's Senator Frederic Collin Walcott, onetime vice president in the banking house of Bonbright & Co. A close personal and political friend of the President's, Senator Walcott together with Senator James Couzens persuaded the Committee to investigate bulls as well as bears. "We are not seeking sensational-ism," he said. "And we are going about this in a sane way. There is no intention ... to seek legislation interfering with the regular operations of the stock exchanges."

The Short Sale. Every transaction consists of a purchase and a sale. To sell short means that the seller has not got what he is selling but expects to acquire it later at a lower price. A short sale in stocks is essentially a contract between a seller and his own broker. A speculator, for example, wants to sell 100 shares of U. S. Steel short. The broker executes the sale in the normal way and gives the buyer a certificate for 100 shares of Steel. The buyer then disappears from the picture. The broker, being owed 100 shares by his short-selling customer, demands from him a deposit of 30 or 40% of the amount involved as protection. If the stock starts going up and the customer cannot put up more margin, the broker buys TOO shares of Steel himself, charges it to the customer and evens up his books. If it goes down and the customer decides to cover, he merely buys 100 shares which, in effect, he gives to the broker to close out the transaction. The difference between selling and buying prices is his profit or loss.

Borrowing. But whence the 100 shares to the buyer? If the broker has not got them in his office, he must go out and borrow them from another broker with whom he must put up the stock's full cash value as security. Sometimes, depending upon the available supply of individual stocks, the lending broker pays the borrowing broker interest on his cash deposit. Sometimes the borrowing broker not only foregoes interest on his cash but has to pay the lending broker a premium for the stock itself. This premium is charged to the short-selling customer.

The Theory. Presumably, the chief source of income of members of the Exchange is from commissions. They realize it is to their advantage to bar any practice which would tend to destroy values and frighten the public away from the market. Thus permission of short-selling is evidence that they honestly believe it is not destructive.

Most members of the Exchange go farther than such a negative statement. They feel short-selling is beneficial in that it tends to limit the movements of stocks. The theory is that when a stock gets too high shorts begin to sell it, stop the rise, save a bullish public money; that when it gets too low they start to cover and hence provide support in a declining market.

The Practice. No critic of short-selling denies that the market-stabilizing theory on short sales is excellent. But critics do claim it fails to function. Their first argument is that the theory presupposes that short-sellers are more astute than other traders. But their chief point is that short-selling has been abused. The charge of abuse is that shorts help their own ends by deliberately depressing prices. Just as a pool of bulls creates excited buying, a pool of bears brings frightened selling.

The issue becomes largely a matter of intent. Selling a stock short because it seems too high is ethically not wrong. Selling it with the idea of taking an active hand in making it go lower cannot be justified to most critics of the Exchange. Of the many who have sold stocks short, only a few did so with malicious intent. But it is easy to image Senator Norbeck demanding a halt to all short-selling in order to stop such actions.

The Specialist. For every stock there is a specialist, a member of the Exchange who keeps a book in which he enters all orders to buy or sell at a fixed price. Hence he, and anyone to whom he shows the book, usually knows what would happen if a stock went up two points or down two. He often has an account of his own and sometimes, contrary to the rules of the Exchange, uses his knowledge to his own advantage.* A specialist requires great capital behind him since, in order to keep the market open, he must often deal directly in the stock against his better judgment.

Preparation, Forewarned that such an investigation by the Senate was coming, the Exchange has been preparing itself. The preparation has been in obtaining adequate information to use at the hearings, in propaganda speeches in defense of short-selling and in modifications of the procedure under political criticism.

Advocates of short-selling have not been pleased by these modifications, fearing they will be interpreted as an admission of error or weakness by the Exchange. The most recent modification was a rule that brokers cannot lend stock without the owner's special written consent, thus eliminating the complaint that lending a stock without specific consent is a "betrayal" of the customer.

Emotion. Most U. S. citizens have been hurt by the decline in prices. Many of them cannot believe present prices are justified by future prospects. Most of them believe bears ''selling what they did not own" depresses prices. Many of them, including their President, are sure that the market's decline made business worse. In normal times nobody likes a bear. When the bear has been right and the people wrong they dislike him even more intensely. Wall Street last week awaited the start of the Senate's investigation with some fear, much curiosity. Its fear was chiefly that the probe might evolve into a punitive bear-hunt out of which would grow legislative restrictions upon a free and open market.

*The Stock Exchange, ever diligent to discover and punish violators, has suspended two of its members within recent months for unethical trading.

This file is automatically generated by a robot program, so reader's discretion is required.