No Casino Allowed

BUSINESS & FINANCE

By last week it was apparent to even the most confirmed optimist that the U. S. is in the midst of a business depression quite severe enough to explain the 40% drop of the New York stock market in the past three months. But in Wall Street there is still much talk that the market's fall is due primarily to such "technical reasons" as lack of liquidity brought on by too much Government regulation. Regarded, therefore, as something of a seer is the Stock Exchange's President Charles R. Gay, who sounded off against Government regulation in his annual report just as the break in prices was beginning (TIME, Aug. 30). From Washington last week the seer got his long expected and long delayed official spanking.

When President Gay made his original assault on SEC trading strictures, the Commission's chairman was James M. Landis. An amiable watchdog, he made only a partial retort, resigned to become dean of Harvard Law School (TIME, Sept. 27). For not replying in full, the SEC came in for considerable criticism from New Dealers. So when the SEC fell to Chairman William Orville Douglas, he began negotiating with the Stock Exchange for a letter to be written by President Gay explaining that the Exchange had no knife sharpened for the SEC and reviewing the Exchange's own plans to keep its house in order. No less than 15 versions of the letter were composed by the Exchange's law committee, sent to Washington and promptly sent back as unsatisfactory. Last week, suddenly losing patience, Bill Douglas issued a manifesto which not only answered President Gay but also confirmed Wall Street's fear that the onetime law professor is a reformer of unswervable purpose. Excerpts:

"I have always regarded the exchanges as the scales upon which that great national resource, invested capital, is weighed and evalued. Scales of such importance must be tamper-proof with no concealed springs--and there must be no laying on of hands. Such scales must not be utilized by the inside few to the detriment of the outside many. . .

"Operating as private membership associations, exchanges have always administered their affairs in much the same manner as private clubs. For a business so vested with public interest, this traditional method has become archaic. . . .

"A vigilant, vigorous, and full-time enforcement of existing regulatory obligations is essential. But even more important is a progressive assault upon the roots of practices which make many of these rules necessary. That assault can be a joint venture of the commission and the exchanges--and it is my hope that it will be exactly that.

"The problem of the permissible field of operation of the professional trading member on the floor of the Exchange for his own account is one which has long pressed for solution. . . . Any study of our markets over the past twenty-five years will reveal that there has always been present a tendency upon the part of the professional trader to accentuate a declining market by selling short for speculative profit at a time when public distress adds a factor of demoralization. . . .

"On September 7 and 10 of this year, two days of spectacular price losses, members of the New York Stock Exchange in general and mere particularly the specialists, were heavy sellers on the decline. . . . [Such] figures serve only to fortify further the conclusion indicated repeatedly in our studies that members of the Exchange trading for their own account--particularly the specialists--either create the daily price fluctuations or else contribute materially to their severity. ... In thirty-five trading days between August 16 and September 25, this year, twenty members alone accounted for 16% of the total trading in the United States Steel common and twelve members accounted for 13% in General Motors common.

"Here we see how extensively the members tend to concentrate their activities in the stocks which are so-called market leaders--stocks the price movements in which undoubtedly have a tremendous effect upon the general trend of prices. . . . These figures as a group are a challenge to the validity of the common assertion that the existence of the specialist and the floor trader is justified on the basis of their stabilizing influence on the market, and their resultant benefits to the members of the public who enter the market.

"In a market in which there is such an enormous public interest--in which not only 300,000 small traders but 10,000,000 investors have a stake, it is essential that no element of the Casino be allowed to intrude and that all such elements be obliterated. . . .

"These problems constitute a challenge to the exchanges and their members as well as to the commission. It is a challenge which can only be met with progressive action, just as any public institution must meet the challenge of time and altered conditions. Such challenges must usually be met with change."

After Wall Street had sizzled for a week at these cracks and all their implied threats, President Gay unburdened himself of a polite but very generalized reply. Excerpt: "I do not contend that the recent decline in market prices is to be attributed to the condition of the market to which I called attention, or indeed to any single cause. I would be less than candid, however, if I failed to say that recent market developments have confirmed my belief that in the interests of the public and the investor the question of what are wise restrictions upon the scope of the market is an urgent one. ..."

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