SEC to O-T-C

The world's greatest securities market is not, as most people suppose, the New York Stock Exchange. Together that exchange and 21 others in various U. S. cities trade in a mere 7,000 security issues. But the vast, inchoate and little publicized U. S. over-the-counter market deals with no less than 55,000. The dollar volume of business it handles has been estimated as much as 300% above that of the exchanges, but no one knows how great it is. Nor does anyone know exactly how many "otc" dealers there are. On January 1, 6,883 such dealers were registered with the Securities & Exchange Commission, but it guesses that there are at least 3,000 more.

Since SEC's major purpose is to police U. S. security markets,* this ignorance, after three years' intensive study of the subject, might be surprising were it not that everyone admits that complete o-t-c regulation approaches the impossible. Congress was stumped by the problem while creating SEC in 1934 and purposely left the law vague. SEC ordered that all dealers register. Two years ago, after a majority had done so, it began a cautious supervision (TIME, Jan. 13, 1936). Last summer it issued a set of fair practice rules. But not until last week was it finally ready to take in hand the o-t-c market as firmly as it already has the exchanges. Through SEC Chairman William O. Douglas' close friend and political backer, Senator Francis T. Maloney of Connecticut, the Commission presented Congress with a bill to regulate over-the-counter trading.

Since anyone who engages in the business of trading securities outside of an exchange is an over-the-counter dealer, o-t-c firms range in size from one man behind a dirty glass partition to frenzied establishments with 175 telephones. Because there can be no o-t-c ticker and hardly any published quotations, the market prices are established largely through dealer-to-dealer telephone inquiries. Dealers act either as brokers (buying securities on commission for customers) or traders (selling securities they own to customers).

In counter trading there is no fixed brokerage commission as in the exchanges, and dealers generally charge what the traffic will bear. Most o-t-c dealers prefer to sell as traders because the "spread" between what they paid for a security and what they sell it for can be far greater than are most commissions. In both cases, however, customers have little means of telling whether they are quoted a fair price or charged a fair commission.

This indisputable evil is counterbalanced by numerous advantages which make the o-t-c market virtually indispensable. Since most exchanges will not accept new security issues without much red tape, counter trading is their primary market.* It is also the primary market for buying and selling huge blocks of securities. On the New York Stock Exchange, sale in one deal of $10,000,000 in bonds would cause tremendous speculative excitement and price fluctuation. On the o-t-c market, it passes unnoticed. Secretive firms, loath to disclose their finances, also prefer to have their securities traded on the over-the-counter market rather than on the exchanges. Banks and insurance companies are almost unanimously o-t-c patrons because they fear published fluctuations in their stocks might alarm depositors and policyholders.

By the SEC fair practice code, o-t-c dealers now are obliged to give customers all pertinent information on any deal. But it is manifestly impossible for SEC to keep tabs on all firms to see that this is done. Nearest approach, decided Bill Douglas, was to foster the already substantial trend for o-t-c dealers to band together into associations on a geographical basis. The associations would be expected to police themselves, but if they failed, SEC would have the same disciplinary powers over them that it now has over the exchanges--i.e., to suspend any offending dealer or firm.

*This week SEC ruled that, after Feb. 8, short sales of most securities must not be made at prices at or below the last sale price. The New York Stock Exchange floor rules already prohibit short sales below the last price.

*Strictly speaking, every new issue, whether destined for listing or not, begins its career with an over-the-counter sale--from underwriter to the public.

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