Curbing the Curb

For Wall Street it was a week of excitement--and irony. Just as the Dow-Jones industrial average burst through the magic 700 mark (only a decade ago, the average stood at 250), the 1961 bull and its keepers came under the most embarrassing scrutiny the U.S. stock market has faced in more than 20 years.

Some of the scrutinizing was being done by the keepers themselves. For the second time in two months, New York Stock Exchange President Keith Funston warned against "unwise speculation" in low-priced shares and new issues--speculation partly fueled by the highest level of market loans ($5.2 billion) since the beginning of the Great Depression. More worrisome for Wall Street was the announcement by a House of Representatives subcommittee that it planned to investigate both SEC and stock-exchange practices to decide whether investors need to be protected with tighter security laws. On top of that, SEC announced a full-scale probe of the American Stock Exchange, the first publicly announced proceedings against any U.S. exchange since 1938.

SEC's investigation grew out of charges against Gerard A. Re and his son Gerard F., who, from their privileged position as specialists on the American Exchange, made an estimated profit of $3,000,000 in five years of market rigging and price fixing (they have since been expelled from the exchange). Behind the commission's terse promise to check on the "rules, policies, practices and procedures" governing Amex's specialists and other members lay an evident determination to find out how the Res had got away with their shenanigans under the supposedly vigilant eyes of both Amex and SEC officials.

Lusty & Lax. Part of the answer lies in the lusty, freewheeling nature of the American Exchange, which professionals still call "the Curb" in memory of its humble beginnings. Unlike the older New

York Stock Exchange. Amex has no explicit minimum requirements for listing companies (though it usually insists on at least 100,000 shares outstanding), feels free to accept a promising company even if it has no earnings. More of a professional's market than the Big Board, Amex operates in a climate of headier speculation and less disclosure--all of which set the scene for the Res.

As stock specialists, charged with maintaining a "fair and orderly'' market in the stocks assigned to them, the Res were both brokers executing floor orders for other brokers, and traders on their own account. In their role of brokers' broker, they acquired, like all specialists, a treasury of inside information--a situation that has led some critics to charge all specialists with automatic conflict of interest.

Despite the delicacy of the specialist's job, however, SEC has left both the establishment of specific rules for specialists and the policing of them to the stock exchanges; the commission itself can neither change the specialist rules made by the exchanges nor punish offenders with anything more than an order for their expulsion from the exchange.

Dangers of Growth. Policing on the American Exchange is less strict than on the Big Board. While the American Exchange requires a list of all specialists' transactions to be turned in monthly, and takes the specialist to task if his stock behaves erratically, it has nothing like the Big Board's four-times-a-year surprise checkup of specialists' records. Traditionally penny-conscious and understaffed, Amex is even hard-pressed to check all the records it has. The Res. taking advantage of this situation, often did not keep complete records of their transactions, reported no untoward behavior in their stocks, as required, and often failed even to report their transactions to the tape. Though much of SEC's evidence against the Res finally turned up in Amex records, much was not there simply because the Res had failed to report it.

The heady growth of the American Exchange (from 112 million shares traded in 1951 to 286 million in 1960) has helped to further weaken Amex controls. Though trading on Amex fortnight ago exceeded Big Board trading for the first time, Amex has only 160 specialists (who handle an average of six stocks each) v. the Big Board's 350 specialists (who handle only three or four each). To add to the confusion, Amex specialists also handle odd-lot trading, a task left to odd-lot houses by the Big Board.

More Enforcement. One result of the SEC investigation will almost certainly be a demand that Amex bring its policing standards up to those of the New York Stock Exchange. Another, many brokers feel, may be a shake-up of Amex's board of governors (who twice exonerated the Res) in order to give more representation to the big wire houses, which have long exerted heavy influence on the New York Stock Exchange and are acutely aware of the necessity of maintaining an orderly market for their nationwide clients.

SEC's recommendations are unlikely to stop there. Faced with recent scandals even on the closely policed Big Board, the commission may ask for basic changes in the 1934 Securities Exchange Act, which permits the two New York exchanges to be self-policing bodies. SEC does not relish the job of policing the two exchanges itself--it already has more work than it can efficiently handle--but it may ask for power to impose new specialist rules on the exchanges when necessary, urge legislation clamping stricter controls on securities trading. To make its enforcement stand up. the commission may also seek legislation that would subject violators of the specialist rules to federal prosecution.

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