odd-lot transactions * * *" At a minimum, the transactions should be systematically reported, as floor traders' transactions are now reported, and the Exchange should itself supervise the handling of odd-lot brokers' "triggering" round-lot transactions.

The matter of automation is of a different character but is not less a matter of public concern. In 1956 the Exchange employed the firm of Ebasco Services, Inc., to make a study of possibilities for automation on the Exchange. The Special Study has reviewed the history of their proposals concerning the handling of odd lots and of the oddlot firms' attitudes and actions in regard to them. It is clear that the two firms regarded the possibility of automation as a grave threat to their duopoly, and it is difficult to escape the conclusion that they succeeded in warding off a consideration of the merits by emphasizing the potential impact on seat values for all members and otherwise beclouding the real issues of economy and efficiency. More particularly, they almost immediately succeeded in establishing the principle that the full complement of associate brokers, with their approximately 100 stock exchange seats, was sacrosanct; and once this principle was accepted, the potential for substantial savings vanished and automation was doomed. Automation, whether of factories, railroads, or securities markets, always presents difficult problems and conflicting interests often including the public interest-but it is unusual to have the problems and conflicts resolved with the factor of cost-savings eliminated at the outset.

That the odd-lot firms themselves would resist any plan for modernization which would reduce their profits, eliminate many associate brokers, and make it easier for competition to develop is not surprising. It is regrettable, however, that the Exchange was so ready to accept their contentions and that the commission firms did not feel called upon to voice the interests of public odd-lot customers, whose business both the Exchange and the firms actively solicit. Finally, it is to be noted that the Commission apparently was not advised of the Ebasco proposals at any point, and there was no governmental representation of the public interest in any stage of the deliberations.

This history has significance reaching beyond the specific subject of odd-lot automation. In an age in which electronic means of communication and data processing are being constantly improved and expanded, there are certain to be many valuable new techniques for the securities markets, if not in the next year or two then in the next decade or two-"certain," that is, if the possibilities are not stifled in private discussions among those with vested interests to protect. Securities markets are not inherently more immune from featherbedding than any other business.

If the securities markets are to be truly public institutions, as they have been under the law for 30 years, the public interest in questions of automation must have a voice. The Commission should equip itself to keep abreast of electronic and computer developments in the securities industry. Otherwise, these may be neglected or suppressed for want of any consideration of the public interest.

The Special Study concludes and recommends:

1. Although existing problems in the handling of odd-lot business on the New York Stock Exchange and its regulation by the Exchange and the Commission can be pointed out with considerable specificity, it has not been feasible nor would it have been

appropriate for the Special Study to undertake the detailed studies required to arrive at specific answers, as distinguished from pointing out the kinds of studies still needed in order to make appropriate and effective improvements. Especially because the problems revealed affect the small investor, it is important not only that they be recognized, but that the Exchange and the Commission move with dispatch toward their resolution. In the absence of prompt and effective action by the Exchange, the Commission itself should directly undertake the needed measures.

2. The New York Stock Exchange should recognize and meet its responsibility to regulate odd-lot differentials. As a first step to that end, it should immediately undertake, with such participation of the Commission as may be found appropriate, a cost study of the odd-lot business. In such study, costs should be appropriately allocated so that odd-lot customers will not be charged for services rendered to others, including the odd-lot firms' cost of stock borrowing and of information services that benefit commission firms or their round-lot customers. As in the case of commission rates on round-lot transactions (see pt. I of this chapter), the Commission should undertake a more affirmative role of oversight in connection with the determination of relevant costs and the fixing of differentials.

3. The Exchange should promptly adopt (i) appropriate rules governing the handling of odd-lot transactions and offsetting round-lot transactions (including but not necessarily limited to the problem of "triggering" round-lot transactions by odd-lot dealers, and the relationships between odd-lot dealers and specialists), and (ii) systematic reporting requirements and surveillance procedures concerning such offsetting transactions.

4. The Exchange should be directed to advise the Commission in writing at an early date (and from time to time thereafter so long as the Commission considers the question open) as to the feasibility of automating the execution of odd-lot orders and as to the possible effects of automation on floor operations, costs, and odd-lot differentials. In connection with its current plans for automation of certain functions and facilities, the Exchange should promptly advise the Commission in writing whether all or any part of the information services now rendered by the odd-lot firms to the Exchange and its members can and should be eliminated, modified, or replaced in any manner. The Commission should make such further studies of its own or in conjunction with the Exchange, and take such further measures, as may be indicated in light of the Exchange's advices on each of the above matters.

5. Inasmuch as the Special Study's consideration of the odd-lot business was essentially limited to the NYSE, the Commission should, in conjunction with the American Stock Exchange and the regional exchanges, undertake studies of the methods and costs of handling odd lots on those exchanges.

6. Reference is made to the recommendation in part I of this chapter with respect to disclosure of the odd-lot differential in customers' confirmations of odd-lot transactions. Reference is made, also, to the recommendation in chapter VIII.B with respect to possible reduction of the round-lot unit.

F. FLOOR TRADERS

1. INTRODUCTION

Members participating in the trading of securities on the floor of the NYSE are of four types: specialists, odd-lot dealers and their associate brokers, floor brokers, and floor traders. In the ranks of these floor members the floor trader is unique, for he is the only such member who is not assigned, and does not assume, any responsibility in the handling of orders on the Exchange. Floor brokers and specialists must meet fiduciary standards of behavior in executing agency orders. Associate brokers consider themselves obligated to fill every odd-lot order placed with them. Specialists must, in certain situations, buy stock from or sell stock to willing sellers or buyers. The floor trader, on the other hand, is no one's agent, and under no conditions is he required to buy or sell stock. His presence on the floor is dictated only by his personal desire to trade profitably, for his own account, on the floor of the Exchange.

In acting on a pure profit motive, the floor trader is on firm free enterprise footing. Highly controversial, however, is the propriety of his trading on the floor, in view of the fact he is not assigned any role in the execution of orders on the Exchange. Critics of floor trading maintain that his competitive trading advantage is unwarranted, and that floor traders accentuate price movements by selling stock on price declines and purchasing stock on price rises. The Exchange, on the other hand, has contended that floor traders produce certain beneficial "byproducts," enumerated as improved market liquidity, stability, and continuity, which warrant their presence on the floor.

In evaluating these conflicting views the Special Study staff has reviewed floor trading materials in the files of the Commission, including numerous statistical studies, reports, minutes of conferences, and public releases of the Commission. Also reviewed were statements of the NYSE with respect to floor traders, as well as a study of floor trading conducted for the Exchange by an independent engineering firm in 1945. Testimony was taken from NYSE officials and floor members concerning various aspects of floor trading.

Although the statistical studies conducted by the Commission have produced consistent results, the Special Study staff repeated certain of these studies, and added others, for three 1-week training periods ended January 27, March 24, and June 16, 1961. Data were obtained primarily from Form 82 reports which each member of the Exchange who effects floor trades must file daily with the Exchange, which in turn files copies with the Commission. These forms include for each reported floor trade the date and time of execution, the name of the stock, the price, the number of shares traded, whether the trade was a purchase, a "long" sale, or a short sale, the trader's position at the opening of the trading session, and whether the transaction was effected on a "plus tick," a "zero-plus tick," a "zero-minus tick," or a "minus tick." 430 Results of these studies are included in the text. Summarized or excerpted results of many of the earlier studies are contained in appendix VI-H.

430 These terms are defined in pt. D, above. A sample form 82 appears in app. VI-G.

This study of floor trading is limited for the most part to the NYSE. Floor trading on Amex, as material in appendix H confirms, is similar in most respects to floor trading on the NYSE. Regional exchange floor trading, as noted at the end of this part, requires additional study.

2. THE NATURE OF FLOOR TRADING

a. Floor traders and floor trading defined

A "floor trade," according to NYSE regulations, is any transaction initiated by a member, while on the floor of the Exchange, for his own account or for an account in which he or his member organization has an interest, except for transactions effected by a specialist in stocks in which he specializes or by an odd-lot dealer in stocks in which he is registered. A floor trade may thus be effected by a specialist in stocks in which he is not specializing, by an odd-lot dealer in stocks in which he is not registered, by any floor broker, by a "floor trader" or by any other member who happens, for whatever reason, to be on the floor. In classifying members, the Exchange designates them as "floor traders," "floor brokers," etc., according to each member's principal activity. When evaluating the propriety of floor trading, however, it is necessary to include all member trading on the floor, with the exception of specialist and odd-lot dealer trading in stocks in which they are registered. Hereafter in this part of the report, the terms floor trader and floor trading are used in this broader sense.

b. Number of floor traders, and amount of floor trading

As of October 31, 1935, 31 individual members of the NYSE were engaged primarily as floor traders, and 4 member firms maintained active floor trading accounts, so that there was a total of 35 "major" floor trading accounts. This figure has since ranged from a low of 30 in 1950 to a high of 48 in the years 1951, 1952, and 1961, excluding the years 1942 to 1949 for which data are not available. In only 2 of the years for which data are available has the number of individual members engaged primarily in floor trading fallen below 28 or exceeded 34. Active member firm accounts, on the other hand, numbering only 4 in 1935, totaled 18 in 1961.431

In addition, the NYSE has reported annually to the Commission, since 1950, the number of members engaged "intermittently" as floor traders, with apparent reference to those members engaged primarily in other activities who effect a significant number of floor trades. The number of such members has shown a steady increase from 68 in 1950 to 150 in 1961. Many other members engage in floor trading on a sporadic or infrequent basis, but their number is not annually reported. Judging from the number of members reporting floor trades during periods covered by studies, the total number of members effecting floor trades exceeds 300 per year.

Although the number of members engaged primarily as floor traders has remained relatively constant and the total number of members engaging in floor trading appears to be increasing, the volume of floor trading has declined since 1937. As indicated in appendix VI-H.1, floor traders' purchases and sales have declined from 61 million shares in 1937 to 44.7 million in 1961, or from 6.8 percent of total Exchange purchases and sales to 2.1 percent.

431 For more detail on the number of floor traders, see app. VI-H.1.

c. Characteristics of floor trading

Prior studies by the Commission indicate that most floor trading on the NYSE tends to be done by a relatively small number of floor traders.432 Data complied by the Special Study confirm this fact. The 15 most active floor traders accounted for 49.8, 55.5 and 56.2 percent of all floor trading volume during the weeks ended January 27, March 24, and June 16, 1961, respectively (tables VI-52 to VI-54). The respective percentages for the 30 most active floor traders were 71.30, 72.89 and 73.75 for weeks in which total floor traders numbered 175, 193 and 162. Although the 30 most active accounts were not the same over each of the 3 weeks, several accounts-including the E. H. Stern, and E. H. Stern & Co., accounts-consistently ranked among the leaders. Together the 2 Stern accounts represented between 12 and 16 percent of total floor trading in each of the 3 weeks. A total of 15 accounts were among the top 30 in all 3 weeks, and 14 accounts were among the top 30 in 2 of the 3 weeks.

A more significant fact is that floor trading has traditionally concentrated in the more active stocks. During a 25-week period in 1935, floor trading in 20 selected active stocks accounted for 14.8 percent of the total reported purchases and sales in those stocks, whereas floor trading in all other stocks amounted to 8.5 percent of the total reported purchases and sales in such stocks. A similar study covering 2 weeks in 1938 found that floor trading accounted for 10.8 percent of total volume in 20 very active stocks, but only 4.7 percent of total volume in all remaining stocks. Over a 4-week period in 1952 floor traders dealt in 527 issues, 84 of which accounted for 32 percent of total reported Exchange volume and approximately 70 percent of total floor trading volume. For the week ended April 3, 1959, floor trading in the 100 most active stocks accounted for 75 percent of all floor trading.433

Data for the 3 weeks in 1961 confirm these earlier findings. During this period 50 percent of all "stock days" 434 were days when volume was less than 1,800 shares, and only 10 percent of the stock days in which floor traders participated are included among these relatively inactive stock days (chart VI-3). That is, 90 percent of all stock days in which floor traders participated were those above the median in activity (as measured by share volume). Floor trading tends to gravitate to the more active stock days to such an extent that approximately 70 percent of all stock days in which floor traders participated

432 See app. VI-H.2.

433 See app. VI-H.3.

434 The "stock day" concept is analogous to the man-hour or man-day concepts utilized in economic statistics. Thus, just as 10 man-days of labor may represent the work of 10 men on 1 day, 2 men on each of 5 days, etc., 10 stock days may represent 10 stocks traded on 1 day, 2 stocks traded on each of 5 days, etc. That is, any stock which trades on more than 1 day is counted as one for each day it trades; e.g., General Motors trading on 3 days during a period under study would be counted as 3 stock days. If 900 stocks are traded on the Exchange on Monday, 1,100 on Tuesday, 1.050 on Wednesday, 950 on Thursday, and 1,100 on Friday, the total number of stock days for the week would be 5,100.

The primary merit of the stock day approach is that it allows a study, by days, of all trading over the period studied, but at the same time breaks down this trading according to the daily performance of each stock. Although stocks cannot be identified by name, the characteristics of each stock for each day it trades (its price, price range, and volume, etc.) are preserved. Thus it is possible to examine the trading of any particular group (public, members, or any class of members) with respect to stocks classified according to those characteristics; for example, public trading in low-priced stocks, member trading in volatile stocks, floor trader trading in active stocks, etc., as each stock displayed such characteristics on each day it traded-in other words, on each stock day. A complete explanation of the process of analyzing these data is set forth in app. VI-A.