Not only are floor members in the most advantageous position to evaluate general market conditions and the market in individual stocks, but in addition they are in a position to react immediately to developments affecting such markets. Unexpected announcements concerning earnings, dividends, mergers, contract awards, litigation, etc. often create sudden activity and price changes. The floor trader is but seconds away from such trading. Other speculators or investors have both a time disadvantage and the handicap of having to designate an agent to represent them at the post.

The floor trading in Sperry Rand Corp. on Wednesday, January 25, 1961, illustrates the significance of these floor trader advantages. Just before noon, the board of directors of Sperry Rand Corp. decided to declare a 2-percent stock dividend in lieu of the quarterly cash dividend on its common stock.445 This decision was made known to the NYSE by 1:48 but the announcement, which also noted a substantial decline in net earnings, did not appear on the Dow Jones "broad tape" until 2:32 that afternoon. In order to relate this announcement to the activity of floor traders and the price action of the stock, every transaction in the stock during the day was plotted, and transactions by floor traders and specialists were identified (chart VI-5). These data were then summarized by six periods which reflect the significant price movements and floor trading activity in relation to the dividend announcement (table VI-62).

444

Between the opening and 1:30, the price declined from 233% to 2234 on a volume of 24,800 shares, as floor traders purchased 600 shares and sold 9,500. The great majority of the floor trader sales throughout the day were effected by the E. H. Stern and E. H. Stern & Co. floor trading accounts, which had no purchases in Sperry Rand Corp. for the day. Between 1:30 and 2:21 the price suffered its greatest decline of the day, dropping off 1 point to 2134 on an accelerated volume of 20,800 shares, as floor traders purchased 1,000 shares and sold 9,400. At about 2:22 the stock began its only rally of the day; by 2:32 it had regained 5% of a point to 22% on a volume of 6,400 shares, as floor traders purchased 1,500 shares and sold 900. The dividend announcement at 2:32 did not immediately reverse the rally; the price remained at 22% as of 2:36, having briefly touched 222. While the price held between 2:33 and 2:36 floor traders made no purchases and sold 1,700 shares. Between 2:37 and 2:45 the price fell 3% of a point to 22 on a total volume of 9,900 shares, as floor traders bought 300 shares and sold 8,100, or 81.8 percent of all shares sold. Thereafter floor traders virtually abandoned the stock, purchasing 800 shares and selling 800 as total volume ran to 30,600 shares or 31.5 percent of the day's total

443 On Wednesday, Sperry Rand closed at 21%, off 1% on a total reported volume of 97,200 shares. On Monday of that week, the stock had closed at 234, off on a total reported volume of 21,900 shares, as floor traders purchased 1,200 shares and sold 2,000. On Tuesday the stock closed off 14, as floor traders purchased 2,200 shares and sold 800 out of a total reported volume of 32,200. Volume suddenly soared on Wednesday as the stock suffered a large price decline, and on this date floor traders purchased 4,300 shares or 4.4 percent of all reported purchases and sold 30,400 shares or 31.3 percent of all reported sales. On Thursday, volume increased again to 138,200 shares as the price declined, and floor traders continued to sell on balance, purchasing 11,000 shares and selling 14,800. As the stock recovered 14 on Friday to 22% on a reported volume of 90,300 shares, floor traders became purchasers on balance, purchasing 5,300 shares and selling 4,400.

444 All transactions for the day are taken from the daily publication "Stock Sales on the New York Stock Exchange" by Francis Emory Fitch, Inc. This source indicates a total volume of 97,000 shares in Sperry Rand Corp. on Wednesday while the Wall Street Journal reported 97,200 shares. A 200-share discrepancy thus appears in the various tables, depending on the source used.

volume-in the final 45 minutes of trading. The heavy volume after 2:45 indicates that it was not until this period, after the floor traders had virtually completed their sales for the day, that the public reacted to the news.

The Special Study made no inquiry into the circumstances surrounding sales in Sperry Rand Corp. before the dividend news was publicly disseminated. It is clear, however, that floor traders utilized their time and place advantages in the moments following the announcement to react quickly to the news. Between 2:33 and 2:45 they sold 9,800 shares, or 32.2 percent of their total sales for the day, while a total of 14,400 shares traded. Not only were the floor traders able to sell large amounts of stock before the public reaction became evident at the post, but in addition those floor traders who had been trading in and out were able to realize profits in the sale of stock bought just prior to the announcement. Six of the first eight floor trader transactions after 2:32 involved the sale of stock purchased between 2:23 and 2:31 during the brief rally, and not one of these transactions was effected at a loss:

TABLE VI-1.-Selected sales by floor traders in Sperry Rand Corp. between 2:33 and 2:45 on Jan. 25, 1961

1 Purchase price was deemed to be the last price at which the floor trader had purchased Sperry Rand Corp. stock.

One floor trading account purchased these shares in one 400-share transaction at 2:30.

Floor traders, in short, exerted a depressing influence on the stock prior to the adverse news, and-reacting more quickly to the news than other investors-further contributed to the price decline in the moments immediately following the news by selling more heavily than in any similar period during the day.

As was noted at the outset, the floor trader is the only member of the Exchange who has no special function and undertakes no obligations in relation to the operation of the market as a public institution. In light of the governing statutory scheme of the last 30 years, this fact, in itself, raises a fundamental question of public policy as to the extent to which a public market may be permitted to shelter such private trading activities, even apart from serious questions as to the net impact of floor trading on the orderly functioning of the market. An examination of that impact is the subject of the next section. b. The relationship of floor trading to price movements

On at least 15 separate occasions over the past 27 years, the Commission or the Division of Trading and Exchanges has systematically collected and analyzed data which show that floor traders as a group are usually buyers when the market is rising and sellers when the market is declining, and that they are generally sellers in declining

stocks and buyers in rising stocks. Thus, another most serious objection to floor trading is that it is inimical to orderly functioning of the market because it accentuates price movements in the market as a whole and in individual securities; i.e., it is a significant destabilizing factor in the market.

The design of these studies has taken various forms. The Division of Trading and Exchanges has computed floor trader net purchase or sale balances (the extent, measured in number of shares, to which floor traders purchased more than they sold, or vice versa) during various market trends as indicated by one or another of the market indicators, e.g., Dow Jones, Standard & Poor's, SEC, etc. Many of these studies are set forth in condensed form in appendix H.4.

In order to determine the relationship of floor trading to price trends in individual stocks, the same type of studies have been conducted for individual stocks or small groups of stocks, utilizing price movements in the stocks involved rather than overall market indicators. These studies, a few of which are set forth in appendix H.5, show that floor traders tend to trade with the price trend in individual stocks or small groups of stocks.

In addition, the Division of Trading and Exchanges has on numerous occasions analyzed the timing of floor trades. In both chart and table form, floor trades have been plotted in time sequence against price movements (in both individual stocks and the market as a whole) and total trading volume. These charts and tables provide additional evidence of the destabilizing impact of floor trading on price movements.445

In the following subsections, more detailed attention is given to the relationship of floor trading to price movements in the market as a whole, and to price movements in individual stocks.

(1) Relationship of floor trading to market trends

The relationship between market trends and floor traders' net balances has been tested and stated in various ways. No matter what the scope of the study or form of presentation of results, the studies have consistently shown that floor traders trade predominantly with the trend, thereby accentuating market movements. When there is little change in the market indicators, this tendency is not pronounced and floor traders will often trade against the trend. As the market movements increase in size, however, the tendency for floor traders to trade with the trend becomes marked. The length of test periods has ranged from five minutes through hours, days, weeks and periods of major index trends (e.g., changes of more than 20 points in a standard index) which cover many months. The studies have included periods of rising, declining, relatively stable and hybrid market prices. They have variously tested the net balances of all floor traders, the 50 most active floor traders, and all floor traders who purchased or sold more than 500 shares during a 1-week period. They have included both the NYSE and Amex.

Results have been stated in several ways. Some studies compare the number of days during the test period on which floor traders traded with the trend and the number of days on which they traded against the trend. Other studies indicate the net number of shares

445 See app. VI-H, charts 1 through 11, and tables 13 and 14.

96-746-63-pt. 2 -15

purchased or sold by floor traders over given periods of rising or declining market movements. Many studies combine both forms of presentation by (1) breaking test periods into several groups of days, the first group containing days of greatest price rise and the last group days of greatest price decline; (2) computing for each group the number of days on which floor traders traded with the trend or against the trend; and (3) computing the average daily purchase or sale balance of floor traders for each group. 446

In every period of major market trends studied by the Division of Trading and Exchanges in which the market fell to any significant extent, floor traders were sellers on balance. In all but two studies of significant index rise, floor traders were purchasers on balance.447 These two exceptions may be attributable to floor trading rules then in effect on the NYSE, and will be treated in more detail in the subsection on regulation, to follow. Studies of the relationship of floor trading to daily market movements have also consistently shown floor traders to trade with daily trends, the only exception occurring during one of the major rising market trends noted above.448 Similarly, studies have shown that floor trading tends to follow hourly and 5minute changes in market indicators.449

A study of floor traders' net daily balances over the 2-year period from November 2, 1959, to November 1, 1961, confirms the fact that they tend to trade with the trend of daily market movements (table VI-63). In 21 of the 24 groups of days (classified by changes in a standard market index) covering the 2-year period, floor traders traded more shares with than against the daily index trend. Moreover, their net daily balances tend to be larger when they trade with the trend than when they trade against it. Thus, their average daily balances with the trend were larger than their average daily balances against the trend in 16 of the 24 groups of days.

In the three 1-week periods studied, floor traders traded with the daily market trend on 11 days, against it on 4. The net daily balances were further refined for 4 of the days on which floor traders traded with the trend, by computing separately floor trader net balances in rising stocks and declining stocks. The results, covering 2 days when the market index increased and 2 days when it declined, are as follows: 450

TABLE VI-m.-Breakdown of aggregate floor traders' balances

447 Periods of major trends studied by the Commission are noted in apps. VI-H.4.b and VI-H.4.g. The periods in which floor traders were found to be trading against a rising trend are noted in app. VI-H.4.g.

448 Many examples of floor trading with daily market movements are noted in app. VI-H.4. The exceptional result is noted in app. VI-H.1.h.

440 See apps. VI-H.4.e, VI-H.4.f, and VI-H.4.j.

450 See tables VI-64 to VI-67 for a more complete presentation of data.

These results indicate that daily net balance data tend to understate somewhat the effect of floor trading on rising stocks, and similarly tend to overstate to a degree its effects on declining stocks, but overall provide meaningful indicators of the effect of floor trading on market movements.451

(2) Relationship of floor trading to price movements in individual stocks

When individual stocks or stock days are considered, the tendency of floor traders to follow the trend of price movements becomes even more salient. This tendency was studied for stock days in which floor traders had a high participation rate, for stock days in which high floor trader participation occurred in conjunction with wide price movement and high trading volume, and for all stock days in which floor traders traded, taking into consideration the size of their balances. Over the 3 weeks there were 50 stock days in which floor traders accounted for 25 percent or more of either all purchases or all sales in a given stock (table VI-70). Floor traders traded with the trend in 40 of these cases, against the trend in 6, and in 4 cases were heavy buyers or sellers in stocks that were unchanged on the day. That is, when floor traders accounted for 25 percent or more of the purchases or sales of a stock on any given day, they traded with the price trend of that stock in 80 percent of the cases.

Floor traders accounted for at least 10 percent of either all purchases or all sales in stock which experienced a price change of 1 point or more on a volume of 10,000 shares or more, on 40 stock days over the 3 weeks studied. On four of these stock days floor traders' purchases exactly equalled their sales. Of the remaining 36 stock days, floor traders traded with the trend in 23 cases, or 64 percent of the stock days, and against the trend in 13 cases, or 36 percent of the stock days (table VI-68).452 Moreover, their balances were far larger on the average when they traded with the trend than when they traded against the trend. Thus, their purchase and sale balances with the trend totaled 70,700 shares, or an average of 3,074 shares per stock day, while their balances against the trend totaled only 14,500 shares, or an average of 1,115 shares per stock day. Floor trading in these stocks in most instances tended to increase relative to total volume on days when total reported volume increased, and to show a relative decrease as total reported volume decreased (table VI-69). In many cases-two of which follow-this pattern was particularly conspicuous. On March 21 floor traders traded 1,000 shares of Lear, Inc., out of a total volume of 28,400 shares, but on March 22 they traded 16,000 shares as total volume increased to 75,300 shares. On January 24 they traded only 400 shares of Food Giant Markets, Inc., out of a total volume of 7,500 shares, but on January 25 they traded 20,100 shares as total volume soared to 108,700 shares.453

451 Compare the contrary results obtained in a breakdown of specialist net balances in pt. D, above.

452 Although these 36 stock days represent only 1.6 percent of the 2,274 stock days on which floor traders traded over the 3 weeks, the 284,600 shares they purchased and sold on these 36 stock days constitute 9.2 percent of the total shares (3,091,270) they purchased and sold over the 3 weeks. Their purchases and sales for the 23 stock days on which they traded with the trend accounted for 6.8 percent of their total purchases and sales over the 3 weeks.

453 A third example-trading in Sperry Rand Corp. on Jan. 24 and 25-has already been noted.