(a) Commissions must be charged on each transaction executed by members on behalf of others in securities admitted to dealings upon the Exchange; (b) The commissions charged may not be less than the rates set forth in article XV of the constitution; i.e., the commissions set forth are maudatory minimum commission rates;

(c) The commissions charged "shall be net and free from any rebate, return, discount or allowance made in any shape or manner, or by any method or arrangement, direct or indirect"; and

(d) Nonmembers of the Exchange shall pay higher rates of commission than members.

The constitution then sets forth details of rates and regulations covering both member and nonmember transactions in each type of securities dealt in on the Exchange-stocks, rights, warrants, and bonds-all of which are divided into classes and subclasses. For purposes of simplicity, this part will be primarily concerned with the commission schedule applicable to round-lot transactions in regularly traded stocks selling at $1 and above.

The inclusion of the principal commission schedules in the body of the NYSE constitution means, as a practical matter, that the commission schedule can be changed only by amendment of the constitution. Article XIX of that document provides a detailed procedure for such amendment. In brief, this consists of approval by the board of governors and then submission to members. A majority of outstanding memberships must participate in the vote, and a majority of the ballots must favor a change before it can become effective.

(a) Nonmember commission rates.-Three basically different methods have been used to compute nonmember commission rates for stock transactions in the 170-year history of the Exchange. From 1792 to 1919 the base was a flat rate on par value; from 1919 to 1947 it was a sliding scale per share charge on share value; from 1947 to the present it has been a sliding scale on money involved per round lot. The present commission schedule for nonmembers on the NYSE is quite simple in form. It may be summarized as follows:

Money involved per round lot:

Under $100-

$100 to under $400_

$400 to under $2,400.

$2,400 to under $5,000. $5,000 and over..

Commission

As mutually agreed. 2 percent plus $3.

1 percent plus $7.

1⁄2 percent plus $19. 1/10 percent plus $39.

NOTE.-Minimum: $6, when amount involved is $100 or more; maximum: $75.

Several points, to be discussed in greater detail below, should be noted:

1. These are minimum rates and apply uniformly to all nonmembers of the NYSE. Coupled with the antirebate provisions of the constitution referred to above, they obviously preclude direct price or rate competition.

2. These rates cover the basic brokerage function and include ancillary services as well, but there is no specification as to the types or extent of such services to be included, nor is there any prohibition against making additional charges for such services. Thus, within limits, competition in respect of services is quite permissible.

3. Commission rates are computed on the amount of money involved in each round-lot transaction (100 shares). There is no discount for size or volume of transaction; the commission for a 1,000-share transaction is 10 times the amount for one of 100 shares.

4. The declining percent base of the round-lot rate decreases the rate, computed as a percent of round-lot dollar amount, as the dollar value of the round-lot increases.

5. The rate on odd lots (transactions of less than round-lot size) is $2.00 less than the round-lot commission."

542 See sec. 2.e, below, and pt. E of this chapter for a discussion of the odd-lot differential which, in effect, is an additional charge paid by odd-lot customers.

In certain of the above respects, however, as is also discussed below, the apparent rigidity of the schedule is considerably relaxed in actual practice.

(b) Member commission rates.-The member commission schedule differs from the nonmember schedule in two material respects: First, these rates are markedly lower than those set forth in the nonmember schedule. Second, members of the NYSE do not deal with one another on the basis of a single all-inclusive commission rate, but separate member or "internal" minimum commission rates are set forth for: (1) executing and clearing; (2) executing only, and (3) clearing only.

In order to execute a trade on the NYSE without the assistance of another member, a member firm must have a direct wire to a partner on the floor acting as a floor broker. In order to clear a trade executed on the Exchange without the assistance of another member firm, a member must have a "back office" operation within a reasonable distance of the Exchange to facilitate delivery and receipt of tickets and securities, although clearing by mail is now permitted under specified circumstances. Member firms without execution and clearance facilities must channel their Exchange orders through New York member firms possessing them. For this service the "customer" firm must pay the other member the "execution and clearance commission." This rate is prescribed by the Exchange on a per share basis (rather than on a money-involved basis) and varies, with reference to the nonmember rate, from a low of about 17 percent for a $150 stock to a high of about 36 percent for a $10 stock, depending on the price of the security involved.

The "execution and clearance commission" actually consists of two separate commissions. The first, the "execution commission" or "floor brokerage," is simply the commission paid to the specialist or floor broker who executes the order. Based on a charge per share as set forth in the constitution, it varies from about 8 to 21 percent of the nonmember commission in accordance with the price of the security involved. For most transactions, floor brokerage constitutes exactly 50 percent of the prescribed minimum execution and clearance commission. The remaining half, i.e., the "clearance commission," is derived by simply subtracting floor brokerage from the execution and clearance commission.

These member rates apply to member agency transactions, i.e., transactions effected on behalf of customers. When the transaction involved is for the member's own account, procedures and commissions are the same as described above with the exceptions that (1) the clearing commission, graduated on the basis of the price of the security, is substantially lower than on agency transactions and (2) the basic rate applies if purchase and sale of the security are effected on the same day-otherwise a rate 50 percent higher applies. When adjustment is made for this time factor, the member clearing commission ranges from about 4 to 12 percent of the total nonmember commission.

These commissions are set forth in table VI-x, where each is expressed both in dollar terms and as a percentage of the nonmember commission.

TABLE VI-X.-New York Stock Exchange commission charges to members and nonmembers (per 100 shares)

(2) The American and regional exchanges

Until 1958, the nonmember commission rate schedule of the American Stock Exchange (Amex) was the same as the NYSE schedule for stocks over $10 in price but slightly less for lower priced stocks. Since 1958, the rates have been identical, and the rules governing commissions have also been similar in scope and effect. When the NYSE changed its nonmember rates in 1959, the Amex promptly followed suit. The Amex "internal" or member rates are somewhat different, as can be seen in table VI-y, but only one variation is of particular note here: the Amex provides special rates for a separate class of members known as "associate members," established in 1921. Under a revision of the schedule adopted in 1963, an associate membership costs approximately 5 percent of a regular membership (or, recently, approximately $2,500), plus annual fees which are the same as for regular members. It saves its holder about 70 percent of the commissions paid by nonmembers if he clears transactions, and about 60 percent if he does not clear. This type of membership can be utilized only by dealers actively engaged in the business of buying and selling securities. It is discussed further in section 2.a (4).

TABLE VI-Y.-Comparison of NYSE and Amex commission rates on stocks selling at $1 and above (per 100 shares) NEW YORK STOCK EXCHANGE

The nonmember commission rates on the six largest regional stock exchanges registered with the Commission are identical to those of the NYSE, with the single important exception that three of these exchanges grant discounts to certain classes of nonmembers.543 On the

The

54 Broker-dealers qualifying for a special rate as compared with the general public would be "members" under the definition in sec. 3(a)(3) of the Exchange Act. exchange thus assumes some responsibility for regulating their conduct, but not necessarily of the same kind or degree as in the case of regular members or member firms.

Pacific Coast Stock Exchange this discount may be extended, if approved in each case by the Exchange, to "members of a national securities exchange, or a national securities association * * * or (those) engaged in the banking business in the United States ***. The Detroit Stock Exchange discount is available to all "members of the National Association of Securities Dealers, Inc., and/or members of another exchange outside of Michigan where the rules of such other exchange provide for reciprocal arrangements ***." On the Cincinnati Stock Exchange, the discount is limited to (1) members of other exchanges which permit a reciprocal division of commissions and (2) members of the NASD who lack Cincinnati representation and who charge the Cincinnati nonmember rates.

As has the Amex, the regional exchanges have followed the lead of the NYSE in setting their nonmember commission schedules. As chapter VIII.E makes clear, the great bulk of the trading volume of the regional exchanges consists of stocks traded on both the NYSE and the regional exchanges ("dual trading") and is transacted largely by members of the regional exchanges who are also members of the primary exchanges ("dual members"). These conditions constitute fairly irresistible reasons, apart from others, for the regional exchanges' having almost automatically adopted the same nonmember commission schedules as the NYSE. Because of this fact, little separate attention is given here to the commission rate schedules of the regional exchanges.

c. The statutory and business background for commission rate regulation

Section 19 (b) of the Exchange Act vests in the Commission certain authority and corresponding responsibility with respect to commission rates. The pertinent language is:

The Commission is * ** authorized if after making appropriate request in writing to a national securities exchange that such exchange effect on its own behalf specified changes in its rules and practices, and after appropriate notice and opportunity for hearing, the Commission determines that such exchange has not made the changes so requested, and that such changes are necessary or appropriate for the protection of investors or to insure fair dealings in securities traded in upon such exchange or to insure fair administration of such exchange, by rules or regulations or by order to alter or supplement the rules of such exchange (insofar as necessary or appropriate to effect such changes) in respect of such matters as ** (9) the fixing of reasonable rates of commission, interest, listings, and other charges *** and (13) similar matters.

For the purposes of setting the backdrop for the discussion which follows, attention is particularly directed to the following:

(1) The sole statutory standard for commission rates is that they be "reasonable," a term defined only through the criterion of "protection of investors or to insure fair dealings in securities traded in upon such exchange or to insure fair administration of such exchange." The legislative history affords no additional clues. The original drafts of the bills referred to "uniform" rates of commission, but the language was changed to the present wording, without formal explanation, shortly before enactment of the statute.544

(2) The Commission's power in respect of commission rates is to be exercised in the same manner as in the case of certain other exchange rules. After an exchange promulgates a rule concerning commission rates, the Commission is empowered, after formal request for

544 See "Hearings on Stock Exchange Practices Before the Senate Committee on Banking and Currency," 73d Cong., 2d sess., p. 7705 (1934).