Exchange Act authorized the Commisison to deal with such misuse, directing it to implement that section's ban on "any fictitious quotations." An official of the NASD has described the National Quotation Bureau which publishes the sheets as a "private business that is connected with a public interest." No legal restraints prevent any person from undertaking the operation of a wholesale quotation system, but since the Bureau now enjoys a virtual monopoly in its field, any discussion of such systems must focus on it.

a. National Quotation Bureau, Inc.

(1) Structure and mechanics

The Bureau is a private, profitmaking corporation unaffiliated with the NASD or any other organization.159 The Bureau is not subject to regulation by the Commission.100 While the present management of the Bureau is considered responsible, there is no legal assurance that this type of management will continue in the future. The NASD is not unconcerned about the potential dangers here; its executive director made the following statement to the study:

A. I have to say I think Mr. Walker [president of the Bureau] has done and is doing a very good job within the limits of his ability to do so in policing the sheets. Sometimes there is a slip. But I know that he is sincere in his endeavors to police them. I do think that the NASD would take a very dim view of any group getting control of the NQB unless it was just a topnotch group of people. We would be very much concerned if a trading group got control of the NQB. We would be terribly concerned if an inside group consisting of certain underwriting people would get control, certain kinds of underwriters. So, we do have considerable concern as to the future of that organization and what might come out of it.

Q. Could you expand a little bit as to why you would be concerned if certain types of people got control? Why would it be a matter of concern?

A. In the last 3 or 4 years we have had an entirely new type of person entering the underwriting business. I do not think that their ethical concepts are the highest. I think they would not hesitate to use the sheets for their own purposes in maintaining their own markets. I think that would be very dangerous and disastrous. I can also see certain dangers in certain types of trading houses getting control of the sheets. They could use the sheets for their own purposes in making markets in which they were particularly interested. All of these things may add up to considerable danger.

The sheets of the Bureau are ostensibly available only to brokerdealers to inform them of interests in buying or selling securities. The bids and offers that appear may not be a completely accurate indication of the actual market at the time of publication since there is inevitably a delay between a broker-dealer's submission of a quotation and its publication. However, quotations are supposed to be "firm" as of the time of submission: when a broker-dealer submits a quotation, he represents that he is, at that time, willing to trade at the prices quoted. If the quotation represents only a basis for negotiation, there is supposed to be an indication to that effect.161

The sheets do not report on any set "list" of securities. A brokerdealer may submit quotations for as many securities as its contract

159 The service was founded in 1911 by Arthur Elliot, and in 1913 merged with a monthly publication_to form the Bureau. Louis Walker, now its president, began as an employee in 1911. In the early 1920's he purchased an interest in the Bureau, and upon the death of Elliot in the 1930's, Walker bought the controlling interest, which he retains and actively exercises.

100 Quotations for securities traded on exchanges are disseminated and their use is regulated by the particular exchange involved. See ch. VI.B.1. The Commission under sec. 19 (b) of the Exchange Act has the power to alter or supplement exchange rules dealing with, among other things, "the reporting of transactions on the exchange and upon tickers maintained by or with the consent of the exchange."

181 See the discussion of firmness of quotations in sec. 2.b, above.

with the publisher permits. Both the securities quoted and the broker-dealers submitting quotes differ from day to day.162 Widely known and actively traded issues are likely to appear regularly, with as many as 20 or 30 dealers quoting 2-way markets. For many other securities, entries may be quite sporadic, with only one or two dealers appearing, and not even one indicating an interest in both buying and selling 163 Many securities may not be quoted at all, either because no active trading interest exists or because the sources of trading interest are so well known that the market makers consider publication of wholesale quotations unnecessary.

The sheets appear each day in three editions. The Eastern Section, or "pink sheets," is printed in New York and is by far the largest, with over 200 pages of quotations on stocks and about 30 pages on bonds. The Western Section, or "green sheets," is printed in Chicago, with about 32 pages. The Pacific Coast Section, or "white sheets," is printed in San Francisco, with about 42 pages. Many firms in the Pacific Coast area subscribe to, and enter quotations in, the pink and green as well as the white sheets. The Eastern and Western editions have a unified list of 2,000 subscribers. The Pacific Coast edition has 225 subscribers, of which 25 broker-dealers are in the East.

In January 1963 the three editions listed each day a total of about 39,000 quotations covering approximately 10,000 securities and submitted by between 1,000 and 1,300 broker-dealers throughout the country.

The trend of listings over recent years is evidenced by the following: TABLE VII-b.-Number of stock and bond issues quoted in the National Quotation Bureau "sheets," 1950-63

The Bureau charges $336 per year for a subscription to the sheets, which any broker-dealer registered with the Commission may obtain. The sheets are also available to the Commission, the NASD, the Internal Revenue Service, and State tax and securities commissions.

Although the Bureau and the NASD have traditionally considered it a matter of policy that wholesale quotations be available only to broker-dealers (and regulatory bodies), 35 banks and 33 investment advisers were subscribers as of October 1962. The banks' subscriptions were acquired at a time when the Bureau permitted banks to subscribe and gave them perpetual options to renew; subscriptions are no longer available to banks lacking such contract rights. The subscription list includes many of the leading investment advisory services. The Bureau says, "Our reason for furnishing the daily service

162 For a discussion of the continuity and frequency of appearance of issues and of the nature of the markets indicated, see sec. 2.b, above.

163 For example, of the approximately 14,000 domestic over-the-counter stocks for which broker-dealers advertised markets in 1961-62, only about 8,100 were quoted on Jan. 15, See sec. 2.b, above.

1962.

96-746-63-pt. 239

to investment advisers is that they are registered with the SEC and are supposed to be fully informed on the job they are doing."

Institutions and other knowledgeable investors also usually are able to get copies of the sheets, or price information in them, from brokerdealers. For example, a number of institutions replying to questionnaire IN-4 indicated that they were accorded access to the sheets by broker-dealers in return for commission business. Thus, despite the Bureau's and the NASD's stand against any public dissemination, it appears that some non-broker-dealers do have access to the wholesale price information in the sheets.164

To insert listings in the sheets, a broker-dealer must satisfy certain requirements of the Bureau, discussed below. Once these have been met, it can insert 10 listings in the daily sheets for $564 per year, including the cost of the subscription and, in effect,165 any additional listings for which it is willing to pay, at the rate of $240 for each additional 5 listings. At the present time, about 1,300 firms have the right to insert listings. Of these, 97 firms have the right to insert more than 100 listings, and 2 firms have the right to more than 700 listings.168

On the following page a sample from the sheets has been reproduced. The sheets are set up in columnar form, the first column containing the name of the security (alphabetically arranged); the second column, the name of the broker-dealers quoting the security and their telephone numbers; the third, the "bid" price; and the fourth, the "asked."

For at least 5 of each 10 listings submitted by a subscriber, the Bureau requires that the bid or offer include a price. For the other five, a broker-dealer who does not wish to submit an actual bid or offer price may insert "OW" (offer wanted) in the bid column and/or "BW" (bid wanted) in the offer column. If he merely wishes to advertise an interest on either side of the market, he may leave the price columns blank. According to Bureau and trade custom, a quotation in the sheets indicates an interest to buy or sell 100 shares; an interest in fewer shares is supposed to be so indicated.167 An interest in more than 100 shares may be specified in securities priced below $5 or if the order is on an all-or-nothing basis. Entries in the sheets do not indicate if an issuer is in bankruptcy or reorganization; nor, except occasionally, do they indicate whether a quotation is ex-dividend.

164 In a recent disciplinary action, an NASD District Business Conduct Committee said this about public distribution of the sheets:

"Finally, while not an area in which the Committee presumes to impose its jurisdiction. we are of the opinion that the distribution of National Daily Quotation sheets to the public is not good practice, and is, we understand, contrary to the established policies and wishes of the publisher."

When the NASD learned that a few of its members were publishing wholesale quotations in newspapers, its board of governors in a statement to the membership condemned the practice. See NASD News, April 1959.

165 The Bureau has a policy of not accepting more than 3 percent of its listings from any one subscriber.

168 The firms' rights to list break down as follows:

Number of listings:

700 or over.

600 to 699.

500 to 599.

400 to 499

300 to 399.

200 to 299.

100 to 199.

Less than 100.

187 See sec. 2.b (1), above.

Number

of firms

2

1

4

11

21

58

1,203

The manner in which the Bureau collects, processes, and disseminates wholesale quotations to its subscribers has changed little in the last 40 years; however, the size of its staff-now about 300-has increased with the expansion of the over-the-counter markets. In New York, messengers collect quotations, between 11 a.m. and 1 p.m. each day, from about 900 firms. Quotations can also be telephoned, wired (some out-of-town houses use their wire connections with New York firms), or mailed in from out of town.168 The collected quotations are alphabetized and typed by about 40 to 50 typists on stencils. About 3,500 copies of the "pink sheets" are mimeographed every day and distributed to the 2,000 subscribers. In order to meet delivery requirements, the first 500 sets of the sheets must be finished by 5:15 p.m., and the remainder by 6 p.m. Within New York City, the sheets are delivered by messenger on the morning of the business day following printing. In about 16 other cities, subscribers get the sheets by messenger service or railway express; the sheets are sent elsewhere by third-class mail, or, for an additional fee, by first-class or air mail. The Bureau estimates that 85 percent of the sheets are received the day after printing.

The Bureau also publishes monthly and semiannual printed summaries of listings which, unlike the daily service, are made generally available to the public; the circulation of the monthly summaries, however, is only about 60 percent of the daily circulation. These summaries contain a sample of quotations on each security listed in the preceding periods 169 except those for which no price was quoted, and also include some basic information on the security.170 They also include quotations on stocks which did not appear in the daily sheets.171 There is no charge for any insertion in the summaries, which the Bureau views as reference documents rather than a current advertising medium.

(2) Controls over broker-dealers inserting quotations

As noted above, subscriptions to the sheets are available to any broker-dealer registered with the Commission, but to insert listings in the sheets a broker-dealer must satisfy certain Bureau requirements.172 An applicant must give the Bureau a 10-year history of its partners, officers, principal stockholders, and traders and, if any of the firm's principals has been adjudicated bankrupt or enjoined from dealing in securities, the details of such proceedings. The Bureau has not set forth the standards by which it evaluates the information submitted. The Bureau also imposes a minimum capital requirement; a balance sheet must be furnished, showing a net worth of $50,000 if the applicant is a corporation or $10,000 if an individual or partner

108 Quotations received by mail carry a symbol in the sheets to indicate that they are not as recent as other quotations. 169 While each of the semiannuals covers the preceding 6 months, the monthly summaries cover whatever period has elapsed since the publication of the last semiannual.

170 Information is usually provided about the following: dividends and interest, any exchange on which the security is listed, any reorganization, the company's location, number and par value of shares outstanding (and whether a significant number are in the hands of one group or person), the terms of any recent public offering, and sinking fund, conversion, or redemption provisions.

171 Firms subscribing to the summaries may list up to 100 such securities; a nonsubscriber may list up to 25, once the Bureau is satisfied as to its reputation.

172 All broker-dealers presently listing in the sheets and all but 25 of the subscribing broker-dealers are members of the NASD.