survey 5 and of the 1962 market break 56 show that the institutions tended to account for a significantly greater proportion of the buying or selling in some issues than in others for the periods involved.57 Thus, so long as institutional transactions predominate from time to time in purchases or sales of particular stocks, the major influence of the institutions on the market, as a whole, may be transmitted through the activity of these particular issues, especially when they are "market leaders.”

Because of the substantial amounts of equity securities institutions buy and sell, they are likely to exert an increasing effect on the methods of handling large-scale transactions in the stock markets. In this connection, a page may be taken from the history of bond trading. The "institutionalization" of the corporate bond market is a wellknown phenomenon. In 1938, the "consumer" sector-along with the "rest of the world" sector-held about 65 percent of outstanding corporate bonds, life insurance companies held approximately 17 percent, and the banking system 10 percent.58 By 1961, however, holdings of individuals had dwindled to some 18 percent of the estimated total of $107 billion outstanding; institutions as a whole held 82 percent, with life insurance companies alone holding 47 percent (table VIII-11).

Such "institutionalization" has been accompanied by an increase in importance of new issue acquisitions and private placements as opposed to trading in outstanding issues. Also, for bonds as a whole, the negotiated over-the-counter market, rather than the auction market on the exchanges, has become by far the more important trading market. A similar phenomenon appears to have been happening in preferred stocks. And the importance of the over-the-counter trading market, relative to the exchange auction markets, appears also to have been growing in the common stock area, starting with the higher grade, more stable investment-category commons.

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This can be expected to continue as pension funds and institutions as a whole continue to grow in relative importance as common stock investors. Not only are the institutions large investors who often prefer to deal in large transactions, but pension funds (and other institutions except investment companies) appear to have had a lower turnover rate for their equity portfolios than the market—at least the New York Stock Exchange market-as a whole, and therefore may contribute to the thinning of the markets in particular issues.60 Accordingly, an understanding of how institutions handle block transactions is important in order to evaluate the implications of a probable continued growth in the stockholdings of these institutions to the trading markets.

55 See ch. V.

5 See ch. XIII.

57 See also in this connection, note 54, above, "A Study of Mutual Funds," at pp. 11-12, 21-22, 262-282, 359-397; and "Report on Institutional Investors and the Stock Market; 1953-55," at pp. 36-44, 47, 52, 83–137.

58 Andrews. "Pension Funds in the Securities Markets," Harv. Bus. Rev., NovemberDecember 1959, pp. 90, 94.

For a discussion of the trading of NYSE-listed stocks in the over-the-counter market, see pt. D of this chapter.

Go For a discussion of portfolio turnover, see sec. 5, below.

2. METHODS OF HANDLING BLOCK TRANSACTIONS

For purposes of the Special Study's survey, the expression "block purchase or sale" was defined as follows:

The terms "block purchase" and "block sale" mean a change of position resulting from a single primary investment decision. A block purchase or sale may involve more than one transaction."1

Thus, in studying "block" transactions the Special Study started with a decision by the institution to buy or to sell a given quantity of stock. Its interest was in how this decision was carried out. There are a number of different methods by which block purchases or sales can be accomplished, and an actual block program may involve one or a combination of these.

a. Listed stocks

(1) Through the auction market on an exchange

By far the most common way of buying and selling listed stocks, even by institutions working on a large block purchase or sale program, is through a series of relatively small individual executions in the regular auction market on the floor of an exchange.

(2) Through prearranged crosses on the floor of an exchange The "auction market" on the floor of an exchange assumes, in the usual sense, a situation where buy and sell orders meet through the process of bidding and offering on the floor. However, an important method used by large investors for executing part or all of a block purchase or sale has become the simple "crossing" on the floor of prearranged matching buy and sell orders. The matching orders may have been assembled off the floor by the broker retained by the investor initiating the block purchase or sale. The assistance of the specialist may have been used in locating the matching orders. Crosses normally are larger transactions than the pure "auction market" transactions involved in block programs, but there is no requirement that they be given any distinguishing identification on the tape or on confirmation slips, and they were not distinguishable from other floor executions in the transaction data collected through Questionnaire IN-4. In effect, when a cross is involved, the exchange market is being used to consummate a "negotiated" rather than a pure "auction" transaction.62

(3) Through special stock exchange plans

The New York Stock Exchange has adopted seven special plans for executing purchase or sale orders considered too large for execution in the regular auction market within a reasonable time. (Special acquisition or distribution plans exist also on other exchanges.) Four of the plans, all adopted before 1956, are designed to assist the holder in selling large blocks. The three other plans, adopted in 1956, are designed to assist in the purchase of large blocks; but these have proved less popular than the distribution plans.

61 See Questionnaire IN-4, p. 2, app. VIII-A.

62 The cross is executed in the public auction market on the floor, and intervention in the cross by other broker-dealers is possible. In addition, when a single broker represents both sides of the cross, NYSE rule 76 requires him, before executing the cross, to offer the security publicly at a price which is higher than his bid by the minimum price variation permitted in that security.

Certain of the distribution plans are also described and discussed from another point of view in ch. IV.C.

The seven New York Stock Exchange plans are:

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(a) Distribution plans.-(i) Specialist Block Purchase.-With prior approval of a floor governor, the specialist in a stock may purchase a block of that stock from the holder, off the Exchange floor. The floor governor, to approve the purchase, must determine that the regular auction market on the floor of the Exchange cannot, within a reasonable time and at a reasonable price or prices, absorb the particular block of stock, and also that the purchase will aid the specialist in maintaining a fair and orderly market. If the purchase is approved, the specialist can purchase the block, without executing the purchase orders on his book at prices at or above the per-share price he pays for the block. By means of the purchase, the specialist takes the block into his inventory, and then sells shares from it from time to time in the course of his regular activities as a specialist. The purchase is an off-board trade, and is not reported on the tape. The price at which the purchase is made may be away from the price then current on the floor.

(ii) Exchange Distribution. This plan essentially involves a cross on the floor, with the added feature of a special selling effort. Once Exchange approval for the distribution is obtained, the seller's broker is able to offer his own registered representatives and other brokerdealers extra compensation as an incentive to find the matching buy orders. Normally, to provide an incentive to the prospective buyer as well, the seller pays the equivalent of a double commission or more, while the buyer pays no commission. When sufficient buy orders have been accumulated to cover the block (or a portion of it, if the seller is willing to execute the block in stages), they are crossed with the block sell order on the floor of the Exchange, between the bid and asked quotations. The cross is printed on the tape, with a special symbol designating it as an "Exchange Distribution." The distribution must include all of the security which the seller intends to offer within a reasonable time.

(iii) Special Offering.-Following Exchange approval for use of this plan, the seller offers the block at a fixed price (not above the last sale or current offer on the floor, whichever is lower) and the terms of the offer are flashed on the tape in advance. The offer is open to all members and their customers, and includes an agreement to pay a special commission to the brokers who produce buy orders. Here too the seller normally pays the equivalent of a double commission or more, and the purchaser pays none. The offer must ordinarily remain open for at least 15 minutes. It must be subject to acceptance in part as well as in whole, and the offeror must include all of the security which he intends to offer within a reasonable time. Transactions effected pursuant to the Special Offer are printed on the tape. Pricestabilizing purchases and sales by the offeror are permitted to a lim

ited extent.65

(iv) Secondary Distribution.-The Exchange permits its member firms to participate in a Secondary Distribution 66 of a listed stock only

64 For a discussion of this plan and for the specialists' role in handling blocks generally, see ch. VI.D. 65 See NYSE rule 391 and Commission rule 10b-7.

66 A Secondary Distribution, in the stock exchange sense, may or may not be the kind of "secondary distribution" sometimes requiring registration under the Securities Act of 1933. Whether registration under the 1933 act is required depends on the relationship of the seller to the issuer, irrespective of whether the method of distribution is a Secondary Distribution in the exchange sense, one of the other special stock exchange plans, or takes some other form.

upon a determination that the regular auction market on the floor cannot, within a reasonable time and at a reasonable price or prices, absorb the block, and also that a Special Offering or Exchange Distribution is not feasible. Usually, a selling group or syndicate is formed and the distribution is handled like an underwriting; distribution is accomplished after the close of the market; the offering price does not exceed the last sale price on the floor; the seller pays a commission or spread equal to twice the regular commission, or more; and the buyer pays no commission. The terms and conditions of a Secondary Distribution, which is an off-board trade, are announced on the tape when the distribution commences.67 Stabilization is permitted.

(b) Acquisition plans.-(i) Specialist Block Sale.-This plan is the same as the Specialist Block Purchase plan described above, except that it involves an acquisition from the specialist rather than a sale to him.

(ii) Exchange Acquisition.-This is the same as the Exchange Distribution plan described above, except that the initiator is a purchaser rather than a seller.

(iii) Special Bid.-This is the same as the Special Offering plan described above, except that the initiator is a bidder rather than an offeror.

(4) Through special off-board requests

Under NYSE rules, member firms may not trade listed stocks 68 over-the-counter without first obtaining Exchange approval (or approval of a regional exchange where the stock is traded). Transactions accomplished off-board through such requests do not constitute a formal Exchange plan for accomplishing block transactions, but they are a not insignificant means used for such transactions.

(5) Through transactions (in listed stocks) in the over-thecounter market

A number of nonmember broker-dealers make over-the-counter markets in listed stocks.69 For the listed stocks in which such markets are made, they provide one of the methods available to institutions for executing part or all of their block programs.

(6) Other methods

Underwritings, of course, provide a source of purchases for institutional investors, as for other investors. Institutions also sometimes purchase common stock, but more frequently preferred stock, directly from the issuer through private placements. At times, institutional investors purchase or sell blocks of securities through direct transactions with other large investors, without going through a broker-dealer as intermediary. Such direct arrangements appear, however, to be relatively infrequent.

67 In some cases, when the distribution does not become effective until sometime after the close of the market, announcement may be made by some other means, such as the broad tape or the tape of a regional exchange which is still open for business.

es This does not apply to certain "exempt" stocks listed in a supplement following NYSE rule 394. These are all guaranteed or preferred stocks, and their "exempt" status reflects the "institutionalization" of the markets in these stocks.

69 See pt. D of this chapter.

(7) Relative importance of the methods

As indicated above, the most common method of handling block transactions appears to be the regular auction market on the floor of an exchange. While no precise data are available, prearranged crosses on the floor may rank second or close to second in importance. The figures for 1961 indicate that the number of shares handled through the seven special New York Stock Exchange plans was equivalent to less than 2 percent of total NYSE reported round-lot floor volume. Despite this small overall percentage, the number of shares in any single special-plan distribution may be large in relation to floor volume in the particular stock involved. For example, the number of shares offered during 1961 in NYSE-Secondary Distributions ranged from 17 to 1,000 percent, and averaged 180 percent," of the reported round-lot floor volume in the same stock during the month of the distribution. For NYSE-Exchange Distributions during 1961, the ranges were 7 percent and 150 percent, and the average was 55 percent, of such monthly floor volume (excluding the shares sold in the distribution) in the same stock.72

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By far the most popular of the special plans is the Secondary Distribution, with slightly more than 16 million shares being offered in 1961 through some 96 distributions approved by the New York Stock Exchange. Eighty-eight percent of these 96 distributions (and 90 percent of the shares involved) were accounted for by institutional sellers, 53 percent of the distributions (and about 35 percent of the shares) by investment companies alone."

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There were 26 Exchange Distributions (the second most popular plan) on the NYSE in 1961, involving a total of 1.2 million shares. Twenty (77 percent) of these distributions and 87 percent of the shares were from institutional sellers, eight (31 percent) of the distributions and 41 percent of the shares were from investment companies alone, and five (19 percent) of the distributions and 19 percent of the shares were from banks.

There were three NYSE-Specialist Block Purchases (involving a total of 19,400 shares), one NYSE-Specialist Block Sale (involving 15,000 shares), one NYSE-Special Offering (involving 10,000 shares), and no Special Bids or Exchange Acquisitions in 1961. In contrast, a Special Study tabulation of special requests (involving a minimum of 1,000 shares and/or $25,000 in value) by member firms to trade NYSE stocks off-board shows that in 1961, 32 such requests covering a total of 375,000 shares were approved. Twelve of these requests involving 120,360 shares involved transactions with institutions." 74

70 Other data on several of the methods of distribution are found in ch. IV.C.3. 71 The averages given in the text and the next footnote with respect to the Exchange plans are unweighted averages.

NYSE-Specialist Block Purchases in 1961 averaged 6 percent and Specialist Block Sales 5 percent, of the monthly floor volume in the stock involved.

73 In two of these disrtibutions, banks participated with investment companies as sellers. Three investment company complexes, Wellington, Fidelity, and Massachusetts Investors Trust, were the sellers (in two cases with banks) in 39 (41 percent) of the 96 distributions. Banks accounted for only 17 (counting the 2 in which they participated with investment companies) or 17 percent of the distributions, involving about 10 percent of the shares.

74 During 1961, the NYSE received 293 requests to trade stocks off-board. Of these, 25 requests were made to offset errors; 84 involved charitable donations; and 45 involved control stock with an investment letter. All of these 154 requests (except 1) were approved by the Exchange and were not considered in this tabulation. Of the remaining 139 requests, 51 were disapproved, and no action was taken on 4; of the 84 which were approved, only 32 involved blocks as large or larger than 1,000 shares or $25,000 in amount.