away from the securities traded in such market, by reason of a brokerdealer's freedom of access or limitation of access to such market and his resulting pecuniary motivations.

In this connection it is pointed out in chapter III that patterns of compensation for salesmen, as related to particular types of securities, may enter into their advisory and selling activities. Similarly, at the level of the broker-dealer firm, the fact of membership or nonmembership on a particular exchange must be assumed to have bearing on the securities normally handled for customers and the advice given to customers by such firm. While reciprocal arrangements, as pointed out at various places in the report, have served to temper the effect of the membership concept and the commission rate structure in this regard, any rule that tends to motivate a broker-dealer to transact as much as possible of his business in one market rather than another, and hence in the securities traded in the former rather than the latter, must still be assumed to be reflected in the types of recommendation and advice available to his customers.

The Special Study has not been able to explore the questions discussed in this section in all their ramifications. In any event, even if it had been possible to arrive at some specific conclusions and recommendations in light of existing circumstances, the kind of questions here discussed may recurrently need attention as changes occur in the total market pattern. That a particular rule or practice is consistent with the public interest under any given set of conditions of course does not make it so under changed conditions, and thus timely awareness of changing circumstances and vigilance to changing needs and emerging problems are essential.

5. THE COMMISSION'S ROLE IN MARKET ALLOCATION AND THE NEED FOR CONTINUING STUDY

As noted above, in 1936 a basic policy of government was said to be to "create a fair field of competition" and to allow each type of market to develop "in accordance with its natural genius consistently with the public interest." But since the management of an issuer and an exchange might disagree concerning the "proper marketplace for any security," there was need for

some authority other than management or the exchange [which] must exercise a check upon the right of either management or the exchange to grant trading privileges to a security upon an exchange.27

In the same way

this question of whether or not a secondary [exchange] market ought to be created in a listed security elsewhere is really a question that is to be determined in the light of the entire public interest and by an independent authority, such as the Commission *

279

As described in part E, above, the more important aspect of the Commission's role in market allocation has been to attempt to create a fair field of competition among the securities markets. It has not been called upon, in any significant way, to determine disputes, either between management and exchange, or between primary and secondary exchange. Presumably it is inherent in a competitive, free enter

278 SEC, "Report on Trading in Unlisted Securities Upon Exchanges," p. 10 (1936). 270 Testimony of James M. Landis, Chairman of the Commission, hearing on S. 4023 before the Committee on Interstate and Foreign Commerce, 74th Cong., 2d sess., p. 8 (1936).

prise system that market allocations should be determined primarily by the interplay of private; i.e., nongovernmental, interests and forces in most circumstances, but that governmental authority may and should intervene where issues are affected with a public interest which may not otherwise be adequately represented. The fundamentally important point is that, in performing either role-creating and fostering a fair field of competition or directly intervening in furtherance of the public interest or indeed, in determining what role is the appropriate one under existing or changing circumstances of the total market pattern,280 the Commission must be equipped with data and facilities adequate for the exercise of its responsibilities.

As one example, it was pointed out in part D of this chapter that until the advent of the Special Study there was an almost total lack of organized information about over-the-counter trading in listed securities to the point where it was a significant problem even to determine where or how to obtain information for a study. Yet this "third" market is regarded by the president of the NYSE as so grave a threat to that exchange's operation as an auction market that he feels that consideration should be given to eliminating it. Quite apart from the merit or lack of merit of this position, it is an inescapable conclusion that a market of such importance should not exist and expand in complete obscurity.

Broad and important developments of this kind should be kept under observation by the Commission as the official guardian of the public interest in the area of securities markets. As with other subjects discussed in this part F and elsewhere in the report, the first need is for the availability of such data as will shed needed light without imposing an incommensurate burden. As a corollary, data processing equipment adequate for this and other needs discussed in the report seems absolutely essential. Finally, a unit of the Commission's staff-and a sufficient portion of the Commission's own attention-should be divorced from normal tasks of administration and devoted to examination of emerging phenomena or problems, reexamination of pertinent rules and practices in light of new data, and formulation of plans and policies relevant to the Commission's statutory responsibilities where the need is indicated.

6. SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

The market scene is kaleidoscopic rather than static, with various currents of change operating beneath the surface of daily business. Rules and practices of the marketplace must be periodically reappraised both to determine whether they themselves are accountable for possibly unintended changes in market patterns and also to consider whether trading or regulatory mechanisms need to be adapted to new conditions.

The currents of change are sometimes in the same direction, sometimes in opposite directions, and often circular in their interaction. Though they may operate slowly and imperceptibly, they may lead to results of basic importance. Among the most significant phenomena

290 Thus, the Commission's recent recommendation of amendments to sec. 12(f) of the Exchange Act would affect the context within which market allocation may be determined by private competitive forces. See S. 1642 and H.R. 6789, 88th Cong., 1st sess., both introduced June 4, 1963.

examined in this chapter and chapters V to VII are the importance of the NYSE and its membership in other markets and the participation of other markets and nonmember broker-dealers in the trading of NYSE-listed securities. These particular phenomena and others discussed in these chapters raise fundamental issues as to, among other matters, the appropriate extent and limits of competition in the securities markets, as well as rights and obligations in respect of access to particular markets and assurances of best executions.

Broad questions of this kind should receive more positive and continuous attention in the performance of the Commission's total role and responsibility to protect the public interest and the interest of investors. Since market patterns in which these questions arise are constantly subject to change, the Commission should be equipped, in facilities, personnel, and programs to be the repository of essential information and the wellspring of public policy in these areas.

The Special Study concludes and recommends:

1. It is essential for the Commission to improve its facilities and programs for continuous accumulation of data with respect to fundamental, but often obscure, changes in the components, uses and needs of the total pattern of trading markets; i.e., the separate markets when considered in relation to each other. This need, together with others discussed in chapters VI, VII, and VIII, calls for both a reappraisal of present reporting systems, with full regard to the burden of supplying particular information in relation to its utility in the public interest, and a considerably wider perspective as to potential uses of data processing equipment in discharging the Commission's regulatory responsibilities.

2. The Commission should establish a separate, permanent policy and planning unit within its staff, having the responsibility of accumulating and analyzing pertinent data bearing on market patterns and practices generally, making special studies as the need may be indicated, and reviewing policies and regulations in light of changing circumstances.

3. Among the subjects that appear to need further and continuing attention of such a staff group and of the Commission are (a) types and forms of competition and of limitations on competition actually or potentially existing within and among markets, and their impact on the free, fair, and orderly functioning of the various markets; and (b) factors contributing to or detracting from the public's ready access to all markets and its assurance of obtaining the best execution of any particular transaction.

Chart VIII - 2

DISTRIBUTION OF RELATIVE RANKINGS OF DIFFERENT SOURCES OF INCOME 1/