tion between the different bodies would be desirable and that greater effort should be made to clarify responsibilities. Recent moves in this direction should be encouraged and the Commission should take the initiative in bringing interested agencies together to formulate appropriate guidelines.

There has been a recognition among industry leaders in recent months that a reduction in duplication and an increase in coordination can contribute to more effective regulation. Important cooperative steps have been taken by some of the agencies in respect of customer complaints, underwriters' compensation, financial responsibility, Regulation T enforcement, and qualification examinations for salesmen. Despite the national character of most of the securities regulation discussed in this report, the States occupy an important position in the overall regulatory scheme. They provide a means of handling certain essentially local problems and they complement Federal regulation in important ways, although there is considerable variation in the scope and effectiveness of the regulatory activities of the various States. The activities of the State administrators, through the North American Securities Administrators and the Midwest Securities Commissioners Association, have been useful in developing higher standards in certain important substantive areas as well as in attempting to achieve uniformity of regulation among the States.

There appear to be successful cooperative programs for the exchange of information among the various States and between the States and the Commission. In some respects the self-regulatory agencies have cooperated with the States, particularly as to examinations for salesmen. However, a special problem appears to exist between the NASD and the States in that the NASD is unwilling to furnish information to State administrators regarding Association disciplinary actions. In the interest of strengthening the total regulatory effort it would be desirable to give local NASD officials broader discretion to cooperate and coordinate their disciplinary activities with State officials.

The Special Study concludes and recommends.

1. This report indicates various ways in which the quantity and quality of self-regulation and/or governmental regulation need strengthening. On the other hand, available mechanisms, budgets, and personnel of some agencies already seem overtaxed, and at the same time there appears to be considerable duplication of effort among the various agencies in certain respects, adding to the burdens on the agencies themselves and on broker-dealers subject to multiple regulation. In the interests of the public, the regulatory agencies and the securities industry, further and continuing attention should be given to possibilities for coordinating efforts and allocating responsibilities in a more efficient and productive pattern, without limitation on any self-regulatory agency's freedom to have special measures or programs for its own membership. Among such possibilities would be further standardization of application and report forms for firms and individuals, to be used by all interested agencies with appropriate supplementation by each to serve its special needs; further development of centralized examining and investigating procedures, again with appropriate supplementation to meet special needs of

aggregate were net sellers on May 28, bu in AT&T. The open-end investment co hand, were overall net buyers of stocks o balance in General Motors and U.S. Ste Avco or Brunswick. Similarly, althoug a purchase balance, they were relatively and had modest sale balances in IBM a tions in the practices of the participant the inadequacy of aggregated data alon diversity of members' and nonmember stocks.

Neither this study nor that of the Ne able to isolate and identify the "causes" 28, 29, and 31. There was some specu events might be the result of some conspi Upon the basis of the study's inquiry, th that the break was deliberately precipit or that there was any manipulation or ill ing of the market.

The avalanche of orders which came period subjected the market mechanisms in many respects they did not function in significant were the lateness of the tape a investors to predict accurately the prices be executed. Further indicative of th mechanisms, some odd-lot orders on Ma first round-lot sale following receipt a closing price, in most instances consider odd-lot differential.

1 NYSE, "The Stock Market Under Stress" (1963).

rlier part of the day and a very sharp f the day, and since it was not possible hese two phases, significant relationships could not be established. On May 31, d sharply upward, there was a distinct 1 that of Monday: on the purchase side market and stop orders, whereas on the vere market and stop orders.

me of sell-stop orders on May 28 is also y mentioned, such an order is used as a a prompt sale if the market price reaches specified figure, and it becomes a market eached. Thus, a sharp decline_such as olving a heavy preponderance of market

buy orders, produces a separate source ders are triggered by the decline. The ecialists on May 28 may not have been may well have been placed at any time nto play as prices fell.

of stop orders on May 28 was pointed ified:

stop orders, and they, as much as anything, , with an overhanging volume of market short

used to buy or sell securities in the auction market of lers, and stop orders. Briefly, a market order is one able. A limit order is one to buy or sell at a specific specified price would be above the prevailing market, evailing market. A stop order, sometimes called a which, if the market moves adversely, the customer is on the sell side, it specifies a price below that above that prevailing the reverse of the situation in guarantee execution at the specified price, but merely = that price is reached. It is to be expected that the narily exceed that of buy-stop orders.

orders. The bid had to be dropped considerably to take care of the new stop orders that were put into effect *

The volume of short selling in the aggregate, and for certain individual stocks, by classes of participants, is shown elsewhere in the report, but these figures do not necessarily reveal the full impact of short selling. In testimony taken by the study, specialists indicated that there was a significant amount of potential short selling (brokers in the "crowd" waiting for an uptick) which was never realized in transactions. This potential short selling overhanging the market may well have prompted some specialists to moderate their stabilizing activities, since they would know that any rally would be met by shortsale orders in the "crowd." As one specialist put it, short selling during the break acted to "lengthen the time that it took a stock to go up because there had to be substantially more buyers to move the stock

The Exchange Act makes it clear that there is an important public interest in the effects of rapid price fluctuations both up and down. The Act states as one of the reasons for its passage the fact that "national emergencies*** are precipitated, intensified, and prolonged by *** sudden and unreasonable fluctuations of security prices and by excessive speculation. ***" Accordingly, the Commission is given the authority and responsibility—

if in its opinion the public interest so requires, summarily to suspend trading in any registered security on any national securities exchange for a period not exceeding 10 days, or with the approval of the President, summarily to suspend all trading on any national securities exchange for a period not exceeding 90 days.

The power to suspend all trading on an exchange is indeed an awesome one, as indicated by the requirement of Presidential approval, and the Commission has never invoked it. Once market changes became so chaotic as to warrant halting all trading on the exchanges, it is possible that investor tensions would be so acute that unexpected and severe reactions might follow from the suspension itself.

On the other hand, assuming that any intermediate, technical measures-i.e., measures short of suspension of all trading-would be feasible and desirable, it obviously is not practicable to wait until a severe break is in progress to determine what they may be. The uncertainties and pressures existing under such conditions militate against the development of a sound course of action. Nor is it possible at the time of a market break, unless arrangements for gathering information have been worked out in advance, to obtain speedily the kind of current and meaningful trading data which the Commission and other Government agencies might consider useful in discharging their responsibilities. Yet, once a break has passed, there is a tendency to forget the concerns existing at the time and the apprehensions as to what might happen should it continue.

The history of the May 28 market break reveals that a complex interaction of causes and effects—including rational and emotional motivations as well as a variety of mechanisms and pressures-may suddenly create a downward spiral of great velocity and force. This, in turn, may change the impact of various normal market mechanisms,

3 Ch. VI.H.5.b. (pt. 2).

4 Exchange Act, sec. 2(4).