A visitor to a securities exchange in the 1930s would have encountered four different types of traders. Least common were "floor traders," who bought and sold for their own account. "Specialists" comprised another small group who sold specific types of stocks to others and could "make a market" through their unique knowledge of market activity. "Broker-dealers" were specialists who sold to their own accounts. The majority of traders, however, were "commission brokers" who bought and sold stocks for clients.
Much of the debate that took place during the framing of the Exchange Act was over whether and how to limit these trader activities. But few guidelines were set and Kennedy moved slowly. He made three of the thorniest issues--the separation of broker-dealer functions, reform of the role of specialists, and regulation of over-the-counter markets--the subject of formal study. None were resolved until after he had resigned.
The agency began the process of establishing new rules by consulting closely with investment bankers, commission houses, and securities dealers. The SEC also worked closely with the Federal Reserve to formulate rules regarding margins--the extension and maintenance of credit on securities purchases. The SEC's regime grew organically as rules were devised and vetted with industry veterans.
On April 16, 1935, the Commission issued sixteen rules for traders. Rule 1 prohibited "excessive" trading by exchange members for their own accounts. Rule 6 forbade sales of same stock at successively higher or lower prices to create the appearance of activity. Rule 10 prohibited specialists from buying or selling their specialties for accounts in which they had interest unless necessary for a "fair and orderly market," and Rule 16 barred short selling.
Although the Commission made the implementation of these rules strictly voluntary, more than one industry veteran believed that by allowing the industry to participate in its own regulation, Kennedy went far toward ensuring effective compliance.
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