Securities and Exchange Commission Historical Society

The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

Evolution of the Perfect Institution

Stress on the System: Specialists

"As a specialist, your job is to maintain a fair and orderly market under all conditions, and the companies are very concerned, when the market goes down, how you participate. They aren't too interested how you participate on the way up, but they wanted you to be there on the way down."

- December 3, 2009 Interview with Donald Stone

In 1949, the United States economy entered its first bull market since the 1920s. The New York Stock Exchange was ready to fuel the accelerating engine of American finance. That autumn, the NYSE advisory committee further undercut the commission brokers by requiring that all governors spend "a substantial part of their time on the floor."  Unable to do so, commission brokers were forced to resign. The board was then expanded to 33 members, and committee appointment power was vested in the chairman. These initiatives went unchecked by the SEC.30

Americans, impressed by the wartime economic miracle and the postwar consumer boom, gave great latitude to business and little attention to regulation. It was during this golden age of corporate capitalism that the NYSE hired former college president G. Keith Funston. While Funston tried to recapture the individual investors who had left in 1929, a very different clientele was mounting a new challenge to the exchange. Increasingly, middle-class Americans were turning to mutual funds instead of owning stocks directly. Others were beneficiaries of corporate or government pension plans whose funds were invested in the stock market. By the end of the 1950s, these new institutional investors accounted for one-fifth of exchange transactions.31

As a rule, NYSE specialists never had deep-enough pockets to handle large institutional orders. Big customers grew increasingly resentful at having to pay the same commission rates on large institutional orders as private customers did on small ones. As a result, more institutional business went onto the over-the-counter (OTC) market. By the 1960s, an entity dubbed "The Third Market" flourished by trading NYSE-listed shares on the OTC market. At no point did NYSE governors see a reason to accommodate the institutions.

Specialists, short on stock in a thin market and faced with sudden demand, had no recourse except to obtain shares over the counter. In 1948 the NYSE issued Circular 52 requiring exchange approval, often granted, for such transactions. By 1957, however, the practice had become so pervasive that exchange Rule 394 was promulgated to ban off-exchange transactions in NYSE stocks.32 Rule 394 (later renamed Rule 390) disadvantaged investors and had little purpose other than to prop up the exchange market structure. Although the SEC criticized the rule, it failed to take action against it.

Economic growth in the 1950s culminated in a late decade "tech stock" boom that broke decisively in 1961, just as a reinvigorated SEC began conduct of its landmark "Special Study of the Securities Markets."  Although the study concluded that self-regulation appeared "to have stood the test of time," it confirmed that the NYSE tended to put self-preservation above the public interest and documented an "apparent reluctance...to impose disciplinary sanctions on floor traders."  After the NYSE countered with its own study of floor trading, the SEC compromised, imposing on specialists an "affirmative obligation" to trade for their account or refrain from trading in such a way as to maintain a fair and orderly market.33

<<Previous Next >>



Related Museum Resources

Papers

October 25, 1956
transcript pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
November 17, 1961
image pdf (All rights are owned exclusively by NYSE Euronext (copyright) 2010 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives. All worldwide intellectual property rights including without limitation moral rights vest in NYSE Euronext and/or its affiliates.)
December 6, 1961
image pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
1963
SEC Special Study of the Securities Markets

(Courtesy of Stuart Kaswell; made possible through a gift from the family of Milton H. Cohen)

May 6, 1963
image pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
May 31, 1963
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
October 18, 1963
image pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
February 1964
New York Stock Exchange Study of Floor Trading

(Courtesy of the National Archives and Records Administration)

March 16, 1964
image pdf (Courtesy of the National Archives and Records Administration)
March 18, 1964
image pdf (Courtesy of the National Archives and Records Administration)
March 24, 1964
transcript pdf (Courtesy of the National Archives and Records Administration)
August 26, 1964
image pdf (Courtesy FINRA)
September 24, 1964
image pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)
June 1, 1971
transcript pdf (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)

Photos

June 24, 1965

New York Stock Exchange

(All rights are owned exclusively by NYSE Euronext (copyright) 2007 NYSE Euronext, All Rights Reserved, courtesy New York Stock Exchange Archives; use restricted to the virtual museum and archive at www.sechistorical.org )

Oral Histories

22 March 2006

David Silver - Part I

  • - Part 1
  • - Part 2
  • - Part 3
  • edited transcript (pdf)
03 December 2009

Donald Stone

Film, Radio And Television

February 20, 1952

G. Keith Funston, New York Stock Exchange, on "Longines Chronoscope Television Journal"

courtesy of the Longines Wittenauer Watch Company, Inc. Collection, National Archives and Records Administration; made possible through the support of the Securities Law Student Association, Columbus School of Law, The Catholic University of America

1956

"Working Dollars," New York Stock Exchange Film

courtesy of the Prelinger Archives, Library of Congress; made possible through the support of the Securities Law Student Association, Columbus School of Law, The Catholic University of America

Early 1960s

"The Big Board," New York Stock Exchange Film

courtesy of the Prelinger Archives, Library of Congress; made possible through the support of the Securities Law Student Association, Columbus School of Law, The Catholic University of America

November 18, 1966

G. Keith Funston, New York Stock Exchange, discussing Eastern Europe on Voice of America

courtesy of the National Archives and Records Administration

Galleries

The Bright Image: The SEC, 1961-1973

Permission for Use

The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.

Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.

Material used with the Society's permission should be credited to: www.sechistorical.org.