Gay's Gloom

In Cambridge, Mass., where he is preparing to take over the job of dean of the Harvard Law School, James McCauley Landis fortnight ago delivered his matured opinion of the work of the Securities & Exchange Commission of which he is retiring chairman: "More than a billion dollars of American money has been kept from falling into the hands of swindlers through SEC operations to date. . . . And the amount of other millions of fraudulent, or semi-fraudulent investments deterred by SEC activities from even trying to 'get by' can only be estimated. . . . I do not think basic soundness of our markets has been impaired by restrictions for the protection of customers and lessening of the speculative tinge. It may be--who can tell?--that there will be sharper short-term deviations--fluctuations that concern the speculator rather than the investor--but I think the danger of runaway markets and also of dangerously inflated markets has been greatly decreased. Present markets tend to make investors think very much less in terms of capital appreciation than in terms of earnings, soundness of organization and good management."

Last week, without challenging the merit of SEC's efforts to purify the issuance of new securities, the New York Stock Exchange, which has never openly attacked SEC, and Charles R. Gay (called the Exchange's "New Deal" president) broadly and frankly questioned the results of SEC's regulation of securities exchanges.

Said Mr. Gay in his annual report: "I am fearful that, in an effort to cure what might be termed sporadic evils, undue restraints are being placed upon normal, proper action, thus creating abnormal market conditions. Evidence accumulates that the quality of the market has been seriously affected. With muc concern I note the continuance of narrow, illiquid markets in which wide spreads between bid and asked quotations prevail and in which comparatively small volumes of buying or selling create undue fluctuations in prices. Almost daily, situations are called to my attention wherein it is impossible to buy or sell reasonable amounts of stock at reasonable prices. Orders which, a few years ago, could have been executed within a few minutes or a few hours now often require days and sometimes weeks, with resulting increased risk to the owner. . . ."

Almost every broker in Wall Street has for months been talking this way in private. Reason at this time for speaking publicly was fear that the SEC would soon inaugurate its "segregation plan" announced last June. To achieve an investment market and reduce speculation, the SEC proposed, by segregating the functions of broker and dealer, to reduce the kind of quick-turnover buying and selling which these professionals practice. Unless a "valid case" against it were presented by the Exchange, Chairman Landis declared he would achieve this by: 1) placing all trading by members, on the floor or off, for their own account on a fully margined basis--forcing them to put up cash instead of allowing them to buy in and sell out on the same day without putting up any money at all; 2) placing all trading by commission houses for their own accounts on an outright cash basis; 3) partially limiting trading by specialists in particular stocks.

The latter two points of this program have not yet been put into effect--and last week the SEC indicated that they would not be while the market is in its present state. For completing a transaction in Wall Street last week was like shoving a spoon through molasses. Busiest day saw a turnover of only 800,000 shares. Not since April had there been a two-million share day, and the Stock Exchange report pointed out that volume of transactions for the year ended May 1 was off 8.5% although the aggregate of shares listed for trading was up 3.7% and money value of share transactions increased 13.5%.

President Gay's case against segregation and too strict SEC control is that the present type of thin market 1) hinders the necessary flow of new capital into industry;* 2) causes wide fluctuation in prices, scaring away or actually causing losses to the public; 3) make for an unstable market in time of stress. The Exchange report hammered home the classical argument for speculation by professionals:

"The short-term dealer in a market, by being ready to buy or sell at the going price, bridges over the inconvenience of time and price and minimizes the risk of ownership. He outbids the indifferent buyer and undersells the reluctant seller. His act has the effect of transmitting through a span of time the urgent selling of one instant to meet the eager buying of another. . . . He makes continuously effective at each instant of the period the longer term buying and selling demands which, although they may be and usually are equalized over the period as a whole, are not synchronized each instant within it. . . . It appears to be true that no important investigation by an official commission, either here or abroad, has ever found non-manipulative short-term dealing to have been fundamentally responsible for major price inflation or the subsequent deflation. . . ."

* The Gay report pointed out that market activity and new stock issues have always (except in 1923 and 1929) almost exactly paralleled each other, and argued that "a volume of new stock issues is unlikely unless the breadth and activity of the present stockmarket show a substantial increase."

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