IC-NRLF 
 
 181 
 
Money Trust Investigation. 
 
 BRIEF ON BEHALF OF THE NEW YORK 
 STOCK EXCHANGE. 
 
 JOHN G. MILBURN, 
 WALTER F. TAYLOR, 
 
 Counsel for The New York Stock Exchange 
 
 C. G. BURGOYNE, 72 to 78 Spring Street, New York. 
 
MONEY TEUST INVESTIGATION. 
 
 BRIEF ON BEHALF OF THE NEW YORK 
 STOCK EXCHANGE. 
 
 The Resolution of the House of Representatives, No. 504, 
 under which the Committee is acting, contains among its 
 recitals one to the effect that it has been charged that certain 
 groups of financiers are " enabled to use the funds and prop- 
 erty of the great national banks and other moneyed corpora- 
 tions in the leading money centers to control the security and 
 commodity markets ; to regulate the interest rates for money ; 
 to create, avert, and compose panics ; to dominate the New 
 York Stock Exchange and the various clearing-house associa- 
 tions throughout the country, and through such associations 
 and by reason of their aforesaid control over the aforesaid 
 railroads, industrial corporations, and moneyed institutions, 
 and others, and in other ways resulting therefrom have 
 wielded a power over the business, commerce, credits, and 
 finances of the country that is despotic and perilous 
 and is daily becoming more perilous to the public wel- 
 fare." The resolution authorizes the Committee to investi- 
 gate and inquire into each of the matters recited in 
 the preamble and among other things to inquire into and 
 investigate whether and to lohat extent. " (j) The manage- 
 ment and operations of the New York Stock Exchange and the 
 New York Clearing House Association are, or may be, directly 
 or indirectly, dominated, controlled, or otherwise affected by 
 any individuals or groups of individuals who control or are 
 influential in directing the use or deposit of the funds of 
 national banks in the City of New York, or of interstate rail- 
 
 340918 
 
way or industrial corporations, or life insurance companies, 
 and the relations that the New York Stock Exchange and the 
 New York Clearing House bear to such individuals and groups 
 of individuals and to their financial transactions and to our 
 commercial and financial systems and to interstate and foreign 
 commerce ; (k) Any individual, firm, or corporation, or any 
 one or more groups of such individuals, firms, or corporations, 
 may or can affect the security markets of the country through 
 the New York Stock Exchange, or can create, avert, or com- 
 pose panics by the control of the use and disposition of 
 moneys in the banks and other moneyed or other corporations 
 that are controlled by such individual, firm, or corporation, or 
 by other means." 
 
 These, we believe, are the only parts of the Eesolution 
 under which the Committee is acting that refer to the New 
 York Stock Exchange. 
 
 The inquiry, so far as the New York Stock Exchange is 
 concerned, has taken a range far beyond the specific questions 
 formulated by the resolution. It could not have been broader 
 if everything pertaining to the constitution, government and 
 management of the Exchange, and the conduct of its members 
 and their relations to whoever has dealings with them, had 
 been involved. This is our excuse for discussing the subject 
 so comprehensively. If the only matter for consideration 
 was, whether any group of financiers or individuals dominates 
 in any degree the Exchange, or through it, the security 
 markets of the country, we should not have deemed it neces- 
 sary to request the privilege of submitting a brief. 
 
 Statement, 
 
 The New York Stock Exchange is a voluntary unincor- 
 porated association consisting of 1100 members. It may be 
 sued in the name of its president or treasurer, as may any 
 other voluntary unincorporated association, under the pro- 
 
3 
 
 visions of the New York Code of Civil Procedure. The object 
 of the association, as stated in its constitution, is " to furnish 
 exchange rooms and other facilities for the convenient transac- 
 tion of their business by its members, as brokers ; to main- 
 tain high standards of commercial honor and integrity among 
 its members, and to promote and inculcate just and equitable 
 principles of trade and business." 
 
 The Exchange owns the stock of the Stock Exchange 
 Building Company, which owns the building popularly known 
 as the Stock Exchange. It also owns the securities of the 
 New York Quotation Company, which operates a ticker service, 
 and supplies quotations to members of the Exchange at their 
 offices south of Chambers Street. The principal sources of its 
 income are the dues paid by its members, the amounts re- 
 ceived from the New York Quotation Company and from the 
 Western Union Telegraph Company for its quotations, and 
 fees charged by it upon the listing of stocks and bonds. 
 
 The Building Company leases to the Exchange the rooms 
 and offices it uses. 
 
 The quotations to whicli we have referred are the quota- 
 tions of transactions upon the floor of the Exchange collected 
 by its employees as the transactions occur, and immediately 
 transmitted to the operators of the New York Quotation Com- 
 pany and the Western Union Telegraph Company, by whom, 
 respectively, they are sent out over their tickers. The Western 
 Union Telegraph Company furnishes the quotations to mem- 
 bers of the Exchange in the City of New York north of 
 Chambers Street, to such other persons and corporations in 
 the City of New York as are approved by the Exchange, and 
 to its patrons in other cities in the State of New York and 
 elsewhere. It is prohibited from furnishing the quotations to 
 any person, firm or corporation engaged in a bucket shop 
 business. 
 
 The Exchange does no business unless the matters to 
 which we have referred are considered to constitute " doing 
 business." 
 
The Exchange is not open to the public, no one being 
 allowed to trade on its floor except its own members. All 
 transactions on the floor are transactions between members,, 
 who contract in their own names, whether for themselves, 
 or on behalf of undisclosed principals. The only people 
 who buy or sell, or transact any other business, on the floor 
 of the Exchange are its members acting for themselves or 
 others. 
 
 There are certain rules of the Exchange that affect the 
 contracts which may be entered into between brokers and 
 their principals. In the main, however, the relations between 
 members and their customers do not come within the cogni- 
 zance of the Exchange so long as there is no violation of 
 equitable principles of trade. 
 
 Whether a customer who gives an order to purchase stock 
 is to pay for it in full, or to pay part of the purchase price r 
 borrowing the balance from the broker and leaving the stock 
 with him as security ; whether, and to what extent, the broker 
 may pledge the stock so left with him to secure the money he 
 advances to the customer ; whether^ a customer who orders a 
 broker to sell stock has already furnished him with the stock 
 to make delivery, or is to furnish him with the stock before 
 the date of delivery, or depends upon the broker to procure 
 for his account the stock with which to make delivery, are all 
 matters that depend upon the contract or arrangement between 
 the broker and his customer. When one broker sells stock 
 to another he does not know whether the purchasing broker is 
 purchasing the stock on margin, or for a customer who has 
 paid for it outright, or for his own account. A broker who 
 buys from another broker does not know whether the selling 
 broker is selling the stock short, or on his own account, or for 
 the account of a customer. A purchase made for a margin 
 account or a short sale is, to all outward appearances, so far 
 as the seller in one case, or the buyer in the other case, ia 
 concerned, just like any other purchase or sale. 
 
Just as the Exchange has no direct concern with the con- 
 tracts between brokers and their principals, so long as there is 
 no violation of equitable principles of trade, it has no direct 
 concern with the terms upon which members borrow money 
 from banks to carry their customers' accounts, or with the 
 collateral pledged to secure the money so borrowed. These 
 are matters that are worked out between the lending banks 
 and the borrowing brokers. 
 
 The rules of the Exchange absolutely require that all 
 transactions upon the floor shall be real transactions ; and 
 that every contract to purchase or sell shall contemplate actual 
 delivery of the security, and shall be followed by such de- 
 livery. The rules do not countenance trading in differences. 
 The usual and regular contract calls for payment and delivery 
 upon the day following the contract (Constitution, page 46). 
 
 The only securities dealt in upon the Exchange are those 
 that have been admitted to the Stock List by the officials of 
 the Exchange, who have the power at any time to strike a 
 security from the list, or to suspend dealings in a security 
 upon the floor. Members of the Exchange, elsewhere than upon 
 the floor of the Exchange, may deal in unlisted securities as 
 freely as any one else. 
 
 The number of issues of stock listed on the Exchange 
 is 555, and the number of bond issues 1,026. The num- 
 ber of issues listed is very small in comparison with the total 
 number of issues of corporations throughout the country, 
 though the aggregate amount of securities listed bears a 
 very much higher proportion to the aggregate amount of all 
 securities, the listed issues including many great issues and 
 comparatively few that are small. 
 
 The listing of a security is an assurance that there has been 
 a compliance with the requirements preliminary to listing. 
 
 In the early days of the Exchange the requirements for the 
 listing of a security were of minor importance ; but they have 
 been gradually made more and more stringent. The purpose 
 
6 
 
 of the requirements is the protection of those who trade in 
 securities listed upon the Exchange. 
 
 Every corporation applying to list securities must agree 
 not to dispose of its interests in any constituent company with- 
 out the consent of its stockholders, and to publish at least once 
 in each year, and submit to its stockholders at least fifteen days 
 in advance of its annual meeting, a detailed statement of its 
 physical and financial condition ; an income account covering 
 the previous fiscal year ; a balance sheet showing assets and 
 liabilities at the end of the year, and an income account and 
 balance sheet of all its subsidiary companies. A railroad 
 company must state, among other things, the location and 
 route of its road ; its total mileage and character of its prop- 
 erty ; contemplated extensions ; total equipment ; mortgage 
 liens ; other indebtedness or liabilities ; its various issues of 
 securities and application of proceeds / its income account 
 for the last preceding year, and a balance sheet. Similar 
 requirements are imposed with respect to the listing 
 of railroad bonds and the securities of other 
 corporations. There must also be furnished the resolu- 
 tion of stockholders and directors authorizing the issue ; 
 opinion of counsel as to the legality of the issue ; the report 
 of a duly qualified engineer covering the actual physical con- 
 dition of the property as of recent date ; and other documents 
 bearing upon the validity of the issue, and the properties 
 which it represents or upon which it is a lien. 
 
 Since 1868 thirty days' notice of a proposed increase in 
 the capital stock of a company must be given to the Exchange 
 before such increase may be admitted to dealings. 
 
 Securities are not listed until the ownership has become 
 distributed and diversified. Whenever the great bulk of any 
 security has been absorbed by a single interest the security is 
 stricken from the list. 
 
 Throughout this brief our use of the term u securities " in- 
 cludes stocks. 
 
Governor Hughes of New York appointed a Commission in 
 December, 1908, of which Mr. Horace White was chairman, 
 to ascertain what changes, if any, were advisable in the laws 
 of the State bearing on speculation in securities and com- 
 modities, or relating to the protection of investors, or with 
 regard to the instrumentalities and organizations used in deal- 
 ing in securities and commodities which are the subject of 
 speculation. This Commission, after an exhaustive study of 
 the subject, made its report in June, 1909. 
 
 Among the principal conclusions of the Commission were : 
 
 (1) Purchasing securities on margin is as legitimate a 
 transaction as the purchase of any other property in which 
 part payment is deferred. 
 
 (2) " Short sales " are perfectly legitimate and of sub- 
 stantial advantage to the community. 
 
 (3) The Stock Exchange clearing-house is essential to en- 
 able the Exchange to do its necessary and legitimate business. 
 
 (4) The Stock Exchange under its present organization, 
 that is, unincorporated, is a more potent instrument for the 
 accomplishment of good than it would be if incorporated. 
 
 (5) The statute excepting call loans, secured by ware- 
 house receipts, bills of lading, bills of exchange, and other 
 negotiable instruments, from the operation of the usury laws 
 operates beneficially, and its repeal is inadvisable. 
 
 (6) The efforts of the Stock Exchange to control the dis- 
 tribution of its quotations were fully approved, and legislation 
 enabling it more effectually to prevent these quotations from 
 being transmitted to bucket shops was recommended. 
 
 The report contained a number of suggestions and 
 recommendations. 
 
 It suggested that brokers discourage speculation upon 
 small margins, and that the Exchange use its influence, and, if 
 necessary, its power to prevent members from soliciting and 
 accepting business as a general thing on a less margin than 
 twenty per cent. The Exchange has not taken any action upon 
 
this recommendation, for the reason that it has deemed that 
 such a rigid rule would unduly eliminate the element of per- 
 sonal credit, and for the further reason that, as stated by the 
 Commission itself, " the amount of credit which one person may 
 extend to another is a dangerous subject on which to legislate." 
 
 Another suggestion related to the regulation of pyramiding, 
 but this was not practical. 
 
 Manipulation was discussed in the report. The impossi- 
 bility of preventing it altogether was recognized ; one form 
 of it was held to be justifiable, and it was suggested that 
 the forms of it which were condemned might be prevented 
 through the exercise by the Exchange of its influence and 
 authority over its members. The views of the Exchange upon 
 the subject of manipulation are set out below. 
 
 The report recommended that the Exchange adopt a rule 
 conferring upon the Governing Committee power to de- 
 cide when a corner exists and to fix a settlement price. 
 This recommendation the Exchange has not acted upon ; and 
 it has not appeared to be urgent. There have been only two 
 corners in many years. The last was the Northern Pacific 
 corner in 1901. 
 
 A further recommendation was that the books and accounts 
 of the members should be subjected to periodic examination 
 and inspection by the Exchange. The Exchange has not 
 adopted this recommendation further than to authorize its 
 Law Committee to examine into the dealings of any member. 
 There is naturally great opposition on the part of the members 
 to such inquisitorial scrutiny and disclosure of their affairs, 
 which they jealously regard as private and confidential. 
 
 The report stated the existing law as to the hypothecation 
 of securities by brokers, and recommended that the Legisla- 
 ture adopt a statute making the wrongful disposition of a cus- 
 tomer's securities larceny. This was a recommendation ad- 
 dressed to the Legislature for its action. 
 
 It was recommended that the rule forbidding any member 
 
to deal or carry an account for a clerk or employee of another 
 member should be extended to prevent dealing for account of 
 any clerk or subordinate employee of any bank, trust com- 
 pany, insurance company or other inonied corporation or bank ; 
 and the Exchange promptly adopted the recommendation and 
 amended the rule accordingly. 
 
 Another recommendation was the abolition of the un- 
 listed department of the Exchange, and that recom- 
 mendation has been carried out. In connection with 
 that recommendation the suggestion was made that the 
 Exchange should adopt methods to compel the 
 filing of frequent statements of the financial condition of the 
 companies whose securities are listed, including balance sheets 
 and income and expense accounts, which should be open to 
 public examination under proper rules and regulations ; and 
 that in future applications for listing the consideration for 
 capital stock issued should be stated. As to these latter 
 suggestions we call attention to the requirements for listing 
 from which we have quoted at considerable length above. 
 Copies of applications for listing are given to the press and 
 are widely disseminated, and all documents filed by applicants 
 are open to inspection at the offices of the Exchange. To require 
 the filing with the Exchange of frequent statements scarcely 
 seems necessary in view of the detailed statements that are 
 widely published and distributed to stockholders by nearly all 
 the companies whose securities are listed, and such publications 
 as Poor's Manual, Moody 's Manual and the Financial Chroni- 
 cle, which are readily accessible in brokers' offices and else- 
 where to those who desire the information that such state- 
 ments would furnish. 
 
 The report recommended the enactment of a statute with 
 respect to false reports of transactions made by brokers to 
 customers which the Legislature has not as yet adopted. 
 
 A valuable recommendation related to the unit in trading. 
 The language of the report was : " The Exchange should in- 
 sist that all trading be done on the basis of a reasonably 
 
10 
 
 small unit, say 100 shares of stock or $1,000 of bonds, but 
 should not permit the offers of such lots or bids for such lots 
 to be ignored by traders offering or bidding for larger 
 amounts. The practice now permitted by allowing bids and 
 offers for large amounts, all or none, assists the manipulation 
 of prices." The Exchange adopted these suggestions in an 
 elaborate system of rules found on pages 76 et seq. of 
 the constitution. The scheme of these rules may be 
 shown by a quotation : "If a bid is made for a larger 
 lot of stock above the price at which smaller lots 
 are offered, or if a transaction is made in a larger lot above 
 the price in which smaller lots are offered, such bidder or 
 buyer shall be compelled to buy any or all of the smaller lots 
 which were publicly offered at the time at the lower price up 
 to the amount of the bid for the larger lot." This system of 
 rules, of which the one quoted is part, is drastic and of 
 great effect in preventing manipulation of prices. 
 
 The report recommended that the clearing sheets sent by 
 members to the Clearing House be retained instead of being 
 returned to the members at the end of each week. The 
 Exchange considers that these sheets are the property of 
 its members, sent in to the Clearing House for a particular 
 purpose, and that the owners are entitled to them when that 
 purpose has been accomplished. The sheets are only tran- 
 scripts from the members' books, which are permanent records 
 of the transactions. For these reasons it has not adopted 
 this suggestion. 
 
 A further recommendation was that branch offices of 
 brokers should be abolished or effectively regulated. The Ex- 
 change has not as yet seen its way clear to altogether abolish 
 them. It has, however, taken firm measures for the effective 
 regulation of such offices and the elimination of their objec- 
 tionable features. 
 
 A further recommendation was that a statute be adopted 
 making misleading advertisements criminal, but the Legis- 
 lature has not yet adopted that recommendation. 
 
11 
 
 I. 
 
 The New York Stock Exchange is not con- 
 cerned in interstate or foreign commerce, nor 
 do its operations in any respect come within the 
 sphere of federal jurisdiction. 
 
 Hopkins vs. U. S. t 171 U. S., 578 ; and Anderson 
 vs. U. S., 171 U. S., 604. 
 
 (a) The first of these cases was a case brought by the 
 United States against the members of a voluntary unincorpo- 
 rated association known as The Kansas City Live Stock 
 Exchange. The purpose of the action was to obtain the 
 dissolution of the Exchange and to perpetually enjoin the 
 members from entering into, or from continuing in, 
 any combination of a like character. The rules of 
 the Exchange prescribed the minimum rates to be 
 charged by its members for selling live stock ; pro- 
 hibited the members from employing any agent or 
 solicitor except upon a stipulated salary not contingent on the 
 commission earned ; limited the number of solicitors that 
 might be employed ; prohibited the members from sending 
 prepaid telegrams or telephone messages giving current quo- 
 tations ; and also provided that no member of the Exchange 
 should transact business with any person violating any of the 
 rules or regulations of the Exchange or with an expelled or 
 suspended member. It appeared that substantially all the 
 business transacted in receiving, buying, selling and handling 
 live stock at Kansas City was carried on by the members of 
 the Exchange as commission merchants, and that great quan- 
 tities of this live stock was shipped from other states and 
 was sold at the stock yards to various packing houses, and for 
 shipment to other states. 
 
12 . 
 
 Mr. Justice PECKHAM, in delivering the opinion of the court, 
 said : 
 
 " As set forth in the record, the main facts are that 
 the defendants have entered into a voluntary associa- 
 tion for the purpose of thereby the better conducting 
 their business, and that after they entered into such 
 association they still continued their individual business 
 in full competition with each other, and that the asso- 
 ciation itself, as an association, does no business what- 
 ever, but is simply a means by and through which the 
 individual members who have become thus associated 
 are the better enabled to transact their business ; to 
 maintain and uphold a proper way of doing it ; and to 
 create the means for preserving business integrity in 
 the transaction of the business itself. The business of 
 defendants is primarily and substantially the buying 
 and selling, in their character as commission merchants, 
 at the stock yards in Kansas City, live stock which has 
 been consigned to some of them for the purpose of sale, 
 and the rendering of an account of the proceeds arising 
 therefrom. The sale or purchase of live stock as com- 
 mission merchants at Kansas City is the business done, 
 and its character is not altered because the larger pro- 
 portion of the purchases and sales may be of live stock 
 sent into the State from other States or from the 
 Territories. * * * 
 
 * The by-laws of the exchange relate to the 
 business of its members who are commission merchants 
 at Kansas City, and some of these by-laws, it is claimed 
 by the Government, are in violation of the act of Con- 
 gress, because they are in restraint of that business 
 which is in truth interstate commerce. That one of 
 the by-laws which relates to the commissions to be 
 charged for selling the various kinds of stock, is par- 
 ticularly cited as a violation of the act. * * * 
 The commission agent in selling the cattle for their 
 owner simply aids him in finding a market ; but the 
 facilities thus afforded the owner by the agent are not 
 of such a nature as to thereby make that agent an indi- 
 vidual engaged in interstate commerce, nor is his agree- 
 
13 
 
 inent with others engaged ID the same business, 
 as to the terms upon which they would provide 
 these facilities, rendered void as a con- 
 tract in restraint of that commerce. * * * 
 
 * * * If charges of the nature described do not 
 amount to a regulation of interstate trade or commerce, 
 * * * it would for a like reason seem clear that 
 agreements relating to the amounts of such charges 
 among those who furnish the privileges or facilities are 
 not in restraint of that kind of trade. * * * 
 
 * * * The services of members of different stock 
 and produce exchanges throughout the country, in 
 effecting sales of the articles they deal in, are of a simi- 
 lar nature. Members of the New York Stock Exchange 
 buy and sell shares of stock of railroads and other cor- 
 porations, and the property represented by such shares 
 of stock is situated all over the country. Is a broker 
 whose principal lives outside of New York State, and 
 who sends him the shares of stock or the bonds of a 
 corporation created and doing business in another State, 
 for sale, engaged in interstate commerce ? If he is em- 
 ployed to purchase stock or bonds in a like corporation 
 under the same circumstances, is he then engaged in the 
 business of interstate commerce ? It may, perhaps, be 
 answered that stocks or bonds are not commodities, and 
 that dealers therein are not engaged in commerce. 
 Whether it is an answer to the question need not be 
 considered, for we will take the case of the New York 
 Produce Exchange. Is a member of that body to 
 whom a cargo of grain is consigned from a western 
 State to be sold engaged in interstate commerce when 
 he performs the service of selling the article upon its 
 arrival in New York and transmitting the proceeds of 
 the sale less his commission ? Is a New Orleans cotton 
 broker who is a member of the Cotton Exchange of that 
 city, and who receives consignments of cotton from dif- 
 ferent States and sells them on 'change in New Orleans 
 and accounts to his consignors for the proceeds of such 
 sales less his commission, engaged in interstate com- 
 merce ? Is the character of the business altered in 
 
14 
 
 either case by the fact that the broker has ad- 
 vanced moneys to the owner of the article and 
 taken a mortgage thereon as his security? We 
 understand we are in these queries assuming sub- 
 stantially the same facts as those which are con- 
 tained in the case before us, and if these defendants 
 are engaged in interstate commerce because of their 
 services in the sale of cattle which may come from 
 other States, then the same must be said in regard to 
 the members of the other exchanges above referred to. 
 We think it would be an entirely novel view of the 
 situation if all the members of these different exchanges 
 throughout the country were to be regarded as engaged 
 in interstate commerce, because they sell things for their 
 principals which come from States different from the 
 one in which the exchange is situated and the sale 
 made. 
 
 " The theory upon which we think the by-law or 
 agreement regarding commissions is not a violation of 
 the statute operates also in the case of the other pro- 
 visions of the by-laws. The answer in regard to all 
 objections is, the defendants are not engaged in inter- 
 state commerce." 
 
 Anderson vs. United States, 171 U. 8., 604, was another 
 case brought by the United States under the Sherman Act, 
 the purpose of the action being the dissolution of the .Traders' 
 Live Stock Exchange, an unincorporated association. The 
 members of the Exchange were not commission merchants 
 as in the Hopkins case, ' but traders. The rules of the 
 exchange provided that it would not recognize any yard 
 trader unless he was a member of the Exchange ; that two or 
 more parties trading together as partners must both be mem- 
 bers of the Exchange ; that no member of the Exchange should 
 employ any person to buy or sell cattle unless such person 
 held a certificate of membership in the Exchange ; and that no 
 member of the Exchange should be allowed to pay any other 
 buyer or salesman any sum of money as a fee for buying 
 
15 
 
 cattle from, or selling to, a party not a member of the 
 Exchange. Mr. Justice PECKHAM in delivering the opinion of 
 the Supreme Court said : 
 
 " In the view we take of this case we are not called 
 upon to decide whether the defendants are or are not 
 engaged in interstate commerce, because if it be con- 
 ceded they are so engaged, the agreement as evidenced 
 by the by-laws is not one in restraint of that trade, nor 
 is there any combination to monopolize or attempt to 
 
 monopolize such trade within the meaning of the act. 
 # * 
 
 " From very early times it has been the custom for 
 men engaged in the occupation of buying and selling 
 articles of a similar nature at any particular place to 
 associate themselves together. The object of the asso- 
 ciation has in many cases been to provide for the ready 
 transaction of the business of the associates by obtain- 
 ing a general headquarters for its conduct, and thus to 
 ensure a quick and certain market for the sale or 
 purchase of the article dealt in. Another purpose 
 has been to provide a standard of business integ- 
 rity among the members by adopting rules for just 
 and fair dealing among them and enforcing the 
 same by penalties for their violation. The agree- 
 ments have been voluntary, and the penalties have 
 been enforced under the supervision and by mem- 
 bers of the association. The preamble adopted by the 
 association in this case shows the ostensible purpose 
 of its formation. It was not formed for pecuniary 
 profits, and a careful perusal of the whole agreement 
 fails, as we think, to show that its purpose was other 
 than as stated in the preamble. In other words, we 
 think that the rules adopted do not contradict the 
 expressed purpose of the preamble, and that the result 
 naturally to be expected from an enforcement of the 
 rules would not directly, if at all, affect interstate trade 
 and commerce." * * * 
 
 In Ware <& Ldand vs. Mobile County, 209 U. S., 405, it 
 was held that contracts for sales of cotton for future delivery, 
 
10 
 
 which do not obligate interstate shipments, were not subjects 
 of interstate commerce, and that brokers in Mobile taking 
 orders for the purchase and sale of cotton for future delivery 
 to be executed upon the New York and New Orleans Cotton 
 Exchanges were not engaged in interstate commerce. 
 
 In New York, ex rel. Hatch vs. Eeardon, 204 U. 8., 152, 
 the Supreme Court passed upon the question whether the 
 Stock Transfer Tax of New York was or was not a burden 
 upon interstate commerce. Speaking of a sale made in the 
 State of New York of stock in the Southern Railway Company 
 and of stock in the Chicago, Milwaukee and St. Paul Railroad 
 Company, the Court said : "There is not a shadow of a ground " 
 for calling these transactions interstate commerce (page 161). 
 
 ( b) It follows from these cases that Congress has no power 
 with respect to the matters affecting directly or remotely the 
 Exchange concerning which testimony was elicited ; for in- 
 stance as to whether such a body as the Exchange should 
 be incorporated ; the number of its members ; the mini- 
 mum rate of commission ; the rules governing the mem- 
 bers and their transactions on the Exchange ; the exercise 
 of its disciplinary powers over members ; the listing of 
 securities and the striking of securities from the list ; mar- 
 ginal purchases; manipulation, and short sales. All these 
 matters are clearly beyond the province and jurisdiction of 
 Congress. 
 
 (c) The agreement between the Exchange and the Western 
 Union Telegraph Company, under which the Telegraph 
 Company may not deliver quotations to members of the 
 Exchange at their offices south of Chambers Street, but 
 may deliver such quotations to members in the City of 
 New York north of Chambers Street, and to any non- 
 members of the Exchange in the City of New York if ap- 
 proved by the Exchange, and to persons outside the City of 
 New York provided they are not engaged in conducting 
 bucket shops, is not an arrangement that restrains interstate 
 
17 
 
 commerce or any other soit of commerce. The Exchange, as 
 the owner of quotations, prescribes the persons to whom the 
 public service corporation transmitting the quotations may 
 deliver them. The right exercised by the Exchange is similar 
 to the right exercised by every one who sends a telegraph 
 message. 
 
 In Board of Trade vs. Christie Grain and Stock Company, 
 198 U. S., 236, the Chicago Board of Trade , sought success- 
 fully to enjoin certain of the defendants from obtaining and 
 using its quotations. The plaintiff's quotations were fur- 
 nished to a Telegraph Company under an arrangement very 
 similar to the arrangement between the Exchange and the 
 Western Union Telegraph Company, the Telegraph Company 
 agreeing not to furnish them to any bucket shop or place 
 where they might be used as a basis for bets or illegal con- 
 tracts. The Supreme Court said as to the claim that this 
 arrangement was in restraint of trade (page 252) : " But so 
 far as these contracts limit the communication of what the 
 plaintiff might have refrained from communicating to any one, 
 there is no monopoly or atfempt at monopoly, and no contract 
 in restraint of trade, either under the statute or at common 
 law." 
 
 In the case of the Commercial Telegram Company vs. 
 Smith, Jt-7 Hun, 4,94, the claim was made that the Stock 
 Exchange had no right to exclude the Commercial Telegram 
 Company from the privilege of collecting quotations on its 
 floor for transmission to outsiders. This was held to be 
 erroneous. Mr. Justice VAN BRUNT, writing the opinion of 
 the Court, said (pages 505 and 507) : 
 
 " The claim that the Stock Exchange has no right 
 to exclude the Commercial Telegram Company from its 
 floor upon the ground of public policy evidently pro- 
 ceeds upon an entirely erroneous theory. The Exchange 
 is a private association ; it has the right to admit to its 
 
18 
 
 floor whom it pleases ; it obtains nothing from the 
 State except that protection which the law affords to 
 every citizen ; it has sought no special privilege and 
 obtained no special powers. It is, therefore, just as 
 much the master of its own business and of the method 
 of conducting the same as any private individual 
 within the State. It may make public the trans- 
 actions which occur within its walls or it 
 may refuse all information in respect theroto. 
 No matter which course is pursued, so long as it violates 
 no law it has a right to conduct its business as it 
 pleases. * * * The New York Stock Exchange has 
 asked nothing from the people of the State, except that 
 which is granted to every citizen ; it has no special 
 privileges under the law, it has no special rights, and 
 the people therefore have no right to interfere in the 
 transaction of its business to any greater extent than 
 they have in that of any individual." 
 
 In Wilson, as President of the Consolidated Exchange, 
 against Smith, 18 N. Y. State Rep., 78, Mr. Justice BROWN 
 said at pp. 84, 85 : 
 
 " The New York Stock Exchange is not a corpora- 
 tion ; it is a voluntary association of individuals en- 
 gaged in business as brokers in stocks, bonds and other 
 securities. 
 
 " It is not the outgrowth of any public demand, 
 serves no public interest, has sought no special privi- 
 leges or power, and has asked and obtained nothing 
 from the State, except that protection which the law 
 affords every citizen and exists solely for the purpose 
 of affording its members facilities for the transaction 
 of their individual business. * * * 
 
 " 111 the exercise of its ordinary functions it does 
 not usually engage in auy business except such as are 
 incidental to the furnishing proper and convenient 
 facilities to its members. It is not interested in the 
 business transacted between its members, and makes 
 no sales or purchases of any securities dealt in within 
 its walls, and is under no obligation to acquire any in- 
 
19 
 
 formation as to any transactions taking place there, or 
 to ascertain the prices of any securities therein bought 
 or sold. 
 
 " In all this, there is plainly no public service, and 
 in accomplishing the object and purpose of its organi- 
 zation no public duty. * * So that in all business 
 transactions on the floor of the Exchange, between its 
 members there is no public service and no public duty, 
 and no obligation rests upon any of the members of the 
 Exchange to make known any of the details of their trans- 
 actions with other members, and that with respect to 
 sales of bonds, stock and securities there is the same 
 immunity from public inspection as exists in all 
 branches of mercantile business. * * * 
 
 " The Exchange, as an association, stands in no dif- 
 ferent relation to the public in respect to their trans- 
 actions than do individual members. Whatever it does, 
 it does by their direction. Its acts express simply the 
 will of the majority. If there is any public duty 
 growing out of the business of dealing in stocks and 
 bonds, the obligation is greater upon the broker who 
 sells than on the Exchange. The Exchange is but the 
 agent of its members. Whatever information it pos- 
 sesses it holds in trust for its members. Yet any 
 member may refuse to make public his sales or pur- 
 chases. How then can the Exchange be compelled to 
 make public that member's business which he has a 
 right to keep private ? * * * (p. 87). 
 
 " So long as he violates no law and does not inter- 
 fere with the reciprocal rights of others, every man 
 may do what he will with his own ; he may engage in 
 any lawful business or occupation and he may sell his 
 own goods or refuse to sell to whomsoever he chooses. 
 The obligation of the stock exchange with reference to 
 the transactions between its members, arising from the 
 fact that it collects and sells the quotations, can be no 
 greater than the obligations resting on any other mer- 
 chant to make known the price of his goods." 
 
 (d) The provisions of the constitution of the Exchange to 
 the effect that the proceeds of the transfer of a membership 
 
20 
 
 shall be applied first to the payment of debts due to 
 fellow members are not in conflict with the provisions or 
 policy of the Bankruptcy Acts. Hyde vs. Woods, 94 U. S., 
 5%3, dealt with the provisions of the constitution of the San 
 Francisco Stock and Exchange Board, a voluntary associa- 
 tion. The constitution of the Board provided that " in sales of 
 seats for account of delinquent members the proceeds shall 
 be applied to the benefit of the members of this board ex- 
 clusive of outside creditors, unless there shall be a balance 
 after payment of the claims of members in full." The Su- 
 preme Court said with respect to article 15, page 525 : 
 
 " There is no reason why the stock board should 
 not make membership subject to the rule in question, 
 unless it be that it is a violation of some statute, or of 
 some principle of public policy. It does not violate 
 the provision of the bankrupt law against preference of 
 creditors, for such a preference is only void when made 
 within four months previous to the commencement of 
 the bankrupt proceedings. Neither the bankrupt 
 law nor any principle of morals is violated by this 
 provision, so far as we can see. A seat in this 
 board is not a matter of absolute purchase. Though 
 we have said it is property, it is incum- 
 bered with conditions when purchased, without 
 which it could not be obtained. It never was free 
 from the conditions of article 15, neither when Fenn 
 bought, nor at any time before or since. That rule en- 
 tered into and became an incident of the property when 
 it was created, and remains a part of it into whose 
 hands soever it may come. As the creators of this 
 right this property took nothing from any man's 
 creditors when they created it, no wrong was done to 
 any creditor by the imposition of this condition." * * * 
 
 " It is said that it is against the policy of the bank- 
 rupt law, against public policy, to permit a man to make 
 in this or any other manner a standing or perpetual ap- 
 propriation of his property to the prejudice of his gen- 
 eral creditors ; and that it is to this point that the nu- 
 
21 
 
 merous authorities of counsel are cited. They all, how- 
 ever, relate to cases where a man has done this with 
 property which was his own, property on which he 
 himself imposed the direction, or the incumbrance, 
 which impeded creditors. 
 
 " It is quite different where a man takes property by 
 purchase or otherwise, which is subject to that di- 
 rection or disposition when he receives it. It is no act 
 of his which imposes the burden. It was imposed by 
 those who had a right to do it, and to make it an ac- 
 companiment of any title which they gave to it." 
 
 II. 
 
 The organization and constitution of the Ex- 
 change are admirably adapted to facilitate the 
 convenient transaction of the business of its 
 members, to prevent wrong, and to maintain 
 high standards of commercial honor and integ- 
 rity. 
 
 The constitution declares that the object of the Exchange 
 " shall be to furnish exchange rooms and other facilities for the 
 convenient transaction of their business by its members, as 
 brokers ; to maintain high standards of commercial honor and 
 integrity among its members ; and to promote and inculcate 
 just and equitable principles of trade and business." 
 
 The Governing Committee has always been composed of men 
 of experience and high standing. It consists of forty mem- 
 bers, ten of whom are elected every year. The re-election of 
 its members has been the rule, to retain the benefits of their 
 knowledge and experience and assure courage and continuity 
 in the policies of the management. A more stable and efficient 
 form of government could not be devised. 
 
22 
 
 Article XVII., Sec. 2, provides that " a member adjudged 
 * * * to be guilty of fraud or of fraudulent acts shall be 
 expelled." Sec. 6 of the same Article provides that " a mem- 
 ber who shall be adjudged * * * guilty * * of 
 any conduct or proceeding inconsistent with just and equitable 
 principles of trade may be suspended or expelled ; " Sec. 7, 
 that a member may be required to submit to the Governing 
 Committee or to any Standing Committee such portion of his 
 books or papers as are material to any matter under investi- 
 gation ; and Sec. 8, that a member may be suspended for any 
 act determined to be contrary to the interests or welfare of 
 the Exchange. 
 
 Puts and calls are prohibited (page 48). 
 
 Fictitious transactions are forbidden ; (page 48) and this 
 prohibition includes " matched " orders and " wash " sales. 
 
 Resolutions of March 30, 1910 (pages 76 to 79), provide 
 that " all bids and offers on larger lots shall be considered to 
 be for any part thereof in lots of 100 shares or of multiples 
 thereof ", so that any man who offers to buy or sell a larger 
 block of stock must take and pay for, or must sell and deliver, 
 smaller blocks which are offered at lower prices or bid for at 
 higher prices. 
 
 By Article XL, Sec. 1, provision is made for the arbitra- 
 tion of disputes between members ; by Article XXX for 
 immediate settlement of disagreements over the terms of a con- 
 tract ; and by Article XL, Section 1, Par. 10 for the determina- 
 tion of questions arising upon the settlement of contracts, 
 and practically for the prompt disposition of every question 
 which might embarrass the expeditious transaction of busi- 
 ness. 
 
 Any member who fails to comply with his contracts, or is 
 insolvent, is at once automatically suspended. (Article XVI.) 
 
 Members are forbidden to take or carry speculative ac- 
 counts in which a clerk of the Exchange, or of a member of 
 the Exchange, or of a bank, trust company, banker or insur- 
 
23 
 
 ance company, is directly or indirectly interested, unless the 
 written consent of the employer has been first obtained, (page 
 84) 
 
 Every member of the Exchange is required to use due 
 diligence to learn the essential facts relating to every account 
 accepted by himself, or by his clerks or representatives, (page 
 84) 
 
 If any customer of a member chooses to bring before the 
 Arbitration Committee a claim against a member, the member 
 is bound by the award of that Committee. Any complaint of 
 alleged wrongdoing asserted by a non- member against a 
 member of the Exchange is promptly dealt with by the appro- 
 priate Committee. 
 
 These are only a few among the body of rules which has 
 been established as the result of long experience and serious 
 thought. We believe that no better system of rules could 
 have been devised. They are a growth, and reflect the best 
 efforts of the Governors to accomplish the objects of the Ex- 
 change as expressed in its constitution with due regard to 
 changing conditions. They regulate a business of vast 
 dimensions and great complexity ; and that they should not 
 obstruct it in any of its legitimate phases is the essential thing. 
 They may not prevent some sporadic transactions and opera- 
 tions that cannot be justified ; but no system of rules can be 
 devised that will do so. The most that can be expected is, that 
 they go as far in that direction as is consistent with the free 
 and unobstructed transaction of legitimate business. 
 
 The rules making acts contrary to just and equitable prin- 
 ciples of trade a ground for expulsion enable the Exchange to 
 hold its members to a standard of business integrity far higher 
 than the law does, or could, require. A member may be ex- 
 pelled for doing that which, according to the standard of the 
 most honorable of his own business associates, is deemed 
 contrary to fair dealing, irrespective of the question whether 
 or not it amounts at law to fraud or positive wrongdoing. 
 
24 
 
 He may be punished for reckless and unbusinesslike conduct, 
 and even for errors of judgment. In all his transactions 
 he has to conform to a standard which the law does not 
 undertake to prescribe. Whatever he does has to 
 be in accordance with " just and equitable principles of 
 trade " a standard unknown to any system o'f law. Whether 
 any particular act of his violates those principles is deter- 
 mined, not by an outside body of laymen like a jury and 
 the application of technical rules of evidence ; but by a select 
 body of members of the Exchange, chosen to uphold just and 
 fair dealing, who ascertain the facts with businesslike directness, 
 and who are empowered to expel, which is the ruin of a man's 
 career as a broker, or to suspend, which is a deep humiliation. 
 These rules are an illustration of the disciplinary efficiency of 
 the Exchange. 
 
 The rules requiring the completion of any sale and pur- 
 chase on the Exchange by actual delivery and paj^ment on the 
 day after the transaction, and prohibiting fictitious transac- 
 tions, " matched " orders and " wash " sales, are illustrations 
 of the provisions made to assure that every purchase and sale 
 shall be a real and genuine transaction. Many think that that 
 is as far as rules can go in fixing the regularity of purchases and 
 sales. The region beyond is the region of the motives of men, 
 and how far regulation can extend into that region, if at all, 
 without obstructing legitimate business, is one of the most 
 difficult of problems. But the efficacy of the existing rules, 
 providing that every transaction shall be a real and genuine 
 purchase and sale, in assuring the legitimacy of the great bulk 
 of the business transacted on the Exchange is unquestionable. 
 
 In the conduct of this mass of business there is seldom 
 a dispute between the contracting parties which is not im- 
 mediately settled through the instrumentalities of the Ex- 
 change without resort to litigation. There is no business 
 community in which the obligations of good faith and fair 
 dealing are observed more strictly than by the members of the 
 
25 
 
 Exchange. This is proverbial. The repudiation of a contract 
 is practically unknown. Every day thousands of transactions 
 involving millions of money are closed without a hitch. That 
 anything else could happen on the Exchange is almost incon- 
 ceivable to its members. A body which has developed such a 
 high sense of honor among its members must be sound in its 
 principles and administration. 
 
 The fidelity of the members of the Exchange to their cus- 
 tomers is attested by the fact that, notwithstanding the unusual 
 risks and temptations of the business, only seventy-eight 
 failures have occurred in the last thirteen years, or six a year. 
 Thus the annual ratio of members who failed during that 
 period to the total membership was slightly more than one- 
 half of one per cent. ; and half of those who failed settled 
 with their creditors. It seems scarcely probable that any 
 rules could be devised to produce a better showing. 
 
 Without further argument or illustration we feel that we are 
 thoroughly justified in asserting that the constitution, govern- 
 ment and administration of the Exchange are sound and 
 efficient. They are not perfect ; no human things are. They 
 may be criticised, which is also the fate of all things human. 
 That they should be denounced is intolerably unfair and 
 unjust. We can only assume that there is room for improve- 
 ment ; but that is a work to be undertaken calmly and delib- 
 erately, and with a full appreciation of the fact that great 
 interests are at stake which will not bear rough or arbitrary 
 treatment, and of the fact that capable, experienced and high- 
 minded men have been long at work on what problems there 
 are seeking to solve them wisely and sanely. Any other 
 process of change and improvement is fraught with grave 
 dangers. It is too often the case with legislative remedies, 
 originating in excitement and agitation, that they produce 
 just the opposite effect to what was expected and make things 
 worse tfian they were. The history of legislation more than 
 bears out the truth of this statement. 
 
26 
 
 III. 
 
 No good purpose would be accomplished by 
 the incorporation of the Exchange. On the 
 contrary, the substitution of public control for 
 the control exercised by the Exchange over 
 its members would be detrimental to the public 
 interest. To force incorporation would be 
 unjust. 
 
 We beg to refer the Committee to the portions of the 
 report of the Hughes Commission and of the statement of the 
 officials of the Exchange submitted to the Commission that 
 bear on that subject. 
 
 (1) The principal argument for incorporation is that a 
 business of the volume and public importance of the business 
 transacted upon the Exchange should be subject to public 
 regulation and control ; that incorporation would involve such 
 public regulation and control ; and that thereby certain evils 
 supposed to result from, or to be incidental to, dealings in 
 stocks on the Exchange would be prevented or diminished. 
 
 Let us analyze these propositions. It is easy to talk about 
 incorporation and what it would accomplish ; about public 
 regulation and its virtues ; but what is incorporation and what 
 is public regulation ? what agencies do they bring into play to 
 supplant those now in force? what is gained or lost ? A calm 
 consideration of these questions is necessary if they are to be 
 settled on their merits rather than by mere clamour. 
 
 (1) What is incorporation ? 
 
 The Exchange is now a voluntary association of men en- 
 gaged in the business of buying and selling stocks and other 
 securities on their own account and as brokers for others, and 
 who deal with each other. They formed this association 
 as a convenience for themselves in dealing with eacli other. 
 They admit to it whom they see fit and deem proper associ- 
 
ates. No one has a right to be admitted any more than 
 a man has a right to force himself into an ordinary part- 
 nership. It is rather a startling proposition that such a 
 body can be coerced into turning itself into a corpora- 
 tion, if anything can be startling in these days when the 
 average man devotes such time as he can spare from 
 denouncing the shortcomings of public authorities to 
 urging the extension of their powers and activities. 
 But let us suppose that it can be done. What follows ? 
 The Cotton Exchange and the Produce Exchange are 
 incorporated. The public, however, exercises no control over 
 the business conducted upon these Exchanges ; and as such they 
 are substantially as free from public regulation as the Stock 
 Exchange, or as the Consolidated Exchange, which is also unin- 
 corporated. Their charters define the purposes for which they 
 are incorporated and the powers they may exercise for the 
 accomplishment of those purposes. So long as they do not 
 exceed the powers which their charters confer upon them 
 they are the sole judges of the manner in which these powers 
 shall be exercised ; and their acts done in the exercise of these 
 powers are not subject to review by the courts or by any other 
 public authority. (People ex rel. Johnson vs. Neio York Produce 
 Exchange, 149 New York, 401 ; Haebler vs. New York Produce 
 Exchange, 149 New York, 414). 
 
 Hence incorporation of the same kind as the Cotton and 
 Produce Exchanges would accomplish nothing so far as public 
 regulation is concerned. Let us pursue this a little further. 
 
 Following the precedent of the incorporated Exchanges 
 mentioned the charter of the Stock Exchange would declare its 
 purposes and invest it with the powers necessary to carry them 
 out. Among these powers would be the power to make by-laws 
 governing the transaction of business on the Exchange, and the 
 power to discipline its members for conduct in violation of the 
 rules or the law. It would be the discretion of the Exchange 
 that would govern in the exercise of these powers, and no 
 
28 
 
 court or public official could interfere with the exercise of that 
 discretion unless a power was abused or trangressed. No new 
 power of direction, control and government would be intro- 
 duced by incorporation on this model, which is the model of 
 tbe law as it exists to-day. Evidently then something more is 
 intended by the advocates of further control or regulation. 
 
 (2) What then is public control or regulation and what 
 does it involve ? 
 
 (a) It may be assumed that one element is that the 
 Legislature will take a hand in framing the rules for the 
 conduct of the business, and particularly in prohibiting 
 specific acts and practices, such as, for instance, improper 
 manipulation. 
 
 But incorporation is not necessary to the enactment and 
 enforcement of such prohibitions. Members of the Exchange 
 are just as amenable to the laws of the land as other 
 persons, and a prohibited act is just as unlawful on the 
 Exchange as anywhere else. If, for instance, the Legislature 
 succeeds in defining improper manipulation, and enacts a law- 
 prohibiting it, that law is just as applicable to transactions on 
 the Exchange as a voluntary association as it could be if it 
 were incorporated. Incorporation is not necessary to make 
 such a law, or any other general law, applicable to transactions 
 on the Exchange. Hence the necessity of regulation which 
 can be accomplished by such general laws is not an argument 
 for incorporation. There are such general laws in force, and 
 no one ever dreamed that they were not applicable to trans- 
 actions on the Exchange because it was not incorporated. 
 
 As to framing the delicate and intricate rules for the con- 
 duct of the business on the Exchange, which is the fittest body, 
 a legislature changing from year to year, or the Governing 
 Committee of the Exchange, composed of men having an in- 
 timate knowledge of the business, selected for their ability, 
 experience and character, and deeply interested in its orderly 
 
29 
 
 conduct and the reputation of the Exchange? That question 
 answers itself. 
 
 (b) We assume that another element of this public con- 
 trol and regulation is supervision by some State authority of the 
 transactions on the Exchange, of the disciplining of members, 
 and of their solvency. This would require a small army of 
 paid inspectors and accountants. As the Exchange does not 
 buy or sell it has no records. The only records of the daily 
 transactions on the Exchange are the books and papers of the 
 members. The transactions are constant and innumerable. 
 Is there to be a body of public officials constantly examining 
 the books and papers of hundreds of brokers to ascertain 
 whether they have been guilty of violations of the rules or the 
 law for the purpose of initiating discipline or legal proceed- 
 ings ? Such a system of espionage is impracticable, and if it 
 were not impracticable it would be intolerable. 
 
 The same is true of the examination of the books of hun'- 
 dreds of brokers to ascertain their solvency from day to day. 
 If such a thing were practicable, what occasion is there for it 
 considering the small percentage of failures which occurs, as 
 has been shown ? That it is not practicable is obvious to any 
 sensible man. Surely it is not necessary for us to show that 
 there is no analogy between such conditions and the periodical 
 examination of banks by examiners. 
 
 Public regulation and control of the Exchange when ana- 
 lyzed is without any substance. It is something without any 
 useful purpose, practicability or meaning. As a cure for any 
 evils that exist it is without efficiency or merit. The demand 
 for it, however honest, has no real foundation, and serves only 
 to mislead and create prejudice and distrust. The last thing 
 thought of is to define it as a specific measure that can 
 be put in operation to accomplish specific results ; and until 
 that is done it is not entitled to serious consideration. So 
 far it has not been done, and the blind faith in it is part and 
 
30 
 
 parcel of the current belief that whatever there is of wrong or 
 evil in business is curable somehow or other by the interven- 
 tion of the State. 
 
 (3) Incorporation has in it the seeds of demoralization. 
 We firmly believe that its probable consequences will be the de- 
 basement of the Exchange instead of the reform of evils, 
 which, if they exist at all in any real sense, are grossly exag- 
 gerated. 
 
 There are various directions in which incorporation is 
 more than likely to be baleful. 
 
 (a) A vital function of the Exchange is the exercise of its 
 disciplinary power over its members, which has to be taken in 
 connection with the standard of 'conduct it imposes and en- 
 forces. That standard is, as we have seen, that the conduct 
 of its members in their transactions must conform to just and 
 equitable principles of trade. A private association may im- 
 pose such a standard upon its members though it is higher 
 than the standard prescribed by law. The Exchange enforces 
 its own rules and standards through its Governing Com- 
 mittee. Written charges are preferred ; the member is 
 given an opportunity to answer ; and then there 
 is a full hearing before the Governing Committee, at which 
 the member is present to give his own version of the facts. 
 When a member is expelled or suspended the penalty becomes 
 operative immediately ; and the Courts do not interfere if it 
 appears that the charge concerns a violation of an existing 
 rule ; that there is evidence to support it ; and that the Gov- 
 erning Committee acts in good faith in its determination. 
 
 In White vs. Brownell, % Daly, 329, Mr. Justice VAN VORST 
 said: 
 
 " As this association is not organized in pursuance 
 of any statute, nor the terms of membership fixed by 
 the principle of the common law, it follows that the 
 agreement which the members make among themselves 
 
31 
 
 on the subject, must establish and determine the 
 rights of the parties on the subject. The con- 
 stitution of the association, and its laws agreed 
 upon by the members, contains all the stip- 
 ulations of the parties, and is the law which 
 should govern. * * * No person is entitled to mem- 
 bership, in the Open Board of Brokers, except he is ap- 
 proved by the appropriate committee, voted for by the 
 board, and shall agree to, adopt, and affix his name to 
 the constitution, and, having done this, each member 
 should stand by this contract. * * * 
 
 " The Court must regard the Constitution and laws 
 of this board as the contract by which all the members 
 are bound. The Court cannot make any other contract 
 for the parties than they have solemnly made for them- 
 selves." 
 
 " Such an organization may prescribe the conditions 
 upon which persons will be admitted to membership, as 
 well as the conditions upon which the continuance of 
 membership will depend, * * * Voluntary bodies 
 of this kind will be held to the fair and honest adminis- 
 tration of the rules which are in force when any pro- 
 ceeding is instituted against a member ; but where a 
 member is expelled in conformity with the rules, and 
 the proceedings are regular and in good faith, it is final, 
 and no judicial tribunal can interfere." 
 See, also, 
 
 Lewis vs. Wilson, 121 N. Y., 284. 
 
 Neukirch vs. Keppler, 56 App. Div., 225 (affirmed 
 
 without opinion by the Court of Appeals, 174 N. 
 
 Y., 509). 
 Young V8. Eames, 78 App. Div., 229 (affirmed by 
 
 the Court of Appeals without opinion, 181 N. Y., 
 
 542). 
 
 It is a remarkable fact, testifying to the ability and high 
 character of the Governing Committee, that its action in expel- 
 ling or suspending a member has always been sustained by 
 the courts. 
 
32 
 
 If the Exchange were incorporated would its charter pro- 
 vide for a judicial review on the merits of the determina- 
 tions of the Governing Committee expelling or suspending a 
 member? If it did not, how long would it be before its 
 charter was amended to include such a provision ? It is easy 
 to realize the sentimental force of an agitation for such a pro- 
 vision industriously worked up by men under charges or who 
 had been expelled. One can hear the appeal that a man 
 should not be deprived of his membership without his day in 
 a court of law. The issue of such an appeal is not doubtful. 
 
 A judicial review would inevitably sap the disciplinary 
 power of its vitality. Every case would be taken into court, 
 and injunctions and stays of proceedings would stop the exe- 
 cution of the determination of the Governing Committee until 
 the last court of review was through with the case. That would 
 take two or three years, and in the meantime the member would 
 continue his activities on the Exchange. Then there is no 
 comparison between the competency of the Governing Com- 
 mittee as a tribunal to try such cases, with its experience and 
 intimate knowledge of the business and its appreciation of 
 the effect of the acts with which the member is charged, and 
 the competency of the ordinary judge without that experience, 
 knowledge and appreciation. If the court differed with the 
 Governing Committee the member would retain his member- 
 ship though his conduct had been condemned by his associates. 
 Discipline could not possibly be maintained under such condi- 
 tions. Moreover the inevitable tendency of this power of 
 review by the courts would be to substitute the standards 
 of the law for the more stringent standards of the Exchange. 
 " Just and equitable principles of trade " would come to be 
 what the courts declared them to be, and the 
 analogies that the courts would apply would be derived 
 from that body of legal rules which defines what acts are 
 wrongful in the sense that they are a sufficient basis for an 
 
33 
 
 action for the recovery of damages. The Exchange applies 
 the layman's view of what are just and equitable principles of 
 trade, and is governed more by moral than strictly legal con- 
 siderations. There is a wide difference in such matters be- 
 tween what is just from the point of view of honorable con- 
 duct and what is just from the point of view of legal rights. 
 A man may have a real grievance against another in a business 
 matter without there being the slightest violation of his legal 
 rights. It is on this principle that members of the Exchange 
 have been punished by expulsion or suspension for acts con- 
 trary to the morals of business, but without any taint in them 
 of wrong in a legal sense. 
 
 These are the reasons for our statement that a full judi- 
 cial review of the disciplinary judgments of the Governing 
 Committee would lower the whole tone of the Exchange and 
 radically impair its standard of just, equitable and honest 
 dealing. Any movement which deteriorates its standards is 
 inimical to the public interests to a degree commensurate with 
 the vast dealings of which it is the center and with the func- 
 tion it performs. 
 
 (b) Judicial review is also inappropriate with respect to 
 the listing of securities and striking securities from the list. 
 Those are matters that are now entirely subject to determina- 
 tion by a highly qualified committee of the Exchange. The 
 questions they involve are of a business and not a legal char- 
 acter, and require for their determination sound business judg- 
 ment rather than the judicial cast of mind or legal methods. 
 Imagine a judicial tribunal taking evidence as to whether 
 a security should be listed or stricken from the list and then 
 deciding the matter as a legal question. The function 
 of a judge is to apply the law of the land to disputes between 
 parties over their legal rights. It is not his function to 
 determine what are proper securities to be dealt in on a stock 
 exchange. And if it be suggested that this function should be 
 
34 
 
 conferred, not upon the courts, but upon State officials, who 
 will maintain that they would be more competent to decide such 
 questions than the members of a committee of the Exchange 
 selected because of their standing, experience and qualifi- 
 cations? Who would prefer, as to such a matter, the judg- 
 ment of State officials who come and go to that of men whose 
 qualifications are those of genuine experts ? 
 
 (c) The comprehensive objection to incorporation is that it 
 converts a self-governing body into one subject to external 
 control in all the ramifications of its functions and opera- 
 tions. Responsibility is weakened by the commingling 
 of internal and external authority, and responsibility is 
 essential to integrity and efficiency. It is not the case 
 of a trust relation involving money or property, like a 
 bank or insurance company, with respect to which regulation 
 has a distinct function and use. State control of a body 
 like the Exchange inevitably impairs its own responsi- 
 bility for the conditions which exist at any time. Divided 
 between two regulative powers or authorities it is bound to be 
 weak and inefficient. 
 
 Moreover, with incorporation the element of permanence 
 will disappear. Every year there will be efforts to amend 
 the charter inspired by every sort of motive, good and bad. 
 The Exchange is peculiarly a target for such attacks. 
 It is sure to be continually embroiled with proposed legis- 
 lation and distracted by legislation that has been enacted. 
 Members as well as non-members with grievances, how- 
 ever imaginarj' or the result of their own negligence or im- 
 prudence, will rush to the legislature with amendments to still 
 more enfeeble its government. These are the conditions which 
 will prevail beyond any sort of doubt ; and they will surely 
 weaken its government, and eliminate from it many of the strong 
 and able men who devote their time and energy to it out of a 
 spirit of true devotion to its best interests. The office of Gov- 
 ernor will cease to be the honor that it is ; the membership of 
 
35 
 
 the Governing Committee will be less constant ; and the ad- 
 ministration of the affairs of the Exchange, assailed and har- 
 rassed by outside interference, must sink to lower levels. 
 
 (d) There is not the excuse for State control that the busi- 
 ness done on the Exchange is a monopoly. 
 
 There is no monopoly if securities are marketable though not 
 listed upon the Exchange. That they are appears quite clearly 
 from the testimony of Mr. Mabon (pages 372-3, 405-6), and Mr. 
 Pomroy (pages 489, 492, 494, 496), which is confirmed by the 
 fact that the number of corporations in the United States 
 is upwards of two hundred and seventy -two thousand (272,000) ; 
 that the aggregate amount of the stock of these corporations 
 is fifty-eight billion (58,000,000,000) dollars ; that their bond 
 issues aggregate thirty billion (30,000,000,000) ; and that there 
 are listed on the Exchange five hundred and fifty (550) issues of 
 stock, having an aggregate par value of thirteen billion 
 (13,000,000,000) dollars, and one thousand and twenty-eight 
 (1,028) issues of bonds having an aggregate par value of 
 thirteen billion (13,000,000,000). Thus it is evident that stocks 
 and bonds can be and are sold to an enormous extent else- 
 where than upon the Exchange. 
 
 Any well known stock can be readily disposed of, and 
 money borrowed upon it, although not listed on the Exchange. 
 Transactions in such stocks take place all the time in great 
 volume elsewhere. Brokers interested in particular stocks are 
 known to other brokers, and there is no trouble whatever in 
 finding a market through them for non-listed stocks. Bonds 
 are dealt in outside the Exchange to an amount exceeding 
 many fold the transactions in bonds upon its floor. 
 
 Bankers, brokers and dealers, not the Exchange, are the 
 essential mediums of the purchase and sale of securities. In 
 the case of inactive securities the machinery of ^private sale 
 through brokers is fully sufficient to bring buyers and sellers 
 together readily and without inconvenience. In the case of a 
 security that is active, that is to say, where there are many 
 
36 
 
 people constantly offering to sell and offering to buy, so that 
 the trading is in large volume, the facilities afforded by the 
 Exchange are a great convenience in bringing buyers and 
 sellers together, but they are not indispensable. If the se- 
 curity is not listed on the Exchange, the buyers and sellers, or 
 th ir brokers, will find a common meeting place elsewhere. 
 
 Listing upon the Exchange imparts to a security a pe- 
 culiar value, not because such listing is essential to its market- 
 ability or availability as collateral, but because it makes it more 
 acceptable to those to ivhom it is offered for sale or as col- 
 lateral. It is more acceptable because the listing implies 
 that it meets the requirements prescribed by the Ex- 
 change ; because the Exchange has built up a great and 
 enviable reputation ; and because a great proportion of the 
 people who purchase and sell securities deal through members 
 of the Exchange owing to the standing which membership 
 gives. 
 
 These circumstances, however, do not imply that the Ex- 
 change is an exclusive market. 
 
 (4) To coerce the Stock Exchange to accept incorporation 
 would be unjust. It has " asked and obtained nothing from 
 the State except that protection which the law affords ta 
 every citizen " ( Wilson vs. Smith, 18 N. T. State Rep. 
 78). As a voluntary association for the transaction of 
 business by its members under its rules it was formed more 
 than three quarters of a century ago, and has since grown and 
 developed, without contravening any law of the state or any 
 principle of public policy. Membership has come to have 
 a large pecuniary value and represents a considerable invest- 
 ment by every member. For many years the consideration for 
 a seat has ranged between fifty and ninety thousand dollars. 
 Every member has made this investment in the Exchange 
 as a self-governing voluntary association, and in the expecta- 
 tion that it would continue to control and manage its own 
 affairs. The State cannot by a direct enactment incorporate 
 
37 
 
 the Exchange without the consent of its members, because any 
 such enactment would be unconstitutional. To accomplish that 
 result indirectly through coercion and in disregard of the wishes 
 of its members, if that can be done as it seems to be assumed 
 it can be, would be a radical interference with their rights 
 and privileges existing under the sanction of the law, the pecu- 
 niary consequences of which they will have to bear. The con- 
 version of membership in this voluntary association based 
 on a contract, which the State cannot alter or impair, into 
 membership in a corporation under a charter subject in every 
 detail to the plenary legislative power of the State would 
 be followed by an enormous shrinkage in its pecuniary 
 value. Is that just? To ask this question is to answer it. 
 It is confiscation pure and simple. 
 
 (5) We assert that no regulation whatsoever is within 
 the power of Congress. But we are far from asserting that 
 the State is without any power of regulation. That the 
 State may legislate with respect to transactions, such as 
 improper manipulation, is unquestionable. How effectively 
 it can legislate as to such matters is another question. 
 Hopes and expectations in that direction are apt to be 
 in the inverse ratio of accurate knowledge and experience. 
 It is a regulation interfering with, and diminishing, the 
 responsible self-government of the Exchange that we argue 
 against as detrimental in an incalculable degree as well 
 to the interests of the public as to those of the Exchange. 
 There is no justification for the assertion that that government 
 is or has been, blind, sordid or unintelligent. The history 
 of the Exchange as a whole is conclusive evidence 
 to the contrary. It would not stand at the head of the Ex- 
 changes of the world if those had been its characteristics. It 
 is in the nature of things that there should have been sporadic 
 evils ; but an institution is to be judged by its normal condi- 
 tions and not by abnormal incidents. Due allowance is to be 
 made, so far as the abnormal is concerned, for the patent 
 
38 
 
 difficulty of framing regulations that avoid, on the one hand, 
 being too oppressive, and, on the other hand, defy evasion and 
 circumvention; and the better course is to trust to measures 
 being finally worked out to prevent them from within rather 
 than to arbitrarily and impetuously impose them from without. 
 The wise man will find more hope in what the Governing Com- 
 mittee can accomplish than in drastic emergency legislation. 
 
 IV. 
 
 Speculation. 
 
 The fact that a considerable volume of the 
 transactions on the Exchange is speculative in 
 character is not a just ground for criticising the 
 Exchange, its organization or management. 
 
 We do not propose to discuss the general subject of specu- 
 lation at length or in detail. It is an old theme with economists, 
 financiers and moralists, and there is nothing new to be said 
 about it. Like all other activities on a large scale it has its good 
 and its bad side, and all that is attainable is the correction of 
 the latter in so far as it can be accomplished without impair- 
 ing its necessary, useful and beneficent function. That is the 
 object of many of the rules of the Exchange to which we have 
 referred, and the only practical question is whether it is blam- 
 able for not having gone far enough in that direction, and 
 if it is, whether the most effective cure is not to be 
 found in action by the Exchange. A few general 
 observations may not be amiss to relieve the subject 
 from misconceptions and exaggerations, and the prejudices 
 they engender. They will help at any rate to substitute 
 
39 
 
 actual facts and conditions for general and undiscriinin- 
 ating impressions. 
 
 In the year 1912 the par value of the stocks listed upon 
 the Exchange was about thirteen billion (13,000,000,000) 
 dollars, and the par value of the stocks bought and sold was 
 substantially the same. Thus, in the course of a year, the 
 number of shares of stock bought and sold was substantially 
 the same as the number of shares of stock listed. 
 
 The aggregate value of the bonds listed upon the Exchange 
 in 1912 was about thirteen billion (13,000,000,000) dollars, and 
 the total amount of bonds bought and sold was only six hundred 
 and seventy-four million (674,000,000). Speculation in bonds 
 on the Exchange is, therefore, a negligible quantity. 
 
 Even in the case of stocks in which the trading is quite 
 extensive it does not follow that the great bulk of the trading 
 is of a speculative character. Temporary investments and 
 changes of investments account for a considerable volume of 
 dealings. It is also a well known fact that there is a large 
 volume of stocks that are not transferred on the books of the 
 companies issuing them even in the case of purchases for 
 other than speculative purposes. Let us assume, however, 
 that, in the case of stocks which are bought and sold several 
 times over in the course of a year, the bulk of the trading is 
 of a speculative character. The stocks that are the subject of 
 such speculation may be the stocks of enterprises yielding re- 
 turns that fluctuate widely from year to year ; or they may 
 represent enterprises in process of development, the normal 
 value of which for investment purposes has not been fixed, 
 and which, therefore, are traded in upon the basis of their 
 prospective value rather than their current value for invest- 
 ment purposes. 
 
 Speculation in stocks, taken as a whole, is a process by 
 which the risk of loss and the chance of profit in corporate 
 enterprises is divided up among the speculative community 
 during the period that elapses between the floating of the 
 
40 
 
 enterprises and the time when their securities attain a fixed 
 and permanent investment value. 
 
 The originators of a great many sound enterprises would be 
 unable to carry them without assistance until their securities 
 attained a permanent investment value, and they have to de- 
 pend upon the fact that the speculative community is ready 
 to carry all, or a part of, the securities over this period. As 
 the securities become more and more stable they pass from less 
 conservative to more conservative hands, until at last most of 
 them are held by permanent investors. When comment is 
 made upon the amount of money which is being constantly 
 loaned by the banks and others for the purposes of stock 
 speculation, the greater part of it being loaned upon call, the 
 fact is too generally overlooked that this money so loaned is 
 to an appreciable extent the safe proportion of money employed 
 in carrying enterprises of the country over the early period of 
 their development. 
 
 The speculators in stocks, who in the main make up the 
 speculative community to which we have referred, trade in 
 securities as merchants trade in commodities ; that is to say, 
 they buy in the expectation of selling at a higher price for 
 their profit, differing in this from investors, who look for their 
 profit to the return from the securities in the shape of income. 
 Trading in stocks and other securities as such is just as legiti- 
 mate as any mercantile business. The traders who base their 
 transactions on the study of the properties represented by 
 the securities in which they deal, and their knowledge of the 
 inherent value of the securities derived from such study, are 
 usually the most conservative of the dealers in securities. 
 The traders who look for quick profits in slight changes of 
 market prices arising from fluctuations in the condition of the 
 money market or other causes, which they watch closely with a 
 - trained eye, carry on their operations through perfectly legiti- 
 mate and lawful transactions. 
 
 The tendency of the free play of speculation is to provide a 
 
41 
 
 broad, open, active market and to keep the price of a security 
 somewhere around its true value ; at least, somewhere around 
 the average value put upon it by the judgment of those who 
 are interested in it and have a knowledge of the facts relating 
 to it. A security is, of course, subject to constant fluctuations 
 above and below the true value ; but the dealings of the specu- 
 lators who are disposed to purchase whenever it falls below 
 the true value and to sell whenever it goes above, have a strong 
 tendency to bring it back to and keep it around its true value 
 under existing conditions. 
 
 The elimination of speculation by law, if that were possi- 
 ble, would result in periods of extraordinary inflation of prices 
 followed by their rapid fall and disastrous panics. 
 
 It is said that there is much speculation by people who 
 know nothing of inhsrent values and market conditions, and 
 who do not apportion their commitments to their resources. 
 That will be true as long as human beings are free agents. 
 There may be safeguards against it, but there cannot be 
 absolute prevention unless all speculation is sought to be 
 prevented, which, as we have seen, is undesirable even if it 
 were attainable. The difficulty in dealing with this problem 
 is that whether a particular transaction of a particular in- 
 dividual is in fact legitimate speculation or not is known 
 only to himself, for it depends upon his study of the situa- 
 tion, the degree of his knowledge, the extent of his re- 
 sources in comparison with the risk . that he under- 
 takes, and other matters that he alone can know. 
 There is no way of discriminating by rules or 
 regulations between legitimate and reckless speculation, 
 or of applving them if they could be formulated, for the 
 reason that general rules must deal with all men alike, 
 and not with the particular motives or condition of the indi- 
 vidual. The matter may be put in this way : The right to 
 buy and sell securities is just as much an inherent right as 
 the right to buy and sell any other commodity. This right 
 
42 
 
 can be exercised unwisely and recklessly ; bat there is no way 
 of prescribing by law or rule that a ri^ht may be exercised 
 wisely but may not be exercised unwisely. The possession of 
 the right carries with it the possibility of its unwise exercise. 
 We close this discussion with a pertinent quotation from 
 the convincing and lucid article by Professor Emery on 
 " Should speculation be regulated by Law," in the " Journal of 
 Accountancy," for April, 1908. 
 
 " Speculation in securities is bound up in the closest 
 way with the whole matter of the investment of capital 
 and the accumulating of the necessary means for carry- 
 out great industrial enterprises. Just in so far as the 
 stock market has a speculative clientele, it becomes an 
 open and broad market and facilitates the disposal of 
 great issues of stocks and bonds which are necessary for 
 the carrying out of the industrial undertakings of the 
 present age. 
 
 " The limitation of this broad market must in- 
 variably prove a hindrance in the financing of 
 the most legitimate enterprises, and all inter- 
 ference with the freedom of speculation must 
 inevitably lessen openness of the market. If we 
 attempt to secure the benefits, while restricting the 
 evils of speculation, through discriminating against 
 certain kinds of transactions, we find it impossible to 
 really discriminate in any way according to the form 
 of the transactions, while, inevitably, by restricting the 
 forms of commerce and of commercial methods, we put 
 a severe handicap upon entirely legitimate enterprise. 
 There is only one way in which speculation can be 
 stopped altogether, and that is by giving up the system 
 of private property and adopting the Socialistic state. 
 
 " It will be seen then that speculation is not a prod- 
 uct of stock and produce exchanges. Speculation existed 
 long before them, and it was only when speculation 
 from natural causes became more and more important 
 that men engaged chiefly in speculative trade formed 
 organizations in order to adopt a general system of 
 rules for the conduct of such business. 
 
43 
 
 " The real cause then of the modern exchange in 
 modern speculation is to be found, so far as com- 
 modities are concerned, in the marvelous improvements 
 in the method of transportation and communication 
 which have made the market for staple commodities a 
 world market, in which prices are determined by the 
 condition of supply and demand of many different sec- 
 tions separated by thousands of miles. 
 
 " So far as speculation in stocks is concerned this 
 has been the inevitable result of the enormous multi- 
 plication of securities, due to the extension of corporate 
 methods to business, which in itself is the result of huge 
 modern enterprises demanding contributions of capital 
 from a large number of small investors. The ma- 
 terial progress of the last half century would have 
 been impossible without such investment. Such 
 investment would have been impossible without 
 the multiplication of such securities of varying 
 values, and the multiplication of such securities in- 
 evitably brings about speculation. 
 
 " Speculation, even on the- part of the public, with 
 all its evils, has a very important beneficial effect. 
 Unless the public speculates to some extent the market 
 will not only be very restricted but will be in con- 
 sequence much more open to manipulation. The bigger 
 and broader the market the less chances there are for 
 rigging prices. It may seem a very high price to pay 
 for the open market that the speculative spirit should 
 continue on the part of the public, but it would be a 
 mistake to suppose that speculation can be confined 
 to a few great operators and still offer the benefit which 
 the present market gives. 
 
 " From a study of the effects of speculation and the 
 effects of all suggested methods of controlling 
 it, the conclusion is almost irresistible : that 
 legitimate and illegitimate transactions are 
 so closely bound together, and the whole business of 
 speculation is so closely connected with the interests of 
 actual commerce, that any interference with the delicate 
 machinery by the blundering fingers of the law will 
 diminish the beneficial elements of speculation without 
 effectively diminishing its evils. 
 
44 
 
 V. 
 
 Manipulation. 
 
 Manipulation is a term which in itself has a sinister implica- 
 tion. It is applied to a mass of transactions which differ in 
 their purpose and nature, with the result that this sinister im- 
 plication of the term subjects them to wholesale condemna- 
 tion. It has been so emphasized as to create the impression 
 that it comprehends a vast mass of the transactions on the 
 Exchange. This is as unjust as it is prejudicial. It is to this 
 loose use of words and phrases that the deplorable tendency 
 of the times to heap undiscriminating obloquy on our im- 
 portant business and financial institutions is largely attribut- 
 able. It is necessary, therefore, to differentiate the trans- 
 actions to which the term is applied in order to determine to 
 which of them it is properly applied ; and then to differentiate 
 the transactions to which it is properly applicable. 
 
 (a) Evidence was produced that the stocks of a few com- 
 panies had been bought and sold many times over in 
 the course of a single year. That fact may be entirely 
 due to speculation, with which we have dealt, and not 
 at all to manipulation in any proper sense of the term. 
 Any activity of a stock from purely natural causes tends 
 to develop speculation, and particularly the form of it 
 which seeks to realize quick profits from slight changes 
 in price. Arbitrage dealings between New York and 
 London and other markets assume very large proportions, 
 traders buying in one market and selling in another in 
 order to profit by slight differences in the prices prevailing 
 in the different markets. Stocks are daily bought in great 
 quantities, to be sold quickly on slight variations of 
 price. These transactions attain to a large volume ; 
 and are accompanied by comparatively few transfers 
 
45 
 
 on the books of the companies as the stock certificates en- 
 dorsed in blank pass from hand to hand. Hence volume of 
 trading due to ordinary speculation is not to be confounded 
 with manipulation, or treated as manipulation in any sense. 
 The fact is that the transactions for investment and for ordi- 
 nary speculation comprehend the great bulk of the transac- 
 tions on the Exchange. 
 
 (b) We will roughly define " manipulation ", for the pur- 
 poses of this argument, as the creation of activity in a stock, 
 by buying and selling orders emanating from the same man 
 or group of men, to make a market for the stock, or to 
 raise or lower its price in the expectation of a speculative 
 profit. These are the transactions of which we have said that 
 their volume is a very minor quantity as compared with the 
 transactions for the purposes of investment or ordinary specu- 
 lation. The forms of manipulation as thus defined vary in 
 essential matters and require further analysis. 
 
 (1) Such dealings in a new stock conducted in good faith 
 to make a market for it at its true value, or what is believed 
 to be its true value, are claimed by eminent authorities to be 
 legitimate and necessary. 
 
 This form of manipulation involves the execution of selling 
 and purchasing orders given in the same interest under such 
 conditions that the actual transfers of title may be less than 
 the apparent volume of transactions upon the floor. One view 
 to take of it is that suggested in the course of the examination 
 of various witnesses ; i. e., that it represents a stock as 
 active, which is, in fact, inactive, and that its purpose is to 
 mislead in somewhat the same way as a mock auction. The 
 other view is that, so long as the offers to buy and the offers 
 to sell are bona fide offers which any one who chooses may 
 accept, they are actual indications of market conditions ; that 
 is to say, of the price at which the stock in question can be 
 bought and sold. 
 
40 
 
 The Hughes Commission said of this form of manipula- 
 tion : 
 
 " The first kind of manipulation has certain advan- 
 tages, and when not accompanied by ' matched orders ' 
 in unobjectionable per se. It is essential to the organi- 
 zation and carrying through of important enterprises, 
 such as large corporations, that the organizers should 
 be able to raise the money necessary to complete them. 
 This can be done only by the sale of securities. Large 
 blocks of securities, such as are frequently issued by 
 railroad and other companies, cannot be sold over the 
 counter or directly to the ultimate investor, whose 
 confidence in them can, as a rule, be only gradually 
 established. They must therefore, if sold at all, be 
 disposed of to some syndicate, who will in turn pass 
 them on to middlemen or speculators, until, in the 
 course of time, they find their way into the boxes of in- 
 vestors. But prudent investors are not likely to be 
 induced to buy securities which are not regularly 
 quoted on some exchange, and which they cannot sell, 
 or on which they cannot borrow money at their pleas- 
 ure. If the securities are really good and bids and 
 offers bona-Jlde, open to all sellers and buyers, the oper- 
 ation is harmless. It is merely a method of bringing 
 new investments into public notice." 
 
 The question whether such manipulation is legitimate in 
 any particular case must depend upon whether the transac- 
 tions have a tendency to mislead. When the persons conducting 
 the transactions confine themselves to buying from, and selling 
 to, others than themselves, thus furnishing a market for those 
 who wish to buy or to sell, we are unable to see any just 
 grounds for criticism. If, however, they give out orders in such 
 a way that transactions do not result in a real change of 
 ownership, although the offers to purchase and sell are made 
 in the open market where anybody is free to accept them and 
 actual delivery between brokers is made, there is a question 
 which is engaging the serious consideration of the Exchange 
 
47 
 
 whether such transactioDS may not have a tendency to mis- 
 lead, and should not be treated as fictitious whenever mem- 
 bers of the Exchange participate in them with knowledge of 
 their true character. 
 
 (2) Another form of manipulation is described by the 
 Hughes Commission as follows : 
 
 " That which is designed to serve merely speculative 
 purposes in the endeavor to make a profit as the result 
 of fluctuations which have been planned in advance." 
 
 Of it the Commission says : 
 
 " The second kind of manipulation mentioned is 
 undoubtedly open to serious criticism. It has for its 
 object either the creation of high prices for particular 
 stocks, in order to draw in the public as buyers and to 
 unload upon them the holdings of the operators, or to 
 depress the prices and induce the public to sell. There 
 have been instances of gross and unjustifiable manipu- 
 lation of securities, as in the case of American Ice 
 stock. While we have been unable to discover any 
 complete remedy short of abolishing the Stock Ex- 
 change itself, we are convinced that the Exchange can 
 prevent the worst forms of this evil by exercising its 
 influence and authority over the members to prevent 
 them. When continued manipulation exists it is 
 patent to experienced observers." 
 
 This is one of the most difficult and complex problems 
 with which the Exchange has had to deal. It is vastly more 
 complex than the description of it seems to indicate. The 
 plan or scheme which that form of manipulation involves 
 is most likely to be a plan or scheme of persons out- 
 side the Exchange over whom it has no jurisdiction, 
 which is worked through orders to different unconnected 
 brokers that do not differ from the usual orders of cus- 
 tomers to their brokers. A broad prohibitive rule would 
 have no efficacy in that case because of the innocence of the 
 
48 
 
 brokers, The natural effect of any dealings on a large 
 scale is to produce a fluctuation in prices, and it is difficult to 
 draw the line between an adjustment of baying and selling 
 orders which constitutes legitimate speculation and such an 
 adjustment which would bring the transaction as a 
 whole within the definition of improper manipulation. 
 The dangei of any rule to meet this form of manipulation, 
 however carefully it may be framed, is that it is likely to 
 bring within its scope perfectly legitimate transactions and 
 thus curtail the usefulness of the Exchange. So far the efforts 
 to frame a specific rule of that kind have not produced one 
 which has commanded sufficient approval to warrant its adop- 
 tion. There has been a natural and wise disinclination to 
 enact a rule, in addition to the existing rules, to reach a 
 sporadic evil which would also continuously restrict legiti- 
 mate dealings. It is to be borne in mind that what there 
 is of the evil is sporadic, and that the officers of the Exchange 
 see it in its true proportion, which is very different from the 
 proportion popularly assigned to it through misinformation. 
 
 (c) Existing rules and practices of the Exchange in re- 
 straint of manipulation are : 
 
 FIRST. The requirements of the Listing Committee that no 
 stock shall be admitted to dealings upon the Exchange until 
 it has been sufficiently distributed for an open market. 
 
 SECOND. The powers of the Governing Committee and the 
 Stock List Committee to strike securities from the list or to 
 suspend dealings in securities. 
 
 THIRD. The provision of the Constitution prohibiting 
 fictitious transactions, including " matched " orders and 
 " wash " sales. 
 
 FOURTH. The rule which, in its present form, was adopted 
 in 1910 pursuant to the suggestions of the Hughes Com- 
 mission, and which provides (pages 76-77), that " all bids 
 and offers on larger lots shall be considered to be for any 
 part thereof in lots of 100 shares or multiples thereof, and 
 
49 
 
 if a bid is made for a larger lot of stock above the 
 price at which smaller lots are offered, or if a transaction is 
 made in a larger lot above the price at which smaller lots are 
 offered, such bidder or buyer shall be compelled to buy any 
 or all of the smaller lots which were publicly offered at the 
 time, at the lower price, up to the amount of the bid for the 
 larger lot ; " and similarly as to offers to sell. 
 
 These rules are rigidly enforced, and experience has demon- 
 strated them to be an effective restraint on improper manipula- 
 tion, though not to the point of absolute prevention. They 
 accomplish so much that they cannot be ignored and should 
 not be belittled. They have eliminated improper manipulation 
 on any scale as a common practice. The problem now is to 
 prevent even occasional operations of the kind. In our judg- 
 ment more dependence is to be placed on the Exchange itself 
 working out a solution than upon any statute that can be 
 drawn. 
 
 The Governing Committee has been for some time past, 
 and is now, considering the whole subject of manipulation to 
 determine whether further prohibitory rules and provisions 
 with respect to it can be effectively framed. 
 
 VI. 
 
 Short Sales. 
 
 We believe that much of the disapprobation with which 
 the short selling of stock is regarded by many people would 
 be removed by a clear understanding on their part of just 
 what it is. Contracts for the sale of securities made on the 
 Exchange contemplate the delivery of the securities and 
 payment therefor on the day subsequent to the day of the con- 
 tract, and this is true whether the sales are short sales or 
 sales of securities in hand. A broker receives from his prin- 
 
50 
 
 cipal an order to sell a hundred shares of stock. In the exe- 
 cution of this order he makes a contract to sell and de- 
 liver the stock, delivery to be made on the following day 
 and payment in full to be made at the same time. In 
 the simplest case the customer has the stock and fur- 
 nishes it to the broker before the time for delivery under 
 the contract of sale. In all other cases the sale is a short 
 sale. 
 
 The customer may be away from New York and his stock 
 may be in a safe-deposit box to which access cannot be ob- 
 tained until his return. He may live in London, so that many 
 days will elapse before it can be delivered in New York. It 
 may be pledged in a bank, so that it cannot be obtained until 
 a loan is paid off. He may not own the stock, but may be 
 entitled to get it later under a subscription contract or under- 
 writing agreement, or some other sort of executory contract. 
 Lastly, he may not own the stock or have any contract entitling 
 him to receive it, but may have made the sale because he 
 knows that he can buy the stock later and believes than he can 
 buy it at a lower price. 
 
 In all these cases the broker provides the stock with 
 which to make delivery to the purchaser, and the customer 
 sooner or later returns to the broker the amount of stock so 
 advanced. He may do this as soon as he chooses ; he must do 
 it after reasonable notice from the broker so to do. He may fur- 
 nish it from shares that he has had all the time in his safe- 
 deposit box, or that have reached him from abroad, or that he 
 has received under a contract, or that he has bought since the 
 sale. 
 
 The short sale in which the seller does not have the stock 
 but expects to buy it later is the sort that is sometimes criti- 
 cised. But the general view of courts and economic writers 
 is that it is entirely legitimate. 
 
 The Court of Appeals of New York says in Hurd vs. Tay- 
 lor, 181 N. Y., 231 : 
 
51 
 
 " The purchase of stocks through a broker, though 
 the party ordering such purchase does not intend to 
 hold the stocks as an investment, but expects the broker 
 to carry them for him with the design on the part of the 
 purchaser to sell again the stocks when their market 
 value has enhanced, is, however speculative, entirely 
 legal. Equally so is a ' short ' sale, where the seller 
 has not the stock he assumes to sell, but borrows it, 
 and expects to replace it when the market value has 
 declined." 
 
 In Bibb vs. Allen, 149 U. S., 481, the Supreme Court of the 
 United States says : 
 
 " It is well settled that contracts for the future 
 delivery of merchandise or tangible property are not 
 void, whether such property is in existence in the hands 
 of the seller or to be subsequently acquired." 
 
 The Court quoted with approval the charge of the trial 
 Court in Irwin vs. Williar, 110 U. S., Jfl9, which was in part 
 as follows : 
 
 " A person may make a contract for the sale of 
 personal property for future delivery which he has not 
 get. Merchants and traders often do this. A contract 
 for the sale of personal property which the vendor does 
 not own or possess, but expects to obtain by purchase 
 or otherwise, is binding if an actual transfer of prop- 
 erty is contemplated." 
 
 The Hughes Commission in its report said in reference to 
 short selling : 
 
 " We have been strongly urged to advise the prohi- 
 bition or limitation of short sales, not only on the 
 theory that it is wrong to agree to sell what one does 
 not possess, but that such sales reduce the market 
 price of the securities involved. We do not think that 
 it is wrong to agree to sell something that one does not 
 
52 
 
 now possess, but expects to obtain later. Contracts 
 and agreements to sell, and deliver in the future, prop- 
 erty which one does not possess at the time of the con- 
 tract, are common in all kinds of business. The man 
 who has ' sold-short ' must some day buy in order to 
 return the stock which he has borrowed to make the 
 short sale. Short-sellers endeavor to select times when 
 prices seem high in order to sell, and times when prices 
 seem low in order to buy, their action in both cases 
 serving to lessen advances and diminish declines of 
 price. In other words, short-selling tends to produce 
 steadiness in prices, which is an advantage to the com- 
 munity. No other means of restricting unwarranted 
 marking up and down of prices has been suggested 
 to us." 
 
 These views accord with the weight of authority among 
 economists, and their further elaboration is unnecessary. 
 
 Legislation to limit the short selling of securities is undesir- 
 able and it would be ineffective. Whenever the prices of secur- 
 ities reach a point where men believe that they can make a profit 
 by selling them they will make such sales, and no legislation 
 can prevent them from so doing. Such legislation might drive 
 the business away ; but the markets of Paris, Montreal, and, 
 above all, the London market, would be open to it. As be- 
 tween the markets where short selling is permitted and markets 
 where it is prohibited, the former will be the predominant 
 markets and draw to themselves from the latter much of their 
 business and of the capital employed in it. This was the ex- 
 perience of Germany in her attempts to prohibit short selling ; 
 and the same results would follow from any similar attempt 
 made here. 
 
53 
 
 VII. 
 
 Hypothecation. 
 
 It has been made a subject of criticism that the Exchange has 
 no rule regulating the use by its members of the securities 
 carried by them for their customers. 
 
 The Exchange has not undertaken in its constitution to 
 set out the law of principal and broker, or to define the rights 
 t of a broker in respect to his customer's securities. The rights 
 of the parties in respect to such matters are fixed by the law 
 of the land, and it would be impracticable to reproduce the 
 rules of which that law consists in the rules of the Exchange. 
 
 The notion that the Exchange has been remiss with respect 
 to the dealings of its members with the securities of their 
 customers in pledging them to raise the money with which to 
 carry them for their customers is based upon a misconception 
 of the relations of the Exchange to those dealings. The 
 transactions of purchase and sale take place on the Ex- 
 change and are governed by its rules. When they are com- 
 pleted and the stocks bought are delivered they are held by 
 the broker for his customer. What he may then do with 
 them is not a matter which the Exchange can determine, 
 because it depends upon the terms of any arrangement he 
 may have with the customer, or, in the absence of any such 
 arrangement, upon his legal rights. The Exchange has no 
 knowledge of those arrangements, and no authority over the 
 legal rights of the broker. Generally speaking, the legal right 
 of the broker is to pledge the stocks for the amount his 
 customer owes on them. There is authority for saying 
 that he has the further right to pledge the stocks 
 of different customers in mass for a single loan. 
 (Mayer vs. Monzo, 151 App. Div., 866). The customer 
 may enlarge these rights, as is the usual course. 
 Everything depends so much upon the arrangements and 
 
54 
 
 relations between the broker and his customer and what the 
 course of dealing may have been between them that it is 
 apparent that the Exchange has but little, if any, power or 
 opportunity of intervention or control. 
 
 If any member of the Exchange, in dealing with the secu- 
 rities of his customer, is guilty of improper conduct he is, 
 upon its discovery, subject to the penalty of expulsion under 
 the rules which have been already cited. The Exchange cannot 
 act until the fact has been made known by a default or other 
 disclosure, unless it employed a numerous body of examiners 
 to continuously scrutinize the transactions of all of its active 
 members, including their books and the securities pledged for 
 their loans ; and, in addition, ascertained in some way or other 
 what were the arrangements between the members and their 
 customers. It is obviously impracticable for the Exchange to 
 exercise such a function ; and there is absolutely no occasion 
 for it, as is demonstrated by the fact that the losses from any 
 misuse of securities compared with the total volume of the 
 transactions are infinitesimal. The criticism of the Exchange 
 on this ground is without any reasonable basis. 
 
 VIII. 
 
 Particular provisions of the constitution and 
 rules of the Exchange. 
 
 (a) The minimum rate of commission. The suggestion that 
 this regulation is a restraint upon interstate commerce in viola- 
 tion of the Sherman Anti-Trust Act, is answered by the cases 
 cited under Point I. 
 
 The Exchange has fixed the rates to be charged by its 
 members at what it deems to be fair compensation. To permit 
 
55 
 
 its members to charge less than a fair rate would result in 
 secret rebates and concessions to large customers; and might 
 induce members, in the struggle for business, to offer conces- 
 sions which they could not afford. So far as the public is 
 concerned it would tend to the advantage of the large as 
 against the small or occasional customer. The members of 
 the Exchange, like members of the professions, compete for 
 business with one another by each one endeavoring to estab- 
 lish for himself a reputation for business judgment, con- 
 servatism and rectitude, and not by the commission they 
 charge. 
 
 (b) Limitation of membership. Any criticism of the limita- 
 tion of membership to eleven hundred (1,100) would seem to 
 be fanciful. If the membership is at any time not sufficient 
 to transact the business either the membership must be in- 
 creased or the business will go elsewhere. The membership 
 has never in fact proved insufficient. 
 
 (c) The rule prohibiting members from belonging to other 
 Exchanges in the City of New York which permit the 
 trading in securities that are also dealt in upon the Exchange. 
 The sufficient reason for this rule is that the Exchange deems 
 it reasonable and proper that its members should not belong 
 to Exchanges that directly compete with it as markets for 
 business. As its members enjoy the benefit of the market it 
 affords each member should contribute his business to that 
 market rather than to a rival Exchange. 
 
 ( d) Relations to Consolidated Exchange. The whole ques- 
 tion as to the relations of the Exchange to the Consolidated 
 Exchange was involved in the case of Heim vs. New York 
 Stock Exchange, the opinion in which has been handed to the 
 Committee. The court considered, the rule prohibiting the 
 members of the Exchange from transacting business for active 
 members of the Consolidated Exchange and held that it was 
 entirely reasonable. 
 
56 
 
 (e) Preference of members. The rule of the Exchange to 
 the effect that upon the insolvency of a member the proceeds 
 of his membership shall be applied first to the payment of 
 debts due to other members is just and reasonable. The value 
 of each membership is in effect pledged by the member 
 to his fellow members to secure his performance of any 
 obligations into which he may enter with them. The 
 purpose of this mutual pledge is to enable the members 
 to deal freely with each other. Business between the mem- 
 bers is immensely facilitated by the rule, because, without it, 
 it would be very difficult to maintain the other rule whereby a 
 member is bound to close a contract with the member who 
 first accepts his bid or offer ; that is to say, which prevents 
 members from choosing with whom they will trade among 
 their fellow members. This system, which takes away from 
 the members of the Exchange the right to select those with 
 whom they will contract, is necessary to the maintenance of an 
 open market. 
 
 IX. 
 
 Striking securities from the stock list. 
 
 The Exchange was called upon in this investigation to furnish 
 a list of all the securities stricken off the list over a long period 
 of years and the amount of stock in each corporation stricken 
 from the list that was at the time outstanding in the hands of 
 minority interests. The list furnished by the Exchange shows 
 that the Exchange never strikes a security from the list so long 
 as a substantial proportion of the stock is outstanding in the 
 hands of the public. 
 
 There is danger in allowing a stock to remain on the list 
 when only a small proportion of it is outstanding because of the 
 temptation to ingenious manipulation. For this reason the 
 
57 
 
 Exchange refuses to list a security so long as the greater 
 part of it is owned by a single interest. The same reason 
 requires that it should be stricken from the list when only a 
 small proportion remains in the hands of the public. The 
 testimony of Mr. Mabon and Mr. Pomroy shows further that 
 the striking of securities from the list under these circum- 
 stances works no injury to the minority holders. The ex- 
 changeability of this minority interest under the terms of an 
 agreement of consolidation or merger insures for it an imme- 
 diate market value for purposes of sale or for use as collateral 
 security ; and, as has been shown, there is no difficulty either 
 in selling a security, or in borrowing upon it, outside of the 
 Exchange. 
 
 We submit that the evidence conclusively shows that the 
 power to strike securities from the list has not, in fact, been 
 used so as to coerce the owners of minority interests ; and the 
 composition of the Governing Committee of the Exchange 
 furnishes the strongest sort of guarantee that it will never be 
 so used. 
 
 The New York Bank Note Co. 
 
 Representatives of the New York Bank Note Company 
 have been allowed to appear as witnesses and have made the 
 charge that the Exchange in refusing to list the securities en- 
 graved by the New York Bank Note Company is actuated by 
 the desire to promote the interests of the American Bank Note 
 Company. 
 
 In a case which has long been pending in the Federal 
 Court in the Southern District of New York the same charge 
 made by the New York Bank Note Company is denied by 
 the Exchange. The reasons of the refusal of the Exchange to 
 
58 
 
 list securities engraved bj the New York Bank Note Company 
 as set out in its answer to that suit are as follows : 
 
 " Since the organization of the New York Stock 
 Exchange said Exchange has admitted to the list of 
 securities that may be dealt in on the floor of the 
 Exchange by its members only such securities as said 
 Exchange has judged it proper so to admit, and ha& 
 required that issues of securities sought to be listed 
 upon the Exchange should be engraved, and has made 
 such requirements in respect to the engraving thereof 
 as in the judgment of the Exchange were necessary or 
 proper to prevent the forgery of securities dealt in on 
 the Exchange, or the improper use of the plates used in 
 engraving such securities, and to insure that all of such 
 securities in respect to engraving, paper, ink, printing 
 and in all other details should conform to the standard 
 sought to be maintained by the Exchange in respect to 
 securities listed upon said Exchange. 
 
 " Ever since a period long prior to the times men- 
 tioned in the amended complaint the Exchange has 
 deemed it necessary for the purposes aforesaid to re- 
 ^quire that securities sought to be listed upon the 
 Exchange should be engraved by engraving companies 
 whose qualifications in respect to financial responsi- 
 bility, character of direction and management, general 
 features and quality of workmanship, general methods 
 of business, and in all other respects were such in the 
 judgment of the Exchange as to furnish a reasonable 
 assurance that the securities engraved by them would 
 conform to the standard sought to be maintained by the 
 Exchange, and that forgery and misuse of plates would 
 be prevented, and, therefore, the Exchange has re- 
 quired that the securities of all issues sought to be 
 listed upon the Exchange should be engraved by com- 
 panies whose qualifications have been approved by the 
 Exchange. 
 
 " The New York Bank Note Company was organized 
 under the laws of West Virginia in the year 1892, and 
 at various times since its organization has applied to 
 
59 
 
 the New York Stock Exchange to have its qualifications 
 approved by said Exchange, and its representatives 
 have from time to time appeared before the authorities 
 of the Exchange and have been accorded hearings in 
 respect to the qualifications of said Company, but, in 
 the judgment of the Exchange, said Company has 
 failed to show that its qualifications were such as to 
 justify the approval thereof by the Exchange and that 
 the Exchange has not approved said Company or 
 authorized the Committee on Stock List to pass upon 
 securities engraved by said Company. For the reasons 
 aforesaid no securities engraved by the plaintiff have 
 ever been admitted to the stock list of the New York 
 Stock Exchange, and the Committee on Stock List has 
 refused to pass upon specimens of the plaintiff's en- 
 graving work." 
 
 For several years prior to the year 1892 securities engraved 
 by the New York Bank Note Company of New Jersey were ad- 
 mitted to the Stock List. The manager of the Company was 
 George H. Kendall, who is now president of the New York 
 Bank Note Company of West Virginia. The experience of 
 the Exchange with the New Jersey Company under Kendall's 
 management was very unsatisfactory. In 1892 the New Jersey 
 Company went out of business and the New York Bank Note 
 Company of West Virginia was organized. All or substan- 
 tially all of its stock has always been owned by Kendall. It ha& 
 a capital of ten thousand ($10,000) dollars divided into ten 
 thousand shares of one ($1) dollar each. No securities en- 
 graved by it have ever been admitted to the Stock List. 
 
 In 1892 and for many years thereafter there were, besides 
 the American Bank Note Company, several engraving com- 
 panies entirely independent of the American whose work was 
 admitted to the Stock List. These companies were eventually 
 acquired by the American. Since they were so acquired the 
 Stock List Committee has been authorized to pass upon the 
 work of other companies which are entirely independent of the 
 
60 
 
 American, and there are now four such companies whose work 
 is admitted to the Stock List. 
 
 Stock of the American Bank Note Company held from time 
 to time by members of the Exchange for their customers 
 often stands in their names. A few members in no way con- 
 nected with the management of the Exchange own some of 
 the stock, amounting in the aggregate to a small fraction of 
 the total issue. 
 
 The suggestion that the forty members of the Governing 
 Committee of the Exchange, who represent the interests of its 
 eleven hundred members and are elected by, and are responsi- 
 ble to, those eleven hundred members, have excluded securi- 
 ties from the Stock List for the purpose of advancing the 
 personal interest of half a dozen members who happen to 
 own a small part of the stock of the American Bank Note 
 Company, is too absurd for serious consideration. 
 
 XI. 
 
 The Exchange is not dominated by any indi- 
 viduals or groups of individuals as recited in the 
 resolution authorizing this investigation. 
 
 The powers of the Exchange have never been used for the 
 promotion of any private interest or for the special advantage 
 of any particular individual or group of individuals. These 
 powers have been exercised solely with a view to the inter- 
 est and welfare of the Exchange and the promotion of the 
 purposes set forth in its constitution. 
 
 The Exchange has no special relations to the persons and 
 groups referred to in the resolution of Congress or to their 
 financial transactions ; and its only relation to the financial 
 
61 
 
 and commercial system of the country is that it is the place 
 where a great proportion of the trading in securities is carried 
 on. 
 
 Because the Exchange is a great market for active 
 securities the first symptoms of business distrust and 
 disturbance become apparent upon its floor. Though it is a 
 fact that a large volume of securities is carried 
 on call loans obtained from the banks and that the 
 first symptom of a stringency in the money market is the 
 rise in the rate of call money, the responsibility for the 
 conditions that bring about a recurrent stringency in the 
 money market does not rest upon the traders' in securities or 
 the Exchange. They are due to the non- elasticity of our 
 currency system and the fact that its volume continues sub- 
 stantially the same irrespective of the demands of business. 
 But we will refrain from entering upon a discussion of the 
 currency system of the country if for no other reason than that 
 this brief is already too long. 
 
 JOHN G. MILBURN, 
 
 WALTER F. TAYLOR, 
 
 Counsel for the New York 
 
 Stock Exchange. 
 
 [9253] 
 
INDEX. 
 
 PAGE 
 
 Accounts of clerks and employes, prohibited 9 
 
 Advertisements, legislation recommended by Hughes 
 
 Commission 10 
 
 Arbitration of disputes between members 22, 23 
 
 Bankruptcy acts 20 
 
 Books and accounts of members, recommendation of 
 
 Hughes Commission 8 
 
 attitude of Governors 8 
 
 Branch offices 10 
 
 Brown, Judge Charles F., opinion in re Stock Exchange 
 
 Quotations 18, 19 
 
 Bucket shops 3, 7, 16 
 
 Clearing House, New York Stock Exchange, approved by 
 
 Hughes Commission 7 
 
 Clearing sheets of Brokers 10 
 
 Congress, power of, affecting Stock Exchange- 16 
 
 Commission, minimum rate of 54 
 
 relationship to interstate commerce 54 
 
 Consolidated Exchange 55 
 
 Constitution and rules, opinion of Governors as to effi- 
 cacy of 23 
 
 Corners, opinion of Hughes Commission ; 8 
 
 attitude of Governors 8 
 
 Commercial Telegram Company 17 
 
 Corporations, annual reports of , , 6 
 
 Currency system 61 
 
 Decisions of Courts : 
 
 Hopkins vs. United States, 171 U. S. 578 11 
 
 Anderson vs. United States, 171 U. S. 604 11 
 
 Ware & Leland vs. Mobile County, 209 U. S. 405__ 15 
 
 New York ex rel Hatch vs. Beardou, 204 U. S. 152_ 16 
 
II 
 
 PAGE 
 
 Board of Trade vs. Christie Grain & Stock Com- 
 pany, 198 U. S. 236 17 
 
 Commercial Telegram Company vs. Smith, 47 
 
 Hun, 494_ __ 17 
 
 Wilson, as President of the Consolidated Exchange, 
 
 vs. Smith, 18 N. Y. State Eep., 78 18 
 
 Hyde vs. Woods, 94 U. S., 523 20 
 
 People ex rel. Johnson vs. New York Produce Ex- 
 
 149 N. Y., 401__. 27 
 
 Haebler vs. New York Produce Exchange, 149 
 
 N.Y., 414.,--- 27 
 
 White vs. Brownell, 2 Daly, 329 30 
 
 Lewis vs. Wilson, 121 N. Y., 284 31 
 
 Neukirch vs. Keppler, 56 App. Div., 225 31 
 
 Young vs. Eames, 78 App. Div., 229 31 
 
 Wilson vs. Smith, 18 N. Y. State Kep., 78 36 
 
 Hurd vs. Taylor, 181 N. Y., 231 50 
 
 Bibb vs. Allen, 149 U. S., 481 _.. 51 
 
 Irwin vs. Williar, 110 U. S., 499 51 
 
 Mayer vs. Monzo, 151 App. Div., 866 53 
 
 Heim vs. New York Stock Exchange 55 
 
 Discipline of Members, as affected by incorporation 29 
 
 as affected by judicial review 32 
 
 Emery, Henry Crosby, " Should speculation be regulated 
 
 bylaw?" . 42 et seq. 
 
 Failures of Members, ratio of 25 
 
 Federal jurisdiction ,_ 11 et seq. 
 
 Fictitious transactions forbidden 22 
 
 German experience with repressive legislation 52 
 
 Governing Committee, attitude toward manipulation 48, 49 
 
 Hughes Commission : 
 
 Its functions 7 
 
 Its conclusions 7 
 
 Margins, suggestions as to 7 
 
 Stock exchange action 8 
 
 On manipulation 8, 46, 47 
 
 On corners 8 
 
 On examination of Members' books 8 
 
 On hypothecation of securities 8 
 
Ill 
 
 PAGE 
 
 On accounts of clerks and employes 9 
 
 On Unlisted Department 9 
 
 On unit of trading ; 9 
 
 On clearing sheets 10 
 
 On branch offices 10 
 
 On misleading advertisements 10 
 
 On incorporation 26 
 
 On short selling 51,52 
 
 Hypothecation of securities by Brokers : 
 
 Recommendation of Hughes Committee 8 
 
 Attitude of Stock Exchange 53 
 
 Powers of Governors over Members 53, 54 
 
 Incorporation of the Stock Exchange : 
 
 Disapproved by Hughes Commission 7, 26 
 
 Discussion of 26 et seq. 
 
 Meaning of as applied to Stock Exchange 26, 27 
 
 Decisions of New York Courts 27 
 
 What is involved 28 
 
 Unnecessary to enforcement of existing laws. 28 
 
 In relation to discipline of members and their 
 
 solvency 29 
 
 Its impracticability summarized ____.29, 30 
 
 Discipline as affected by judicial review 32 
 
 Competency of Governing Committee contrasted 
 
 with Courts in matter of discipline 32 
 
 Ability of Governors in listing of securities 33 
 
 Transitory nature of charter 34 
 
 Non- existence of monopoly 35 
 
 Injustice of forced incorporation.. ._ 36 
 
 As affecting value of memberships 36 
 
 As interfering with rights of members 37 
 
 Difficulties of legislation . _ . .37, 38 
 
 Interstate or Foreign Commerce : 
 
 Relation of Stock Exchange to . 11 et seq. 
 
 Rates of commission 54, 55 
 
 Interest, high rates due to currency system 61 
 
 usury law, repeal inadvisable 7 
 
 Journal of Accountancy, on speculation . .4% et seq. 
 
 Legislation, effectiveness of 37 
 
IV 
 
 PAGE 
 
 Listing of securities : 
 
 Requirements for _ 6 
 
 Judicial review inappropriate 33 
 
 Value of 36 
 
 Amount of securities listed __ 5, 35 
 
 Powers of the Committee 48 
 
 Striking securities from list 56, 57 
 
 Manipulation : 
 
 Discussed by Hughes Commission 8 
 
 False impressions as to extent of .. 44 
 
 Volume of transactions 44 
 
 Definition of 45 
 
 Analysis of various forms 45 
 
 Opinion of Hughes Commission 46, 47 
 
 Plans of Governors to cope with 46, 47 
 
 Relation of Brokers thereto 47 
 
 Existing rules of the Exchange in restraint of 48, 49 
 
 What has already been accomplished 48, 49 
 
 " Matched " orders, forbidden '22, 24, 46, 47, 48 
 
 Margin transactions : 
 
 Suggestion of Hughes Commission 7 
 
 Approved by Hughes Commission 7 
 
 Memberships, transfers of __19, 20 
 
 Rules of Exchange as to application of proceeds. .19, 20 
 
 Opinion of Supreme Court 20, 21 
 
 Preference of Members 56 
 
 Monopoly, non-existent 35, 36 
 
 of Exchange quotations, opinion of Supreme 
 Court 17 
 
 New York Bank Note Company 57 et seq. 
 
 New York Quotation Company 3 
 
 New York Stock Exchange (see " Stock Exchange "). 
 
 New York Stock Exchange Building Company 3 
 
 Peckham, Mr. Justice, opinion in re interstate commerce 
 and exchanges 12 et seq. 
 
 Preference of Members in proceeds of membership 56 
 
 Pyramiding 8 
 
 Quotations: How furnished 3 
 
 Restrictions approved by Hughes Commission 7 
 Court decisions-. 17 
 
V 
 
 PAGE 
 
 Kates of money as affected by currency system 61 
 
 Regulation and control of the Stock Exchange by incor- 
 poration 26 
 
 (See " Incorporation.") 
 
 Regulation of Exchange : 
 
 Power of State conceded 37 
 
 Power of Congress and of the State 37 
 
 Resolution of the House of Representatives, No. 504 1 
 
 Rules of Stock Exchange, as affected by incorporation 29 
 
 Manipulation . 48 et seq. 
 
 Penalties for improper use of securities by 
 
 Brokers 54 
 
 Rates of commission 55 
 
 Membership in other exchanges 55 
 
 Securities, volume of 35 
 
 Proportion of, listed on Stock Exchange 5-35 
 
 Sherman Anti-Trust Act 11 et seq., 14, 54 
 
 Short Sales : 
 
 Approved by Hughes Commission 7 
 
 Definition of 49 
 
 Various kinds of 50 
 
 Opinions of Courts and economic writers 50, 51, 52 
 
 Effect of legislation 52 
 
 Experience of Germany 52 
 
 Speculation, volume of, on Stock Exchange 38 
 
 Deductions therefrom 38 et seq. 
 
 Analysis of 39 
 
 Necessary to broad markets 41 
 
 Should it be regulated by law 42 et seq. 
 
 Stock Exchange : 
 
 Number of Members 2 
 
 Object of 3 
 
 Property owned by 3 
 
 Sources of income 3 
 
 Quotations 3 
 
 Transactions _ 4 
 
 Rules 4 
 
 Margin transactions 4 
 
 Brokers and customers, agreement between 4 
 
 Delivery of securities 5 
 
VI 
 
 PAGE 
 
 Number of issues listed __. 5 
 
 Rules as to transfers of membership __ 19 
 
 " as to preferred creditors 20 
 
 Facilities for convenient transaction of business 21 
 
 Commercial honor and integrity of Members 21 
 
 Object of Exchange as defined by Constitution 21 
 
 Prohibition of fictitious transactions 22 
 
 Resolutions concerning unit of trading 22 
 
 Arbitration of disputes 22 
 
 Insolvency of members 22 
 
 Arbitration Committee 23 
 
 Opinion of Governors as to efficacy of rules 23 
 
 Standards of business integrity maintained 23, 24 
 
 " Matched " orders and " wash " sales * 24 
 
 Settlement of disputes between Members ._. 24 
 
 Repudiation unknown 25 
 
 Fidelity of Members to customers 25 
 
 Failure of Members, ratio of 25 
 
 Requirements as to listing 6 
 
 Relationship in law between Brokers and cus- 
 tomers ...53, 54 
 
 Limitation of Mem berships 55 
 
 Volume of business as affecting money rates 61 
 
 Stock Exchange Clearing House, approved by Hughes 
 
 Commission 7 
 
 Stock Transfer Tax _. 16 
 
 Unit of trading 9 
 
 Unlisted Department , abolition of 9 
 
 Unlisted Securities, freedom of Members to deal in , __ 5 
 
 Unwisdom of judicial review in listing securities 33 
 
 Usury law, repeal of disapproved by Hughes Commission 7 
 Van Brunt, Mr. Justice, opinion of in re rights of private 
 
 associations 17 
 
 Van Vorst, Mr. Justice, opinion of as to voluntary and 
 
 involuntary associations 31 
 
 Voluntary and involuntary associations, defined by Court. 31 
 
 " Wash'' Sales forbidden ...."... 22, 24, 48 
 
 Western Union Telegraph Company, agreement with 
 
 Stock'Exchange ., 16 
 
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