Wall Street: Curbing the Curb

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For Wall Street it was a week of excitement—and irony. Just as the Dow-Jones industrial average burst through the magic 700 mark (only a decade ago, the average stood at 250), the 1961 bull and its keepers came under the most embarrassing scrutiny the U.S. stock market has faced in more than 20 years.

Some of the scrutinizing was being done by the keepers themselves. For the second time in two months, New York Stock Exchange President Keith Funston warned against "unwise speculation" in low-priced shares and new issues—speculation partly fueled by the highest level of market loans ($5.2 billion) since the beginning of the Great Depression. More worrisome for Wall Street was the announcement by a House of Representatives subcommittee that it planned to investigate both SEC and stock-exchange practices to decide whether investors need to be protected with tighter security laws. On top of that, SEC announced a full-scale probe of the American Stock Exchange, the first publicly announced proceedings against any U.S. exchange since 1938.

SEC's investigation grew out of charges against Gerard A. Re and his son Gerard F., who, from their privileged position as specialists on the American Exchange, made an estimated profit of $3,000,000 in five years of market rigging and price fixing (they have since been expelled from the exchange). Behind the commission's terse promise to check on the "rules, policies, practices and procedures" governing Amex's specialists and other members lay an evident determination to find out how the Res had got away with their shenanigans under the supposedly vigilant eyes of both Amex and SEC officials.

Lusty & Lax. Part of the answer lies in the lusty, freewheeling nature of the American Exchange, which professionals still call "the Curb" in memory of its humble beginnings. Unlike the older New

York Stock Exchange. Amex has no explicit minimum requirements for listing companies (though it usually insists on at least 100,000 shares outstanding), feels free to accept a promising company even if it has no earnings. More of a professional's market than the Big Board, Amex operates in a climate of headier speculation and less disclosure—all of which set the scene for the Res.

As stock specialists, charged with maintaining a "fair and orderly'' market in the stocks assigned to them, the Res were both brokers executing floor orders for other brokers, and traders on their own account. In their role of brokers' broker, they acquired, like all specialists, a treasury of inside information—a situation that has led some critics to charge all specialists with automatic conflict of interest.

Despite the delicacy of the specialist's job, however, SEC has left both the establishment of specific rules for specialists and the policing of them to the stock exchanges; the commission itself can neither change the specialist rules made by the exchanges nor punish offenders with anything more than an order for their expulsion from the exchange.