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The "highest priority" need for reform, said the SEC group, centers in the "over-the-counter" market in unlisted issues, where the investigators accused some brokers and order clerks of "indifference, incompetence and venality." Prices on this market are published by the privately owned National Quotation Bureau, Inc. in daily "pink sheets" that brokers and bankers see but small investors generally do not.
While praising the "conscientious" bureau, the SEC report said: "In case after case, broker-dealers have abused the system by inserting fictitious quotations in connection with worthless securities to give an illusory value." One broker-dealer firm, for example, arranged to list fictitious quotes for the shares of Diversified Funding, Inc., while trying to push those shares to its own customers.
Because O-T-C quotes are vague and controls loose, brokers' commission markups vary greatly: on one selected day in January 1962, this variance alone caused Bank of America common stock to range in price from $61 to $64.25 and Pacific Power & Light to range from $56.25 to $60, depending on where the investor tried to buy the stock. The SEC group wants to put the National Quotation Bureau under SEC control, open its reports to the general public and let investors know the wholesale prices that dealers are paying.
No Immunity. Turning to the haven of the small investor, the SEC group charged that the odd-lot market is controlled by a "duopoly" of two Wall Street wholesalers, Carlisle & Jacquelin and DeCoppett & Doremus. In 1951, said the SEC, the two got together and fixed the extra charges that small investors have to pay above and beyond the regular commission for buying odd lots—1210 per share on stock priced up to $40 and 250 per share on costlier stock.
There are still 19 agonizing steps involved in every odd-lot trade, and the report charged that the two firms have resisted automation because it would "reduce their profits and make it easier for competition to develop." Added the SEC dryly: "Securities markets are not inherently more immune from featherbedding than any other business." The SEC wants the exchanges to regulate and moderate the price markups in odd-lots and push for automation.
Frightened Like People. Even tougher was the SEC group's criticism of professional floor traders, exchange members who pay no commissions and have no responsibility to the public. The SEC has been trying to run them off the floor for a generation; it says that they enjoy special inside advantages and only accelerate the markets' swings by buying on rises and selling on falls. Floor traders claim that they perform a function by pumping cash into the market at strategic moments, but the SEC group contends that they only follow the trends—and thus accelerate the markets' runaway booms and shattering breaks. Proposed: an end to all floor trading by 1965.