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We' have-competition that- does quite a bit more than ue dooWe joined the Pacific Coast Exchange and the Boston Exchange alsofor the same reason, but,we found that it was inot economical to stayc member of the Pacific Coast Stock Exchange. It was at one time ..

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tic#¤+C j.<962;:11 1 ./0 3. 5 ; 0 :, .4

Excerpts from Charles P. Stetson's Testimony '< ,uiu ,f.:. 1

My name is Charles P. Stetgon and I am president of the St6toonSecurittes Corporation, 1239 Post Roads Fairfield, Connecticut.

Is your firm, Mr. Stetson, a member firm of any exchange?

Yes. We are members of the Detroit ....

Can you tell us very briefly your own personal background in thesecurities business?

I went in the business on June 1, 1944 with J. & W. Seligman & Company,New York. I was with them Imtil 1951 and then I formed Stetson &

Company....

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Con you tell us something about your organization now? How manyemployees you have?

Yes. I have two really, besides myself, one part time man or onereally consultant, which would be four including myself, includingthe part time and consultant, who helps us with our back office andaccounting work.

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... Our present business is just a hundred per cent [brokeragelinstitutional business really -- we don't deal with the public --which institutions include mutual funds, insurance companies, banks,and we really got into the institutional business, say in 1958 in abig way and it was just specialized. We used to do underwriting and

we cut Out everything else and just specialized [in crossing blocks] .

We didn't join the Detroit Stock Exchange until a couple of yearsago and, of course, I am sure you know the reasona why we did. Itwas to do a riciprocal business with mutual funds. We dre not byany means a large factor on the Detroit Stock Exchange.

We have competition that does quite o bit more than we do.

We joined the Pacific Coast Exchange and the Booton Enchange alsofor the same reason, but we found that it was not economical to staya member of the Pacific Coast Stock Exchange. It was at one time. .. ,

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o o . I think the growth of institutional funds is really whatotimulated us [to give up underwriting and dealing with thepublic], the fact that we felt it was a kind Of a vacuum in tbistype of [blockl business, which there was I think ag that tima.

Now, there is tremendous competition. An awful lot of people bavecome in since that time. I'd gay I first began to notice it obout1949 or * 50, I began to notice institutions became a factor etten ·they changed. the New York State law. I think it wan chnoged cLouttbat time to pormit pension funds to invest up to 35% of theirI funds in] stocks.

So our basic booineso in '58 was just simply saving people moi>Ipy,taking advantase, of course, that the New York Stock Eschange 'hadno volume discounts.

Although X will say this: I think that in our minds when westarted out we thought that ttle I lack of a] volume discount was amajor factor in our Lucce,8. I think it Ze not really a majorfactor -- itts a factors but I think the inetitution is reallymore anxious in getting the block regardless of whether they getit at the New York Stock Exchange 01: over» the-counter. If they

want to buy something I think the availability of the block iofirst and I think the commission is secondary. I think they Mouldrather do business with us than a Anember of the New Yoric Stock

E:,change.

How does your business operate? Do you use circulars?

Yes. I didn't bring one with ma, but we do send out a circutoronce a week, indicatione of interest where we have buying interestsand selling interesto.

We say that we have had a buying interest in a thousand obarez: ormore of ouch and such a stock.

We aand it to a very limited group of people for several reese,ils;one is we don't rant: to influence the market, we want to be vary'careful who gets itu ...

. . . They [tile institutionol indicate what they want to do. It'anot c firm order. Itat; an indication of what they want te de cod

it's subject to price.

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If ve come back and we are able to offer them something on the b.:,yside. they donet necessarily take it. The price might have changedor somebody else might have filled them. They might have bought; thestock on the New York Stock Exchange if we were too slow. o..

To break down your customers, about what percentage of your custotnersare mutual funds. what percentage are pension trusts.

I say that mutual funds are by far the largest.

They are the backbone of the business.

They account for more than half of your business?

Oh, yes.

Generally, how does your pricing work? Do you subecribe to theNew York Stock Exchange ticker?

We gel: the Ultronic Machine, which gives us the last sale. It docsn't

give us the bid and ask.

Let's say you have gotten an indication from the potential melle.r andnow you have gotten an indication from a potential buyer for the #ameamount, what will happen neit?

We will try to execute the order asuuming that -- most of the peoplewe deal with, the basic assumption is that they will do the trade ator close to the laot sale on the New York Stock Exchange, dependingupon the bid and ask. And after a while you get used to calling;you call and tolk to these people every day and you pretty muct knowwhether they will do it at the last sale and you can almost make thatassumption, unless the seller is very anxious.

By and large, '10 688Ume, unlees they tell us differently, thet Atwould be done at the last sale.

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If you get. an indication from tile buyer that he is intereated iathe last sale at the bid or offer price, then you take that b.ack tothe seller?

Yes, ther, you negotiate.

I have nezotiations that lasted s week. Niese were laige trad<:5where they Wdlit for the market an¢ 20 forth.

Several tigeo alic you show an institution that yOu are a 68114.5 orsomethir,5 and they will ece it on your list and they may take it incetheir -reocarch and their research may try to decide whether timywant to by it or not.

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We had institutions that say, "Do you see any stock around. We maywant to take a position of one or $2.000.000. We just don't wantit to start with." They may not take a position in it because it'san inactive stock.

I would oay in that regard most of our trades would not be in stockwhere it ia General Motors and United States Steel. But there are

a lot of stocks that may only trade, say a thousand shares a day onthe New York Stock Exchange and that'B really a better type of stock.for us to operate in because I'd say basically the buyer and sellerwant the execution, that leads me to believe that the Commission isreally a secondary consideration.' although it's important.

Aside from any give-up or reciprocity, what is your usual commission?

I wish I could say there was a usual one.

We like to charge a quarter of a point, and if we can get a quarterof a point. and if we can get a quarter of a point on both oides,usually in the price range of investment grade stocks, very oftenthat amounts to about half the stock exchange commission, Go weaouume the people are fairly satisfied with that kind of arrangement.

We don't always get that much.

The Commission le undoubtedly and unquestionably megotieted. ...

Sometimes we do it away from the last sale and it is a large trade --well. we don't do it for a quarter of a point. We will get down toan eighth of 8 point. And in certain instances if our trades arereally large we may do it not on one oide and just an eighth on theothet side; but both aides know about this, what we are making onthe other side and they do it at the time of the trade.

Wa will not do a trade for less than an eighth, across for lesa thanan eighth.

An eighth for each side?

No, an eighth on one side, but the man on the other side is gettingit net.

He also knows about this and he adjuste it in the price. Basically,I thought that both sides should pay the commission whether it' s inthe price or the actual quarter or eighth or whatever the situationiso We try to have both sides pay equally on the thing.

We feel we are rendering both sides the same service.

You say in the ideal cage, though, you would set a quarter from eachside?

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All things being equals we will ask that much.

So you would end up essentially on the whole transaction with aboutone stock exchange commiesion?

Yes, it's about that, but that's unusual.

We get a quarter of a point on both sides. We always ask what vethink is the maximum and then we Bettle for less.

But even your maximum would be about half as much where they vestto the Board?

Yes, approximately. ...

Mr. Stetson p up to this point you have been discussing how yourbusiness operates, basically through your telephone and the circulars.

Now. can you explain to un how the Detroit Stock Exchagge comee intothe picture?

Yes. Bauically our business was designed to just save people money,and the mutual fund business competition is, I guess. so great iri

that business to get reciprocity out to the people that are sellingtheir fundo that many of the funds asked us to join the DetroicStock Exchange, and we resiated the thing for a couple of yeare.

One of our competitors, Leonard Frisbie & Company, I think they werethe first to join the Detroit Stock Exchange, and finally competitionwas coming in to our business and we simply had to join the DetroitStock Exchange to keep doing block busines: with the funds. But ue

kind of walk a tight rope because most of the people ve still dealwith donot care about reciprocity. The banks don*t care about it,the pension funds denv t care about it and we still wanted to dobusiness with them.

They obviously couldnot care less about the Detroit Stock Eachs:;Be,but by tho came token we -- then we realized the availability 02the block is really ultimately the most important thing, so vepersuaded some of the people that couldrict care less about reciprocityto -- they had simply had to give ue the full commission on thestock exchange tra<ie. They had no moriey to give up, unless rec;mrchin institutions have that kind of an obligation, but I guess ttoy feelthey take care of thot some other way. But [thesel institutionsbasically want to save money. ...

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THE WITNESS: . 0There are certain funds that don't care about

reciprocity and they are the ones that have their ownsales force, like Hamilton and United Funds, to a largeextent, out in Eaneaa City.

Q: Let ma ask you one other question about Detroit.

Ae you understand the rules of the Detroit Stoc k Exchange, supposeyou have a block of stock which is traded on that Excharge, a duallylisted stock and neither party to the transaction, ae you finallyarrange it, is a fund and as you put it, they can't care less aboutDetroit or anything else, do you just go ahead and croue that in theover-the-counter markett

A: No. If it;s listed on the Detroit we have to go to Detroit. . . 0

Q: Did you ever ask for permission from Detroit to cross a block offthe board?

A: Well, Detroit has a rule D so I understand it, tbat when .0- if ve had

a fund on one Gide and they wanted to do it in Detroit, we have gotto do the busines£ in Detroit.

But when we can't find the other oide, [except for] some dealer 0 0

we can get permission to [trade net with a dealerl. They wouldgive us permission to do that. It seems logical that they bavaa rule like this.

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A: Detroit is reallyAa market, so unless you have 2 crogs you )wallydon't have a trade, You knoti, ita about twice the size of illisroom.

Q: In other words, you don't go to Detroit to find the transection?

A: Absolutely not.

Q: You bring the transaction to the Detroit?

A: Yes. They may do odd lots. I don't think they head of this [block]business before. This is all brand new to Detroit. The 402 give-up[to non-Euchange members] I don't think they anti.cipated [tte mutualfund aspect of the give-up] 0 1 think thie was to bring [Entail non·member]business to Detroit. Yhcy never knew whot a bo:1nas£3 thiswas goins to be.

Q: How much did your member seat cost on tbe Detroit Stock El:ch=ge?

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Reproduced from the Unclassitied / Dectassmea notoll:gs u, ul, i.uu•,a, n-,••<r

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A: 03.0000 and I heard they sold one for fifteen. It'@ the mostexpensive [regional exchange} seet. Except that ve just sold ourseat on Pacific for fifteen. I think the reason there 18 becallse

United Funds has an application to join and, as you know, thereason they are joining is to pass along their eavings to the atock-holders -- rather, it'e a subsidiary of their management company.

Kansas City Securities is joining with the idea that they will paoson savings to their stockholders of United Funds.

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Q: When you have a bank or an insurance company on the other oide, dothey ever give you instructions to give Up?

A: Very seldom. I think IDS has given us instructions -- wello IDSis really in the category of a bank because they have a [captive]sa les force, but they have asked us to give up somebody who gavethem service.

Q: That could be a member of Detroit which could also be a member ofNew York?

A: Yes, I think so.

Q: How about United Funds?

A: You Bee, they not only have their Own BaleS force, but I think aboutten, fifteen per cent of their busineso comen from -- through dealersand so -- their primary objective is to save mothey, but if you 80something on Detroit they con't save money they may as well get themileage out of the situation. so they ask us to give up that 40% tosomebody who sold their funds.

Q: Had they ever aiked you to give up to their management company?

A : 190, tltey haven 't.

Q: Has any mutual fuod asked you to give up to their management canpauy?

A: No. I donit presume they could unlesB they are metabers of the NASD.

Q: Well, many :f them are.

A : Yos, that' s true.

0: You coul<1 if they acked you, coulau' t you?

A: Nes. We could give up to coy bonafide NASD member. Z supposethey feel that [it] wouldn't go back to their stockholdcrs ... andmaybe it'G en advantage to the fund to increase cales.

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Q: Of course I take it, as for co you know, the Detroit Stock Exct:-aggedoesnit care what happens to the money es soon as it'o given up toan NASD member.

A: Thatvo righ;.

Q: Their jurisdiction ends there, go to speak?

A: Right.

Q: Who do you generally use on the Detroit Stock Exchange to executeyour orders?

A: We use Rouey 6 et:litpally.

Q: Just to pin this down, you have both sidea of n transaction aud thenyou call Roney by phone?

A : Yes [wel ask them to cross the trade there.

Q: Doef,ntt that create some uncertainty as to the pricing?

A: When wc do a transaction. ve say, thi.0 is subject to crossing it onDetroit. We have never run into any ptoblem in croaaing mly on theDetroit because Detroit sceuls to be perfectly happy to do it it,t ehelast trade ct the New York Stock Exchange, and Detroit is not mock,of a market....

Q: Theoretically, some other Detroit member could upset your cross.has that ever happened?

A: No, that hoa never happened. I presume the reason there again isthat nobody leaves an order of any Size there on Detroit.

Q: What.about your non-fund customers, are they somewhat mystified orunhappy ot the ·fact that they are paying a full commission on t:lieDetroit Stock Exchanget

A: Well, they dop't like it and as a result we are treading both , idesof v.he fence and wa have lost something there. We.actually preferit got to be members of Decroit, 00 I think ve have loot scme,WI. z t.wit·11 our customers. But then ultijnately the most important thi:;g<ao I say, is for the purchaser to get the block of stock.

That is the primory objective of most buyersthe execution and they can certainly justifyof the business is done in Now York anyway,more and anything they can strve, of course,

or sellers: Cs te getthe thing becsuse 95%

so they are paying 10ie a plus.

Q: On stocko which are not listed en the Detroit Stock Exchange or netodmitted to trading on the Detroit Stock Exchange, do the fantle

ever give you any give-up instructions in those transoctionot

They used to. lilia is not o common practice and I don' C tkink ...this is when the whole buginess sort of started out and peopla weref6eling their way along aa to what Kiley could do before Detroitreally became o factor.

Actually, our competition we werenl t the first people in tainbusiuess. Our competition wao doing it, no the fwAds would Cay,your competition is doing it, will you do it for uu ands of course,we said fine. It;s practically disappacredo Id say, and I i.hinkit's nes-existent for all practical purposes at tbe present time.

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I take it from everything yon have Baid thus fer you would b<: just auhappy or even ... from the viewpoint of your own customere -- ·avenhappier to be Able to do business as you originally started, midthat io to cross these trononctions in your office aud negotiatecompensation.

Yes.

Of cource, we cross them really in the office end then Che Detroit.is just a formality -- I mean going out there. Weil, our primarybusiness is just to do thie block business and we really <lon ' t keep ··-we have to go with the wind, you might say, and if you went ice do iton Detroit -- I think competitive reasons has driven these funds todo it there: so they no choice in the matter really. The' thing is m.

your study shows the whole . reafiozi behind the thing -- it' o tte blewYork Stock Exchange. This gets off on another subject reallre bueI just feel it;s a shame in a way and this would probably hu-t our[own] busineis that here you have th6 New York Stock El:chan&/· whichis really the apex of our great systera and they are really, T think,draggins their feet, [in! moderniziog -- of course, I think theinatitutional business is. new, I think tke New York Stock Exchangepushes the institutions around and United Funds le one of :24 fewthat is fighting back. They are getting to the size tellare they canfight backs particularly comebody like Uuited Fuxids, and its:, justreally basically ridiculous, as you point out in your Study: thatthere is no volume diocount.

De you remember any particular event which ulade it appear to thefunds that it would be better if these transactions were ar):· ugedon Detroit rather than in the over-the-counter market, Cite give-uptransaction?

He wereni t the first to go on Detroit. I tuiok Frisbie •225 41: firstto go on and he drew it to their attention.

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Do you recall any particular funds coming to you and urging you togo on the Detroit?

Well, the urging le strictly indirect. The funds would eay, well,we are doing business with your competitor.

They didn; t tell us to join, but they would say te are doing buainesswith your competitor, so we really have no choice in the matter.

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Can you give us Boma idea, Mr. Stetson of what your grose coaimissionswere in 1964?

Yes.

About $400,000.

Now: that wa B before give-ups?

No, this would be after give-ups.

So it would be, I guess, around $600,000?

Yes.

Your contact with Detroit then is basically limited to Honey & Company[the floor brokerl 7

Yes.

And you bave nothing else to do with Detroit, I take it?

No. I never go out there. I have been out there once. I just callon the phone and ask for the cross.

Does be give you an immediate report by phone?

Yes. We stay around the phone until he tells us that it can he done.

How often cant it be done?

Never

That is consistent with what you aaid before.

Yes.

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How 16 [a Detroit] tranoaction actually cleared?

We clear -- we are members of a clearing house out there, but wenever really had occasion to use it except in the beginning a littlebit. We clear all our busines:; through the First National Bank ofJersey City.

I see.

And which is a fantastically good bank and very aggressive. The.reason we use that, they are five minutes away from Wall Street andin certain instances where the transfer agent im alec outside of theState of New York and the seller is outside the State of New York,we don't have to pay New York State talt.

So Detroit 19 really nothing but tbis telephone between yourselfand Roney?

Thates right.

Certificateo arent sent out there or transactions aren't cleared.

Tbat's right.

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