The Wall Street Jungle [1 ed.]

Table of contents :
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Citation preview

RICHARD

NEY

THE

WALL

STREET

JUNGLE

$7.50 GP-554

f/

HE

WALLSTREET

JUNGLE

RICHARD

NEY

"There is more sheer larceny per square foot on the floor of the New York Stock Exchange

than

any

world."

place

else

in

the

—from the Preface

Richard

Ney's

full-scale

Wall Street Jungle

is a

indictment of the ethics and

methods of the stockbrokers,

bankers,

and corporation chiefs who direct American

money,

charges

are

but

his

directed

most damning against

the

spe-

cialist system. Specialists are a privileged group of brokers on the floor on Most

investors'

orders

the to

Exchange.

buy

or

sell

stock go through their hands. What happens when an investor's order conflicts with the price the specialist wants for his own trading? In many situations, specialists "have the power to set and control

prices,

unilaterally"

as the Securi-

ties and Exchange Commission itself has admitted in a little-read document called the

"Special

Each

Study

specialist

Report."

has

his

secret

book

that gives him a good idea of the floor and ceiling in his stock, and where it's safe

to

play.

Richard

Ney

specialists operate, and

shows

how

brings to light

a whole array of prerogatives the specialists and their friends employ; he shows why investors lose and the house wins in the greatest gambling casino in the world—Wall Street. Mr. Ney shows, too, that public demand often causes stock (continued on back flap)

'

Digitized by the

Internet Archive

in 2012

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The

Wall

Street

Jungle

»

The

Wall

Street

Jungle

by

Richard

Ney

Grove Press, Inc., New York

Copyright © 1970 by Richard Ney All Rights Reserved Library of Congress Catalog Card Number 76-84477 First Printing Manufactured in the United States of America

No part of this book may be reproduced, for any reason, by any means, including

any

method

of

permission of the publisher.

photographic

reproduction,

without

the

To the students of America whose values are the cement of our society.

Preface

Most of

us

enter

the

investment

business

for the

destroying reasons a woman becomes a prostitute: menace of hard work, is a group activity

same

sanity-

it avoids the

that requires little in

the way of intellect, and is a practical means of making money for those with no special talent for anything else. With money one achieves status and power of a kind no other means can reach—which in itself would not be unworthy if the methods

used

to

obtain

it

merited

our respect.

They

don't.

It

should not surprise us, therefore, that these methods are less than explicit; or that the interests of the Stock Exchanges are solely in their billion-dollar speculations, without regard to their social obligations or the needs of a legitimate auction market. There is a difference between what is legal and what is legitimate. Once

understood,

this distinction illuminates

an environ-

ment in which larceny hides its nakedness in the toggery of law and order, custom and routine. We find it in the no man's land of rules and regulations that sanction Stock Exchange members' manhandling of credit and of stock prices on behalf of their own 7

8

Preface

speculations. Short selling, big block fees, special brokerage incentives,

and

are

only

a

the

financial

the

few

specialists'

of

the

investment

methods

establishment

used

and

to

established,

trading

keep at

the

the

accounts,

members

expense

of

of the

individual investor. Much that is painful in our society is due to the public's belief in the cant of the Exchange's chief organs of opinion.

Indeed,

hidden

affecta-

behind

a

facade

of pompous jargon

and

noble

tions, there is more sheer larceny per square foot on the floor of the New York Stock Exchange than any place else in the world. It is the legacy of a communal effort that has become a property right, handed down from father to son to grandson. It is sustained by the exclusive allegiance of its high priests to a tradition that wars against reason and that has become so powerful that anyone setting himself against it on behalf of a higher loyalty soon finds he

has set

himself against

a

power

that

is

identical

to

that of

government itself. Clearly, criminal.

the

lunatic

The story

is

economics told

of

this

that after he

larceny

appeal

to the

had been deported

to

Italy, Lucky Luciano granted an interview in which he described a visit to the floor of the New York Stock Exchange. When the operations of floor specialists had been explained to him, he said, "A terrible thing happened. I realized I'd joined the wrong mob."

Acknowledgments

Success in life is due less to our talents than to the fact that others have

behaved

decently

toward

us.

In

this

sense,

my

debts

are

enormous. I owe much to my teachers who, more than a quarter century ago, struggled to educate me to a more dramatic understanding of the laws of mind and nature.

I owe a great deal to

Joseph Wood Krutch, Lionel Trilling, and many others at Columbia

University.

were

born

to

They made

a

role

as

each

large

as

of their students their

country's

believe

destiny.

they

Their

unfailing wisdom sustained me in my search for leadership. They made it possible to recognize the cramping bias of a generation that

had

become

enfeebled by

success.

My deepest intellectual

debt is to Lucky Roberts. His great understanding of literature provided the gateway out of one world and into another. It was his

knowledge

which

treated

of me

publishers with

the

that

directed

utmost

me

generosity,

to

Grove

Press,

encouragement,

and forbearance. Nor can I fail to direct the reader's attention to two dear friends, Mia Miyashiro and Joan Gluck, my untiring secretaries. They offered me loyalty and trust. They transcribed 9

10

Acknowledgments

my scrawled notes and countless drafts with great skill and affection.

To

all

these

and

to

many

others

who

accident or design—to Charles Champlin —to

Teresa

Calabrese,

Chuck

Stone,

helped

either

and Marshall

Robin

White,

by

Berges

and

John

Peck—to Everett Noonan and Bernard Goldman—to Paul, Kip, Archie, Bill, and Pauline—each of you left your imprint on my mind, my character, and my work.

Contents

1

The Specialist or The Legend of Big Brother

2

The Specialist's Book

3

Mr. Smith Goes to Washington

4

Specialists' Investment Accounts

15

29

49

or Sodom at the Bottom

5

57

The Short Sale or When His Cup Runneth Over Watcheth Out

6

A Telephone Call from Humpty-Dumpty or Mr. X of the SEC 11

79

12

7

Contents

The Financial Elite or Measuring the Stock Exchange's Economic Power

8

The Paradox of the Federal Reserve System

9

America Shall Rise Again

101

or The Role of Stock Exchange Credit and the Morning After

10

111

Gluttony on the Bounty or The Big-Block Myth in Exchange Folklore

11

A Case in Point

12

He Lived Apathy Ever After

129

155

or Commissioner Saul's Analysis of Specialist Activities Subsequent to President Kennedy's Assassination

13

163

The Era of American Political Impotence or Paradise Lost

14

191

Under the Spreading Apathy or La Dolce Vita in the SEC

213

15

The Merits of Speculation

227

16

The Challenge

239

Survival in the Jungle

It's All in the Charts

257

New Concepts for Portfolio Evaluation

Stock Symbols and Specialists

305

287

The

Wall

Street

Jungle

1

The

Specialist

or The

Legend

of Big

Brother

A stock is only worth what its specialist is willing to pay for it.

Some

people claim

that "investment

adviser'—which

is what I

am—is just a high-class name for a croupier. I agree. I deal in a big floating the

richest

crap game,

and

most

one that is

exclusive

played every weekday

casino

in

the

world:

the

in

New

York Stock Exchange. Who the

are

game

this

will

casino's

be

played

pit

bosses,

and,

the

men

frequently,

who

decide

who will win?

how

Who,

for example, on the morning of August 8, 1967, opened Chicago and

Northwestern Railroad down

39 points? Who,

on October

21,

1968, opened one of the preferred stocks of TRW, Inc., 28

points lower than its closing price on the previous day it traded, on a transaction of only

100 shares? And who, on February 4,

1970,

29

opened

Memorex

Vi

points

lower

than

its

previous

closing price?1 Who are the people in this favored spot who decide that one investor shall

receive $2,800 less for his TRW—an electronics

company—and

another $3,900

less for his

100 shares of Chi-

cago and Northwestern Railroad? When the huge Lockheed C5A 15

16

The Wall Street Jungle

cargo

plane

and

Boeing

SST

contracts

were

announced,

who

were the men who made use of public demand for these stocks to subsequently send them downl Who sets limits to the market's vital disorders? Who are the men who move at the center of its convulsions and officiate at Exchange

and

the

its requiems? The New York Slock

American

Stock

Exchange

call

them

"specialists." Specialists are

brokers

who

work

at the

market's center and

who act as its leaders. The rise of the specialist as a permanent fixture of the market was almost unnoticed. For a long time, the community in which he functioned was virtually existence.

But it is he who,

unaware of his

to a great extent, controls the mar-

ket's rises and falls. In this book 1 will attempt to show that the statement "The

stock

market,

by

bringing

together

buyers and

sellers from all over the world, reflects their composite judgment of the present and future value of the stock"- is false. I will try to show that a significant cause of the market's day-to-day fluctuations is, in fact, the manipulations of the specialist. I propose to illuminate the shadows in which the specialist hides, demonstrate his

effect on

stock values and

prices, and distinguish

be-

tween the facts and the sophisticated fictions promulgated about him by the Securities and Exchange Commission and the Stock Exchanges. Who is the specialist? A specialist is the "broker's broker"; the specialist or a member of his team

is always on the Stock Exchange floor near the

signboard

of

buying

selling

or

the

stocks his

in

which

specially

go

customers'

orders to buy or sell

is

to

sell at

a

him.

stocks

Exchange

order

through

price

Regular

that

on

the

New

brokers

Orders York

bring

in his stocks.

for

Slock

him

their

Often the

not

current:

when

the

stock

at $50 a

share, a

customer

might

is selling

give

order to sell

an

specializes.

shares is

of XYZ Company his broker

he

100 shares

waiting at the XYZ specialist's post until

at

the

$51.

Instead

of

price matches his

customer's sell order, the broker generally gives the order to the specialist then

and

to sell

goes

that

$51, if it does.

about

his

customer's

The

100 shares when

For this service

broker's commission.

business.

specialist's the

price

job

is

reaches

he takes a small fraction of the

17

Richard Ncy

The specialist is the man who, according to Stock Exchange theory, is supposed to determine the price of his specialty stock within are

the

perimeters

orders

supposed

to

it

at

$50

supply

and

orders

and

demand.

to sell

it

at

If

there

$51,

he is

to set the "market price' somewhere in between.

The New tion,

buy

of existing

York Stock

Exchange says of the specialist's func-

that he:

.. . must maintain fair and orderly markets in the slocks which he handles, insofar as it is reasonably practicable for him to do so. He does this by buying or selling for his own account when there is a temporary disparity between supply and demand and when he has no competing public order. In this way he contributes to price continuity and to the liquidity of the market and enables

investors'

orders

to

be

executed

at

more

favorable

prices.3

A

report

on

specialist

the

American

"exercises

a

Stock

significant

Exchange

influence

stales

on

the

that

the

public

ap-

praisal of a security, since he is the one who quotes the market. A

team

saw the

of

him

Securities

as

broad

of

Exchange

investigators5

Commission

the individual who exercises decisive "control

market."

Report

and

These

the

terms,

investigators,

SEC,

concluded

writing

that

in

the

the

Special

specialist

over

Study

system

"in

its purposes satisfactorily";0

appears to be serving

even so, they provide a warning. They say that the

New York Slock Exchange of

surveillance

techniques

has pioneered in regarding

the development

specialists'

performances

and has devoted considerable energy to this area. Nevertheless, its present techniques quately

with

certain

are

not sufficienlly refined

important

aspects

of

the

to

deal

specialists'

aderole

and obligations . . .7

At

present,

there

are

members

registered

specialist

units

cialist

of

units may

tions,

so-called

ships

are

the

about

360

New

York

Slock

Exchange

as specialists. They are organized

between operate

joint

one

as

nine

individuals,

accounts,

favored

and

method

specialists

into

each.

partnerships,

or

"combined

of

operation.

books." Those

110 Spe-

corporaPartner-

units

that

choose the corporate method do so partly because, in a corporate structure,

the

specialist's

short-term

gains

are

subject

to

cor-

18

The Wall Street Jungle

porate

rather

stocks,

this

than

kind

individual

of

tax

income

treatment

taxes.

In

provides

highly

volatile

numerous

advan-

tages when specialists trade for their own accounts. In general, the internal composition of a specialist unit is determined by the specific

tax,

trading,

or credit

advantages to

be

gained

by

the

specialists involved. The New York Stock Exchange, as one might expect, vehemently

defends

the

specialist

system.

The

NYSE

is

the

Big

Board and as such always stands ready to provide a catalogue of virtues and

describing

how

well

the

public-spirited

self-regulation

impulses

succeeds.

It fails

of

its

members

to mention

that

the conflicts of interest operating in the Exchanges have proven incapable theory,

of resolution

under existing

codes

and

practices.

In

the Exchanges are governed by a highly moral code of

financial

conduct;

in

fact,

they

pit

the specialist's

financial

in-

terests against those of his customers. The New York Stock Exchange and the regulatory bodies of the federal government have failed to face the basic fault in the specialist's modus operandi—namely, that there is a conflict of interest built into his function. He is meant to be the representative—in the key position on the Stock Exchange—of the public, but at the same time he gains his income by trading against the public. Theoretically, then, he must adhere to a golden mean. But it is one thing to preach the golden mean and quite another to achieve

it.

changes' remain

In

fact,

public in

the

weight,

relations

complete

scope,

programs

ignorance

of

and

have

how

power

caused

specialists

of

the

Ex-

investors operate

to

and

how their operations affect the investor. It is

necessary

to

show

that

both

the

New

York

Stock

Ex-

change and the SEC have failed to create the kind of approach that

would

contribute

to

the

development

of

a

sane

and

safe

auction market. In the course of this book we will acquire a new perspective on the meanings of such words as "stabilization" and "liquidity," and we will see that, far from stabilizing the market, the

specialist

exploit

an

system

is

emergency

so

constructed

situation—or

any

that

a

specialist

announcement,

may be

it

good or bad—to enrich his own account. As foster,

for we

the

much-vaunted

will show

that

"liquidity"

when

the

his

efforts

investor's

are

ability

to

said

to

buy

or

19

Richard Ncy

sell stock at a moment's notice requires the specialist's services, the cost of those services runs high.

In such a market, investors

compete

with

not

with

each

other

but

specialists;

specialists

competing with investors determine the prices at which investors will buy and sell stock. All of us who have

invested

in the market have, at one time

or another, followed this pied piper. Too many of us forget that the

piper

demands

not

only

that we

follow

whatever tune

he

plays—but that somewhere along the way we pay him. The New York Stock Exchange tries to present itself as having a highly moral code. From my vantage point it would seem that

the

Exchange's

casino-like

facility

rituals

for

have

more

to

than

anything

gambling

do

with

providing

else—and

a

the

tables are rigged. One

of

the

rigging

devices

is

called

the

"specialist's

book."

In it the specialist lists the public's buy and sell orders that are above used

or

to

below

a

by-pass

stock's

the

then-existing

functions

of

price.

supply

and

This

list

can

demand.

A

be

close

study of the specialists' use of short selling to acquire stock for their

own

investment

accounts

shows clearly

that

the

game

is

weighted heavily in the specialists' favor. Then

there

are

those

member firms which, lieves,

transactions

between

contrary to what the

never appear on

the

tape.

specialists

and

public generally be-

Such transactions are

routine

on the Exchange in big-block sales and accumulations. The Exchange ence, will

evolved see

events

how

a

complex

effective

following

specialists

maintains

the

that

it

system

has,

of

rules

self-regulation

assassination

largely through

is

for

when

of President

made substantial profits and

the

experi-

self-control.

We

we

the

examine

Kennedy,

when

money came out of

the pockets of individual investors. The

rules

of

the

New

York

Stock

Exchange

grant specialists vast authority to impose upon the prices of stocks.

In

and

the

SEC

an arbitrary structure

the following dialogue

between a

specialist and an SEC investigator, the specialist tells how he uses this

authority:

q:

You supplied 600 [shares] at 43?

a:

That is right.

20

The Wall Street Jungle

q:

If you hadn't done that

a:

It could have sold at any price. I mean, had I wanted to, I could have sold 100 at 43, 100 at 431/4, 100 at 431/2, 100 at 433A, 100 at 43%, and so on; and just done anything I wanted to.

I just didn't.

I figured 43

was a very equitable

price for the buyer.8

He

is

talking here

about

the

specialists'

usual

game—chipping

away at eighths or quarters of a point. Investors in a stock stand to

lose—or

each

occasionally

to gain—$12.50

with

every

chip,

on

100 shares, and specialists often deal in hundreds of thou-

sands of shares per day. Specialists can also use an ax with great effect.

Where

autumn

an

leaves.

market actually

ax

is

used,

the

There's

quite

a

operates

and

investors'

contrast

the

New

money

between

drops

the

York Stock

way

like the

Exchange's

typical statements about it:

Stock

prices

change

because

of

the

law

of

supply

and

de-

mand ... If more people want to buy than sell, the price of a stock goes up ... In the long run, the price of a stock tends to reflect the value of a company . . .9

Sometimes

specialists

transgress

even

the

very

flexible

regula-

tions imposed on them by the Exchange and the SEC and resort to practices even more questionable than those already described. Even

when

this

happens,

they

are

seldom

severely

punished.

For example, one of the most powerful units on the floor is Bill Meehan's

at

Post Twelve.10

such heavyweights Commercial

as

In

Amsled

Solvents,

Deere,

1968,

for

Industries, Ford,

instance, Bell

Fairchild

Radio and

Corporation

Texas

Eastern

of

and

handled

Intercontinental, Camera,

Pacific, Ideal Cement, Glen Alden, Jim Waller, Register, Oklahoma Gas

he

Georgia

National Cash

Electric, Oklahoma Natural Gas,

America,

Southwestern

Transmission.

The

titular

Public head,

Service, founding

father, and guiding genius of this firm, Michael J. Median, was a specialist who revealed himself as a master of price control. After an Meehan's

investigation

activities

in

into the

July,

shifting subtleties of

1937,

the

SEC

alleged

Michael that

his

21

Richard Ney

activities were in violation of the law. The SEC stated its decision regarding Meehan in these words: leads all

"The gravity of his conduct

us to conclude that the penalty should be expulsion from

the

national

securities exchanges of which

he is a

member.

words

"gravity

more

accurate

An order to this effect will accordingly issue."11 It of

is

his

worth

noting

conduct"

phrase.

It

that

instead

of

the

SEC

used

a

harsher,

the

perhaps

is also worth noting that Meehan was allowed to re-

sign, instead of being expelled, and that his firm remained intact and kept its place on the floor. In

his

brilliant

and

Super-Rich, Ferdinand

wide-ranging

book,

The

Rich

and

Lundberg goes to the core of the

lem of crime among the privileged rich.

the

prob-

He draws on the work

of a noted criminologist, Professor Edwin Sutherland, to help us understand why

the

punishment

doesn't fit the

crime when

the

criminal is a member of the establishment:

Most offenses class other

open

than

to

those

members

of

the

traditionally

upper

proscribed,

socio-economic as

he

[Suther-

land] found, were dealt with by special administrative tribunals. The

offenses

were

mostly

variants

of

fraud

or

conspiracy.

Where they were committed against the broad public they called for relatively light penalties, seldom prison terms . . . Even when a member of the upper socio-economic class was found guilty of a sligmatic crime [one involving violence or direct theft] and was about to be sentenced, there was a marked difference in language of the judge . . . The judge (as quoted by Sutherland) ence,

of

typically said;

refinement

and

"You are men of affairs, of experi-

culture,

of

excellent

reputation

and

standing in the business and social world." They were in fact, as the judicial process had just disclosed, criminals . . . When Sutherland inquired closely he found, contrary to the established supposition, that many members of the upper classes did commit countable.

offenses for which the government

But

in

most

cases

special

held

arrangements

them had

ac-

been

made to handle them with kid gloves and in many cases to administer by way of punishment a slap on the wrist. Nor was the reason for differential formulation and application

of the law

hard

to

find.

The

class

whose

members

were

being proceeded against was the class that had the dominant in-

22

The Wall Street Jungle

fluence in the government and supported the political parties at the

top.

It

was,

indeed,

their

government

and

their

political

parties engaged in running their very own plantation.12 There is little question that specialists' income puts them among society's

elite.

(Part 2, p.

Figures

68)

provided

by

the

Special

Study

purport to show the gross income in

Report

1959 and

1960 of all New York Stock Exchange specialist units: PERCENTAGE 7959

AMOUNT

Commissions

$19,590,000

48

21,237,000

52

$40,827,000

100

$18,919,000

55

15,769,000

45

$34,688,000

100

Trading Profits Total

OF TOTAL

1960 Commissions Trading

Profits

Total

If these figures seem surprisingly modest,

it is because the SEC

did not go far enough. Specialists do indeed trade for the benefit of their trading accounts, the figures for which are shown above. But they also trade on behalf of their own investment accounts and

the

accounts

cialists,

brokers,

market

slocks

augmenting

they and

for

their

maintain their

own

big-block

incomes.

in

partnership with

institutional

It

firms.13

financing

becomes

clients,

apparent

other speThey

thus that

also

further

the

SEC

figures barely scratch the surface. The

latest

figures

available

are

ten

years

old.

More

recent

income figures would doubtless reflect the enormous increase in the volume of specialist Many

specialists

have

trading since sulficicntly

1959 large

and

1960.

incomes

to

buy

jet

airplanes as a way to reduce their taxes. Along with other individuals with high incomes,

specialists form

partnerships to buy

diesels or jets and then lease them to railroads or airlines for the 7 per cent tax credit on capital goods purchases to reduce personal income taxes. Heads and

of

losses

corporations

as

they

trade

must in

the

report

to

the

SEC

stock

of

their

their

profits

companies.

Yet

23

Richard Ney

specialists

are

not

required

their specialty

stock

in

investment

their

other

financing

firm,

either

to

in

report

their

profits

their segregated

accounts,

as

tax

in

trading

accounts

co-stockholders

in

or

their

as owners of a specialist financing firm, or from

countless other areas of taxable and nontaxable income." Since the SEC insists that the specialist operates in the public interest,

why

isn't

his

income

public

knowledge?

If

the

SEC

were to make public the income figures for specialists, we might gain

some

market."

insight

into

According

to

their the

"affirmative

Special

contributions

Study

Report

to

(Part

the

2,

p.

121): Some

specialists

testified

that

under

certain

circumstances

specialist has a broad right to liquidate his position, such transactions might not represent

an

a

although

affirmative contribu-

tion to the market and may even serve to destabilize the market

and

depress

prices.

The

reason

advanced

was

that

if

a

specialist faces financial difficulties he has the right to sell his inventory as a matter of business survival. A prominent specialist

and

NYSE]

former

chairman

apparently

of

believes

the that

board

of

governors

specialists

almost unlimited right of liquidation:

are

[of

permitted

the an

"After all, you could ruin

a man if he couldn't get out." Whether such a "right of liquidation" is sanctioned by. .. Exchange rules is,

however,

not en-

tirely clear.

It doesn't really matter, though, whether it's clear, for Exchange rules are, on the whole, not very strict. In

1964, subsequent to

Report,

there

were

the

publication

disquieting

rumors

the specialist system were about

of the

that

Special Study

major

to take place.

The

reforms

of

Exchange's

top negotiating team of specialists met with Commissioner Ralph Saul and other members of the SEC in Washington and on Wall Street.

Their stated

purpose

was

to

consider the Special

Study

Report's recommendations concerning the specialist system. The meetings were ordered to be held behind closed doors. Then, on September

24,

1964,

the

New

York

Stock

Exchange

issued

memorandum to its members: The interchange of ideas [between the Exchange and the SEC] . .. provided the basis for modifying or substantially changing

a

24

The Wall Street Jungle

a number of the recommendations originally made by the SEC Special Study Group.

However, where a Special

Study recom-

mendation appeared to offer the prospect of improving the specialist system,

the

Board

has

not

hesitated

to

endorse

it

and

take appropriate steps towards implementing it. Where ened

the

the

SEC

investigating

specialist

system

team's

with

recommendations

reform

they

were

threat-

"modified."

Where they strengthened the system they were "endorsed." In love

Washington and affairs

are

Wall Street,

pregnant

with

today's government-business

tomorrow's

economic

arrange-

ments; hence it is not surprising that former Commissioner Ralph Saul—who

had

conducted

the

SEC's

1962-1963

investigation

of the securities market and the specialist system—was installed as

President of the American Stock

Exchange in

1966.

Public scandals occur more frequently on the American Slock Exchange ence

in

than

on

the

New

York

Stock

Exchange.

the

differ-

power and separation of activities between the two Ex-

changes has never been adequately explored. of

The

regulations

Exchange, each

governing

the

listing

of

Basically, because

companies

on

each

Exchange can be said to be much like an

indi-

vidual with a distinct personality. The companies on the NYSE, which

arc

mature

financed middle which little

have

crisis

viduated

less of

age,

seasoned,

enjoy

the

capital

and

consistent

less

The

experience,

NYSE

personalities,

suffer

consists the

of

a

well-

the Amex, from

each

highly

indiand

that are one way today and another tomorrow.

It is

pension

funds,

foundations,

and

Amex

of

men

understandable therefore that big money, funds,

security

while the newer companies on

adolescence.

and

companies

and

of

in the form of mutual other

institutional

ac-

counts, tends to restrict most of its trading to the more predictable potentials of the NYSE. The range of the NYSE's financial power and the degree of its political control and dominion over the

economic

resources

of

access to this institutional

the

United

States

are

related

to

its

business.

Yet the motives, functions, and activities of the specialists on both Exchanges have much in common. concerned their

with

profits,

the

power,

Both groups seem more

narrow questions of how privilege,

and

status,

they can

than

with

increase

the

larger

25

Richard Ney

issues of public service. The devices and skills that are employed by

the Amex specialist to exploit

his

employed by the NYSE specialist. the

same

web of myths,

and

also

Both groups are sustained by

both groups observe

mous of Machiavelli's precepts: must

public customers are

the

most

fa-

if one is to lead other men, one

be willing to throw overboard accepted codes of morality

whenever

necessary,

while

at

the same time making a show of

observing these codes. More

fundamental

than

these

considerations

is the

fact

that

the political power and financial status of the NYSE tend to reinforce

each

other.

New York than

The

rule

of the

anywhere else

dollar

is

more

absolute

in

in the world; thus, it has been a

simple matter for the NYSE to establish a situation in which it is able

to

assert

increasing

influence

over

governmental

agencies

that are meant to regulate it. Thus we find that members of the NYSE

retain

as

their

legal

representatives

the

law

offices

of

New York Senators and Congressmen. It has also been revealed that

members

Supreme

of

the

NYSE

contributed

to

Court justice by making donations

lecture

fees.1'

change

can

investors.

Because

grossly

of

its

exploit

The world

influence

the

basic

of the NYSE

in

and

the

income

toward

high

paying

places

universal

of

his

the

Ex-

interests

is a closed world

a

of

of almost

absolute power. The American Slock Exchange is, by comparison, less powerful.

The

powers

authority.

If,

external

after

a

to

the

Amex

major decline

in

allow the

it

only

market,

a the

limited public

clamors for blood, it will most likely be a member of the Amex who

is

offered

because the

the

Amex

to them

regulations

are

less

as a scapegoat. governing

stringent,

the

the

It will listing

dealings

of

be claimed

that

of companies

on

the

on

specialists

this Exchange are more open to question, and that they are more likely course the

be

of a

derelict in

on

was

mistake

in on

fulfilling

dinner party

President

going that

to

of

a

highly

the

about

the

I

their obligations.

discussed

NYSE.

the

it, however:

Stock

Keith

manipulations

active slock,

American

with

his

response

Exchange."

When

Funslon,

Exchanges is regulated has its locus in the dollar.

then

that

had

was,

"Oh,

Let

the manner in which

in the

there

each

been

be

but no

of these

26

If

The Wall Street Jungle

one

than on persons

the

of

more

NYSE,

involved

discreetly craft

hears

in

hushed

recently

it

on

probably

scandals

up.

went

is

scandals

on

the

more

American

Exchange

because the names of some

For example,

down

the

New the

than

York

stock in

$300

Exchange Douglas

million

in

are Air-

value.

There were insiders who got the bad news in advance of the public and the other stockholders and were able to get out at a high price—all

this without

so much

as one member of the NYSE

being cited.16 Indeed, one brokerage firm that was cited by the SEC avoid the

was

allowed

hearings

by

allegations."

to

settle

the

''consenting

This kind

specialists on the NYSE

charges to

the

order

of protection,

and

against

it

in

without

order

to

admitting

commonly offered

not to those on the Amex,

to

is the

basic difference between the two Exchanges. Financier Louis Wolfson, as he was preparing to serve a oneyear sentence for violation of the securities laws, had this to say (as quoted in the Wall Street Journal, April 22, You've got more crooks dustry I've ever seen.

1969):

in Wall Street than in any other in-

27

Richard Ney

NOTES, chapter I 1

During

staled stock's

the

he

afternoon

knew

of

opening

29

of

February

no corporate l

/2

4.

an

official

development

points lower.

to

of

Memorex

account

for

the

At one point during the day

Memorex was down 38 "4 points. Two days earlier the company had reported

sharply

1968). On

higher

February 4,

earnings

($1.87

true to form,

for

the

1969

v^.

$1.35

for

Wall-Street Journal re-

ported ". . . several analysts were disturbed that . . . fourth period net was up only four cents . . 2

Merrill Lynch, Pierce, Fenner & Smith, How to Read a Financial

Report, rev. January, 1961, p. 28. 3

New York Slock Exchange, The Specialist on the New York Slock

Exchange,

An

Explanation Primarily for Corporate Officials,

un-

dated, p. 3. 4

Staff Report on the Organization, Management, and Regulation of

Conduct of Members of the American Stock Exchange, January, 1962, p. 23. 5

This team, the Special Study group, was formed when Congress, in

September, 1961, directed the SEC to make a study and investigation of

the

adequacy with

which

the

rules

of

national

Securities

Ex-

changes and associations protect the interests of investors and to submit a report on or before January 3, 1963. 6

Pan 2, p.

7

SEC, Report of the Special Study of Securities Markets, Part 2,

pp.

167.

170-171,

July

17,

1963. This document will hereafter be

re-

ferred to as the Special Study Report or SSR. In the January,

1962,

SEC

Staff Report

on

the Organization,

Management, and Regulation of Conduct of Members of the American Stock Exchange the specialist's crucial position was also described as follows (p. 23): "In his unique capacity the specialist stands at the heart of the Exchange market mechanism. He has intimate knowledge of the past market action of the slocks in which he specializes. He also has sole access to the specialist book showing outstanding orders both below and above the market which affords him a great competitive advantage over the public." Page 19 of this report states: "Specialists have been shown to be the dominant group in the government of the Exchange." This, of course, is even more true of the NYSE. 8

Emphasis added. Special Study Report, Part 2, p. 136.

28

The Wall Street Jungle

® These

particular statements

are

quoted

in

John G.

Fuller,

The

Money Changers (New York: Dial Press, 1961), p. 137. 10

Typically,

a specialist

unit controls

6 to

15

stocks; two of the

most powerful units handle between 36 and 40 stocks each. " SEC File No. 4-232, July 31, 1937, In the Matter of Michael J. Meehan. 12

New York: Bantam Books, 1969, pp.

125-126. Lundberg's mag-

num opus bears heavily on the workings of the financial establishment and its control over both houses of Congress. ,3

Specialists' trading accounts, investment accounts, and "joint" ac-

counts are defined and explained in Chapter 4. 11

They report profit and loss in their trading accounts to the NYSE,

which holds the reports. Specialists' various "segregated accounts" are described in Chapter 4. 15

Wall Street Journal. September 18, 1968.

16

Merrill Lynch, as a firm, was later cited, but none of its officers

who are members of the NYSE was named—only the smaller fish.

2

The

Specialist's

Book

Using his book, the specialist chops off more heads than Alice's Red Queen.

One of the specialist's greatest advantages over the

average in-

vestor is that the specialist is in the right place at the right time. An investor who wants to buy or sell has a choice between giving

his broker a

market order

(an

order to

buy

or sell at

the

best price available when the order reaches the trading lloor), a stop order (an order to buy or sell that becomes a market order as soon as the price of the stock reaches the the buyer or seller), a limit order

price specified by

(an order to buy or sell at a

specific price or better), or a stop limit order

(an order to buy

or sell that becomes a limit order as soon as the stock reaches the price specified by the buyer or seller).1 These orders are all entered in what is called 'The specialist's book"—a

source

of

incomparable

privilege.

binder approximately 4 inches by 11 record customers' orders

It

is

a

loose-leaf

inches. The book is used to

(placed with the specialist by brokers)

Va

of a point apart—that is, from, say, 35, 35 Va, 35 Va

35

Va.

in

the

Orders to buy or sell stock are entered sequence

price, with 29

a

in

which

they

are

received,

... to

by the specialist

at the

notation of the number of shares.

appropriate

30

The Wall Street Jungle

The specialist's book gives him yet another crucial advantage over

investors.

He

knows

(investors

will be safe to play. For instance, on

his

book

to

buy

700

shares

can

only

guess)

when

it

if there are stop limit orders

at

60

l

A9

which

might

be

the

"break-out" point of the trading range that had existed between 50 and 60, he's safe in buying 700 shares at the "current market price" of 58. The a

stop

speculator order

to

is

easily

"protect"

persuaded

by

himself from

his

loss.

broker "You

to

enter

bought

the

stock at 49—it's now 53, enter a stop at 52 and you'll have covered

all

commission

costs

and

still

be

ahead."

The

broker,

of

course, takes a commission on this deal, and brokers make their living from commissions. On the subject of the prediction value of the book, the Special Study Report is again worth examining:

The specialist's book has an importance beyond that of a mere repository of

unexecuted

agency

orders.

It serves

as

an indi-

cator of public interest in a particular security. For example, a book containing many orders reasonably close to the market indicates that, at the lime, the stock is an active one of wide interest. On the other hand, a light book may indicate that a stock is less active, or that if active, it may be volatile in character. A much-argued point has been whether the number of buyand-sell orders contained on the book is an indicator of immediately forthcoming market trends.

At the time of

the

Pecora

hearings some specialists argued that the book was almost valueless from this point of view. The same argument was made in 1935,

when

the

Commission

had

under

consideration

a

rule

which would have required complete disclosure of the book, and the same point was reiterated during the Segregation Study.

In

fact, it was argued that the contents of the book are apt to be misleading since many orders

are not in

held by floor brokers and others are

in

the book—some

are

brokerage offices and

not yet transmitted to the floor. Nevertheless, it seems clear that in certain instances the book is an important indicator. slop orders suggests

A book that has a great many sell-

that the slock will

when these orders are reached.

suffer a quick

decline

In addition, a large number of

limit orders immediately below or above the market may indi-

31

Richard Ney

cale that, in the very short run, there is a floor or ceiling to the stock's price. Some specialists testified that the trend of the market is indicated by the orders on

the book—that a book which contains

many sell orders is characteristic of a stock which will increase in

price,

while

a book

containing

many

buy

orders

indicates

that the price will decline. One specialist stated that this theory has greater validity when limit orders to sell are filling in after a stock has reached a

low or limit orders

to buy are entered

when a stock has just gone through a sharp rally.-

The specialists who slated "a book containing many buy orders indicates

that

the

price

will

decline"

was

pointing

out—albeit

obliquely—the most important of all the auction market's paradoxes:

that demand, as stated earlier, may tend to send the price

of a stock not up but down. How much time and attention a specialist gives to each order and

whether

himself

often

he

will

use

depends on

the

book

to

benefit

the

name

of

the

the

firm

customer

or

forwarding the

order. The name of the ordering firm is jotted down at the same lime the

as

the

number

name of the firm tells

originated with

his

fine

it,

for

of shares

a point on the

specialist

own

him,

decide

the

price

ordered.

Knowing

for example, whether the order

or an

knowing to

and

allied

company.

Not to put

too

the order's origin makes it possible whether

he

will

give

it

his

best or

worst effort. One of the Exchange's rules is that no order given to a specialist

in

his

specialty

stock

shall

indicate

the

account

for

which

it is entered. The rule was made to ensure equal treatment for all buyers; the

following discussion

from

the

Special Study

Report

suggests the difference between the way a specialist handles just any broker's order and the way he approaches one from a mutual fund, from officials of the companies whose stocks he specializes in, or from an ''intimate friend."

It is necessary to distinguish between several different kinds of situations. Some specialists are partners in member firms which regularly do business with the public, maintaining board rooms and providing all the services commission

business.

Other

usually associated with a public

specialists

introduce

accounts

to

32

The Wall Street Jungle

their clearing agent and obtain a split of commissions. At least two specialists

have arrangements with

mutual funds

whereby

all the fund's orders are transmitted through the specialist, who then channels the orders to the member firms which are to receive reciprocal business. Finally, many specialists have a public

business

restricted

to

friends

and

business

acquaintances,

occasionally officials of the companies in whose stock the specialists are registered. This last may be illustrated from the testimony of one specialist: q:

Can anyone call up and give your firm an order?

a:

Not without checking with us on the floor. That is why we have

the

phone.

The order

would

not

be

accepted

if

we

don't know the person. q:

You

have

to

know

the

person

personally

or

one

of your

partners? a:

Right.

q:

Will you accept orders from any acquaintance of yours?

a:

No.

q:

What is the classification of persons?

a:

Intimate

friends.

We

are

not

in

the

commission

business.

This is just an accommodation.

In this same section, on pages

154-155, the SSR stated:

No matter what method was used to transmit the order to the floor, most specialists staled that they were aware when orders arriving at their posts originated through their own firm, either because the order slip would bear their firm's name or because there would be some special notation on the form.*

The

NYSE

rules

now

prohibit

a

specialist

from

taking

orders

for sale or purchase of shares of his specially stock directly from officers of the company. There seems to be

no check, however,

on whether he takes such orders indirectly, and there are several easy methods for doing so. The Special Study Report, taking off into the friendly dark, says, the specialist is in the same position as others who might seek to

use

knowledge

of

the contents

of

the

book

for

their

own

33

Richard Ney

profit, except insofar as his activities are circumscribed by rules. Thus, in executing his brokerage functions, the specialist has a powerful tool, available to him only, giving him

insight into

the possible course of the market. The justification for the special treatment can lie only in the need for such information for the most effective conduct of his dealer activities, which, as has been indicated,

provide the basis for the

fulfillment

of his re-

sponsibilities to maintain a fair and orderly market.5

Existing discuss

rules

the

notwithstanding,

prices

and

specialists

amounts

at

which

have stop

been

known

to

and limit orders

have been entered in their books with other members. Members then learn the prices at which blocks of stock can be purchased or sold by them. Anyone who has stumbled through the investment world long enough

will

recognize

value

judgments

pulse

and

operating friends,

the

of human

consciousness, as

the specialist

family,

absurdity

and

nature.

as

well

rules

that

Obviously, as

employs

big-block

of

trust

to

the

instinct and

im-

unconsciousness,

his

book

customers.

for

the

Indeed,

it

will

be

benefit of would

be

pointless for a big-block customer to have placed an order with a

specialist

for 200,000

shares of his stock

unless consultation

with the specialist showed that the book could be counted on to supply the bulk of such an order. Attorney

General

Robert

Kennedy's

1960—1961

investiga-

tion

into the

activities of Alexander Guterma, who at the time

had

already been convicted of stock fraud, raised critical ques-

tions

concerning

their

slocks.

The

the

manner

in

immediately

which

specialists

desirable

aspects

of

manipulated their opera-

lions seemed suddenly not quite so desirable, and the undesirable aspects had become even more

undesirable.

Because of Kennedy's revelation by way of Guterma, the SEC was obliged

to launch

an

investigation

of the

Amex.

Pursuant

to an order of the SEC, the investigation was held behind closed doors.

It produced

the Staff Report on

the

Organization, Man-

agement, and Regulation of Conduct of Members of the American Stock Exchange in January,

1962; and it revealed that, on

either the American or New York Stock Exchange, when there was

to be

a secondary

distribution,

it

was

routine

practice

for

34

The Wall Street Jungle

brokers

to

ask

the specialists,

what the aggregate bids on

prior

to the date of the offering,

the book were between the

market

price and the estimated offering price. Commenting on this, the Staff Report stated (p. 39):

the possibility of abuse in connection with the disclosure of nonpublic information on the specialist book in secondary offerings as revealed by ample,

the instant investigation is substantial.

For ex-

the underwriter, issuer, or selling stockholder may ad-

just the receipt

offering price of

such

or the

non-public

time of offering information

in

because of the

order

to

benefit

themselves.

When

the

disclosing books,

SEC to

one

asked

what

nonmembers

anonymous

specialists

the

orders

specialist

thought that

said:

"If

of

might the

the be

idea

on

public

of

their

became

aware of unusually large orders, the tendency very likely would be for the public

to want to be on the same side of the block.

The execution of the block would be more difficult therefore and the

fluctuations

position

as

the

accentuated."8 Yet the specialist is in nonmember

who

would

use

the same

knowledge

of

the

book, if he had it, for his own profit. What the specialist is saying here, him

with

in

fact, is that his monopoly

an

unusual

trading

of information

advantage.

It's

provides

obvious,

but

it's

seldom stated so openly. When it is worth his while, a specialist can hang ten thousand traders

from

orders on

the

branch

of

one

rumor.

When

he

his book—say, from a price of 60 down

has

enough

to 50—the

specialist can build up activity in his stock, then spread another rumor counteracting the rumor used to advance the stock. Once that

rumor

has

the country tape"),

been

sent

through

brokers'

boardrooms

across

(via the Dow Jones News Service, called "the broad

enough sell orders can be

counted on

to enable him

to

have it announced over the ticker tape that "Due to an excess of sell orders trading

was halted."

He can

then re-open

the

stock

10, 20, 30, or more points lower at the market's close. The following more

morning

points

the specialist can

higher.

Meanwhile

it

open

this

same

will

have

been

stock

10

possible

or for

him to have sold out his inventory at the top and then established

35

Richard Ney

a short

position

for himself.

By

halting trading and

re-opening

his stock lower at the close, he is able to cover his short sales'' and

add

favored totally

to his

long

position.

customers to do against

discover and

the

law.

the But

Occasionally same

thing.

where

prevent it? Laws that

are

he

may even

Such

the

an

allow

operation

checks

that

are not enforced

is

would

are mean-

ingless. Further,

investors—even

official

investigators—do

not

have

access to any but the most indirect, unspecific information. Anyone

who wants to know what happened

or is happening in the

Exchange is obliged to burrow underground. Burrowing once again, we see how specialists can use the information in their books, in the following example. The specialist in Fairchild Camera is in RCA

and

Bill Meehan

(he is also the specialist

many other stocks). On January

10,

1967, it ap-

peared, from the price change and the number of shares, that his specialist

unit

had

sold

price it dropped to Few

specialists

market in

Fairchild

124

34.

From

that

/&, where it closed.

a

their stocks.

at

5

120

fire

short

salvo

to

announce

the

end

Certainly Meehan doesn't.

of

a

Many

bull

inves-

tors, who had seen Fairchild move down from its high at the 135 level, sell

it

had

probably

if it

sold

entered

stop

120.10 On

under

orders the

with

their

following

brokers

morning,

to

Fair-

child opened not at 120, not at 119, but at 116 %. It is impossible to know, of course, what Meehan was doing that day, but this opening made it seem likely that Meehan's unit had indeed sold short the previous day. The opening of the stock at

116 %

suggested that he now had not only covered any short sales but had also added stock to his trading account in preparation for a sharp rise in the price of Fairchild.11 Investors 116

%

who

had

had

opening now saw

their

orders

Fairchild

to

move

sell

executed

back

up

to

at

125

the 3

/a,

where Meehan closed it. Meehan's

book

provides

specific

ber of shares available to him

knowledge

about the

and at what prices.

num-

It would

be

useful, no doubt, to know what you can acquire under 120. His book

also

told

him

the

price

Fairchild

Camera

would

have to

drop to if the sell orders were to be executed in one transaction.

36

The Wall Street Jungle

There is very little—far from enough—public information on short selling by specialists. We cannot be certain of what Meehan was doing, the

investor

yet anyone who invests needs to try to predict;

must,

can get, to form

therefore,

put

together such

a working theory.

evidence

as

he

An SEC bulletin shows the

total of each day's short sales by all specialists together; the bulletin comes out, however, about two months after the fact. The pattern of movement in Fairchild that day coincided with what I have found to be, usually, short selling by a specialist. For a striking example, short

see

(on

pp.

37-38)

sales by specialists for October 22,

the

DJIA

1969.11 On

and

that dale

the market, and many stocks, approximated their 1969 highs; to the accompaniment of a big increase in public buying, specialist short

sales

jumped

from

746,840

shares

to

1,016,950

shares.

Note too the increase on that day in member short sales on and off the floor. Public demand for particular stocks not only made it

possible

for

specialists

holdings in these stocks counts)

and

other

members

to

sell

out

their

(from their trading and segregated ac-

but to then sell these stocks short into the bargain.

The specialist's book makes it possible for him

to sell at the

top, and buy big blocks for himself and his big-block customers at the bottom.1- For example, there was a rumor that a merger of Chicago minent,

and and

Northwestern on

Friday,

Railroad

August

with

4,

1967,

Essex the

Wire

stock

was im-

of

North-

western rose from 165 Vi to 171. At that price level, big blocks, representing

informed

money,

began

to move

across

the

tape.

When big blocks move after the kind of percentage gain in price that had occurred in Chicago and Northwestern in the previous week,

it

is

an

indication

that

the

specialist

unit

has

begun

to

unload its stock and the stock of its big-block customers. On Monday, Chicago

August 7, the Henderson specialist unit opened

and Northwestern

Railroad

at

170.

full point from the Friday close—on only son

closed

it that

afternoon at

159,

This was down

300 shares.

down

I 1

points

a

Henderfrom

the

opening. After the close it was announced that the merger with Essex had been called off. Tuesday the stock didn't trade just

before

the

end

of

that

day's

trading.

It

was

until

opened

at

120 on 45,000 shares—down 39 points from the previous day's close—a total of 50 points in two days.1'

37

Richard Ney

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271

Richard Ney

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272

The Wall Street Jungle KIRR-McGIE CORP.

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273

Richard Ney

exploits his book's privileges, how he uses public demand to send prices down instead of up, why and how he uses the short sale and short covering, and how he uses his trading and investment accounts. It is valid to ask if it is possible to recognize a repetitive paltern

from

one

chart

to

the

next

or

if

the

chart

of

KMG

was

unique. The answer is that KMG is typical and that the pattern principles

we

evolved

for

KMG

can

be

employed

with

other

charts. To illustrate this I will provide the charts of several other companies.

While

there

are

variations

the basic angles are extracted,

the

in the

manner

in which

validity of the principle can

be demonstrated by applying the technique to additional charts. By applying the same standards of measurement we rule out the possibility

of

coincidence.

The

importance

of

this

approach

toward understanding the real nature of the stock market cannot be overemphasized. The

series

operating in

of the

four

Boeing

case of

charts

shows

Kerr-McGee

that

the

also operates

principle

in the case

of Boeing. In the 1965 chart of Boeing we employed the I8-degree angle (long-term) Boeing

by

and

in the

1968

members exhibits

chart the subsequent bull raid the

applicability

of the

in

54-degree

angle. Since

the accompanying weekly

and

monthly charts are now

more or less self-explanatory, I can confine my comments to the following points.

It's fair to assume that someone in the system

makes a prior decision about the nature and variety of the basic angles

to be

locked into the initial decline pattern.

these angles will determine

The size of

the stock's variations as it advances

and declines. A

long-term

channel

trend can

exist over a period of years,

and the angles seem to remain fairly constant. Thus, it is not at all

surprising

pattern)

to see

being

our basic

subtly

repeated

angles

(included

within

a

in

stock's

the

chart

decline as

the

stock's price structure moves through time. In 1968,

the

1954-1966,

charts

of

1956-1968,

Rheem,

seen at the higher low of

the

same

1966

and basic

March, angle

(point B on the

1967-March,

formula

can

be

1968 chart)

as

274

The Wall Street Jungle /g0

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275

Richard Ney

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276

The Wall Street Jungle

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