exercises its legislative oversight responsibilities and focuses on a number of matters involving the securities industry.

The national scope of the exchange is evidenced by its 575 member organizations with offices in every State and in 24 foreign countries. The securities of over 1,000 companies are traded in our market and volume flowing through the exchange has, for the past 14 months, averaged approximately 6.4 million shares a day. În 1966, volume averaged 2.8 million shares a day and in 1963, it was only 1.3 million shares a day.

Since 1962, as this subcommittee knows, the exchange has been engaged in a major and continuing reorganization of its structure, its operation and its standards. At the present time, the exchange has a staff of approximately 1,100 people, about one-half of whom are concerned with self-regulatory tasks. The exchange spends about $10 million annually on self-regulatory activities.

Certainly the most pressing matter on which the exchange is focusing its attention is the industry's paperwork backlog which has stemmed from the unprecedented and largely unanticipated volume

of securities transactions.

I would like to make one further comment on that, Mr. Chairman. So far as I know, no one predicted the massive increase in volume that we have had in the securities markets.

Back in 1963, the exchange had consultants which advised the exchange that if economic conditions were generally sound, it could expect, by 1970, a daily average volume averaging 2.2 to 2.5 million shares, and if we had a sustained bull market, a daily average volume, according to our consultants, that might average 3.6 million shares.

We considered this at the exchange a very bullish prediction back in 1963. What has actually happened, as the committee knows, is that daily volume on the exchange for the last year was 6.4 million shares, three times more than the forecast for 1 year from now.

I think this gives you some idea of the fact that we had an increase in volume which was never predicted by our people at the exchange and by consultants whom we employed.

The problem of dealing with paperwork is compounded because the securities industry does not lend itself to a simple definition. It is, as one observer has noted, composed "of a bewildering variety of businesses, including retail brokerages, specialist firms, odd-lot houses, over-the-counter dealers, underwriters, banks that act as investors and brokers as well as lenders, and all kinds of institutional investors from mutual funds to insurance companies."

There is another factor which I would like to add which has compounded our paperwork problems. That is that the public expects our market to respond quickly and reliably to sudden changes in volume.

The public has a right to expect that its orders will be executed and reported promptly within minutes after entry. So member firms and the exchange have to maintain excess capacity to permit handling of peak volumes efficiently.

We are in the kind of business where we cannot, in effect, back order. We must be able to handle volume immediately as it occurs.

While not minimizing the significance we attach to the paperwork problem, it is important to emphasize that the execution of the public's

orders has been handled promptly and efficiently by the exchange and its members. The exchange's trading floor, ticker network and its. clearing facilities have responded successfully to the unusual demands placed on them.

Here I am emphasizing the floor, itself, the actual execution of orders, as contrasted with the complex process of transferring stock certificates and the recordkeeping functions that are set in motion after customers' orders have been executed. This is where the problem has occurred, in that process that occurs after a trade has occurred.

Over the past year dozens of steps have been taken by the exchange and other leading securities industry organizations to alleviate this problem. New procedures and methods have been introduced, automation capabilities have been stepped up, and additional personnel has been recruited and trained. More important, we have begun to draw up and implement plans for the major changes that are clearly ahead. These are the plans I would like to emphasize at this hearing this morning. First, the highest priority is being given to steps that will bring the greatest improvement in the shortest time. Second, automation plans are being accelerated in order to provide faster and more efficient handling of the public's business. And finally, we are addressing ourselves to the future-to the total restructuring of the way paperwork is processed and ownership transferred.

OVER-THE-COUNTER CLEARING

Turning to the immediate steps where we have given highest priority, I think the most urgent of these is the question of over-thecounter clearing, which I think has been discussed by previous witnesses at this hearing.

The American Exchange, at the request of the National Association. of Securities Dealers, is broadening its facilities to clear a far greater number of over-the-counter transactions which settle in the New York area as the NASD itself develops a nationwide facility for clearing these trades. As you know, the lack of central clearing facilities explains why approximately 50 percent of all fails to deliver and 70 percent of fails to deliver 30 days and older lie in the over-the-counter

area.

In the New York metropolitan area, the National Over-the-CounterClearing Corp., using the American Exchange's facilities, is processing about 3 million shares a day of over-the-counter trades in about 2,800 securities. At present, the American Exchange is significantly boosting its over-the-counter clearing capacity so that it will be able to handle 6 million over-the-counter shares a day by April and 10 million by September-should the need for that capacity exist. At that point, it will be possible to boost our capacity further, if necessary, and we will be in a position to tie our facilities into the nationwide network being developed by the NASD.

I might add we are doing this at the request of the NASD. We are cooperating closely with the NASD and other exchanges in bringing about a broader over-the-counter clearance facility for the entire country.

I think in terms of urgent priorities, this is a real key to clearing up the fails that have been described previously in this hearing.

MAJOR STUDIES OF INDUSTRY OPERATIONS

I would now like to turn to some of the longer range plans, because I think these, in terms of significance, are the most important.

The exchange last month retained the North American Rockwell Corp., an important leader in complex systems design and development, to analyze the industry's present operational systems and methods, and to determine the improvements that can be made in the shortest period of time. The Rockwell effort will provide a functional analysis of each step in the transaction process-from receiving a customer's order to delivering securities.

In addition, North American Rockwell will identify the time required to perform each step and also will identify the primary difficulties within the present system. This project is scheduled for completion in approximately 6 months, but it is anticipated that some changes will be implemented during the course of this work. The Rockwell project will help the industry make meaningful changes in its continuing drive to cut down the present backlog.

On this point, I would like to say that the New York Stock Exchange is cooperating fully in North American Rockwell's work. I think that in terms of immediate results, this holds out a lot of promise for the industry.

Over the longer term, we now have retained the Rand Corp. I would like to just discuss that for a moment.

The Rand Corp., an independent nonprofit institution engaged in long range, interdisciplinary research on problems affecting the public interest, has been retained by the American and New York Stock Exchanges. Rand is expected to develop programs and methods and recommend policies aimed at restructuring the system by which the securities industry processes paperwork and transfers ownership.

The Rand Corp. involvement can be looked upon as a research and development project entirely separate from current Exchange actions aimed at short-range problems and opportunities. The need for such research recognizes that present systems have inherent limitations, which must be removed if the public's future investment activity is to be processed efficiently.

The Rand Corp. will analyze each segment of the industry and evaluate alternative systems for meeting its requirements. The massive flow of paperwork necessary to complete a customer's transaction will be organized into a logical information processing system that is streamlined, efficient, and that draws on advanced technology. Total system requirements will be clearly identified.

In this connection, the Rand Corp. will look into the whole question, among others, of elimination of the stock certificate.

They will, hopefully, recommend to us alternative systems for dealing with the whole question of the stock certificate.

We believe that only through such comprehensive system design and research can long-range efforts be developed. The Rand work will encompass all segments of the industry in order to provide efficient and responsive service to the public under the considerably higher volume levels projected for the future.

Of more immediate moment, the exchange is working on the development of operating controls and standards of performance for member firms. Specifically, this program is designed to identify the

criteria by which customer service and operational efficiency should be measured on a continuing basis by member firms.

Comprehensive control data will be available to evaluate back office performance and to measure day-to-day operational conditions in member firms. A corollary of this work, which will be developed in conjunction with the New York Stock Exchange, will be to provide an effective "early warning system" to alert managing partners and exchanges of the need for corrective action before problems become serious.

This program will significantly augment existing exchange audit efforts which are financially oriented.

In this connection, I think most of our efforts at the exchange, at least prior to recent times, have been directed primarily to the financial responsibility of member firms, and to various kinds of surveillance efforts in that area.

This, in a sense, is a new departure, in that we will be looking at the operating conditions and the operational capacity of member firms. This will go along hand in hand with our financial surveillance efforts, which I would like to describe in a moment.

To carry out this program, a new member firm operations division. was established last fall headed by an officer experienced in management control systems and their implementation. In addition, the exchange has recently employed a leading public accounting firm to assist in expediting the plan and to assure its timely introduction.

We believe that this three-stage program, focusing on system for transferring stockownership, represents a significant departure in the traditional regulatory role of the exchange, and is the most effective way for the securities industry to meet future demand.

I would now like to turn to our financial surveillance efforts. This is an area where the exchange has, over many years, devoted a good deal of its regulatory effort.

The exchange maintains active surveillance of the financial status of member firms which are not also members of the New York Stock Exchange.

I would like to clarify that point. Most of our member firms are also members of the New York Stock Exchange. To be specific, 90 percent of the members of the American Stock Exchange are members of the New York Stock Exchange...

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We have only 34 members of the American Stock Exchange who are not members of New York, who do business with the public. These firms must file responses to detailed financial questionnaires three times a year.

With respect to New York firms, or the firms that are both members of New York and the American, in the interest of eliminating duplication of effort, the New York Stock Exchange maintains financial surveillance over those firms.

One such response must follow a surprise, independent audit. For its part, the exchange directs its staff examiners to visit these firms twice a year, or more often where warranted, to verify questionnaire responses and to be sure firms are operating in accordance with exchange rules.

The exchange requires that member organizations carrying public accounts maintain minimum net capital of $50,000. In addition, no firm's aggregate indebtedness may exceed 20 times its net capital. The purpose of our net capital rules has been previously explained at the committee. It is liquidity. It is to insure that member firms have at all times sufficient liquid assets to cover their liabilities. In point of fact, at year end 31 of the 34 firms had a ratio of less than 10 to 1 and other three firms were less than 15 to 1.

HANDLING OF SMALL ORDERS

I would now like to turn to another subject that has come up at the hearings, Mr. Chairman. That is the handling of small orders.

The New York Stock Exchange reported to the subcommittee the results of its survey concerning member firm practices for handling accounts involving amounts under $1,000. We are taking a similar survey of our sole members and preliminary results indicate that the great majority of firms do not place any restrictions that would inhibit such accounts. A few firms have placed restrictions on odd-lot and over-the-counter orders, which restrictions related directly to operational problems, which we have previously described.

The exchange can assure the subcommittee that it would view with serious concern impediments placed on small investors by its member organizations.

DEALING WITH EXCESSIVE SPECULATION

The next subject I would like to turn to are the various steps that the exchange has taken to deal with excessive speculation.

Before getting into that. I would like to give the committee a brief description of some of our compliance work, which I think is very important in insuring that we have a fair and orderly market on the exchange.

The American Stock Exchange has traditionally served as a marketplace for newer growing companies. Since 1962, in order to keep pace with the growth of the economy and to assure that the general strength and quality of the list are suitable for a nationwide auction market, listing standards have been raised three times. In addition, about 160 companies that did not meet standards for continued listing have been removed. The process of raising initial and continuing listing requirements helps assure that companies once listed maintain the qualities needed to be traded in the exchange's marketplace.

We are continuing to review our listing standards and our standards for continuing listing. We feel that is important in assuring that companies have the quality to be on the list of the exchange.

The exchange has continued to develop procedures for more timely surveillance of the market and more effective supervision of member firms. An "on line" stock watch program has been initiated for the purpose of taking immediate action in the event of unusual market situations. The more comprehensive stock watch program is designed to review in depth unusual volume and price changes in particular securities. The new program is aimed at detecting such situations at