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February 1, 2003

Weeden & Co. The NYSE and the Struggle Over a National Securities Market

By Gregory Bresiger

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  • Weeden & Co. The NYSE and the Struggle Over a National Securities Market
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by Donald E. Weeden

Reviewed by Gregory Bresiger

The war continues between the Third Market and the New York Stock Exchange.

This privately published book - part autobiography, part a history of how a venerable family firm began, lost its independence and then gained it back - is a chronicle of how the war began. It is also the fascinating tale of the battle over a national market system and why, according to the author, we still don't have one.

It is the story of how two great market institutions - the NYSE and the Third Market - began to make their cases with the public and the regulators, trying to educate them in the essentials of market structure at a time when the regulators didn't want to know anything about its controversies. In other words, even though the period I referred to in the preceding sentence was the 1950s, it is a time very much like today.

But how did the actual war with the Big Board begin? In the early 1960s, Weeden saw a similar firm, Municipal Securities, have its ticker tape yanked by the NYSE without explanation. Big Board officials later argued, when challenged, that, under the Securities Exchange Act of 1934, they had the total power to determine membership. They also contended that, as an SRO, the NYSE was not covered by the provisions of the Sherman Antitrust Act.

The SEC was on the Big Board's side in this legal battle, which actually began with what would become a controversial rule. Indeed, just a few years before, in 1957, the SEC had made no objections when the NYSE had instituted the infamous Rule 394. That rule was designed to end the practice of allowing member firms. Here was the Pearl Harbor of the Third Market.

Municipal Securities, which during the course of this war would go out of business, hired lawyers and fought it out in federal court with the Big Board. It lost in the federal circuit court, but won in the U.S. Supreme Court. However, it had no interest in pushing its victory and settled with the NYSE, of which it only asked that it pay its legal fees. The Big Board had lucked out. So the battle over the Third Market was left to firms such as Weeden & Co., which continued to press its case with the U.S. Justice Department. But the NYSE, as Weeden tells the story, at the time had plenty of friendly chairmen and commissioners at the SEC.

In the early 1960s, in a friend of the court brief written in a federal circuit court in the Municipal Securities case, SEC officials wrote that, "when exchanges are acting other than in the clear absence of all jurisdiction...they are secure from liability under anti-trust laws to persons aggrieved by their actions, even if such action is arbitrary and unreasonable."