The Stock Exchange Specialist

New York Stock Exchange Floor September 26,1963

The Specialist as a member of a stock exchange has two functions.’ He must execute orders which other members of an exchange may leave with him when the current market price is away from the price of the orders. By executing these orders on behalf of the other exchange members when the market price reaches the price stated on these orders, the specialist makes it possible for these members to perform their business elsewhere on the Floor. In handling these orders, the specialist acts as broker or agent. In addition to the brokerage functions, however, he has historically had the additional function of acting as dealer or principal for his own account. Under current rules and regulations of the exchanges and the Securities and Exchange Commission, purchases and sales for his own account must be made, insofar as reasonably practicable, with a view to assuring a fair and orderly market in the stocks which he services. Moreover, whenever there are public buyers but no public sellers, or public sellers but no public buyers, he is expected, within reasonable limits, to buy or sell for his own account in order to decrease price differences between transactions and to add depth to the market. He performs both functions for a limited number of issues assigned to him by the stock exchange.

HISTORICAL OVERVIEW

In 1935 the Twentieth Century Fund’s study of the securities market concluded that: Specialists, as well as other exchange members, should be permitted to function either as traders or as brokers, but not as both. . . .No specialist, or other broker, should be permitted to have any interest in any trading account, pool, syndicate, underwriting operation or option!

The Fund’s basis for this conclusion was its belief that “the services rendered by the specialist are not of sufficient value to warrant the continuation of a condition where a small group of persons is given a preferred position in the market.”

One year later the Securities and Exchange Commission in studying the same system reached the conclusion that insufficient data had been presented to justify the segregation of functions.’ In 1941 Professor Vernon, then a member of the Commission staff, suggested an alternative to considering the specialist in terms of his general beneficial or detrimental effect on the market as both the Twentieth Century Fund and Segregation Report had done. He stated that the feasibility of regulating the specialist should be viewed in terms giving recognition to the possibility that his job may vary in different types of stocks . . . .The dealer role of specialists may be necessary and justifiable for one set of stocks, providing sufficient grounds for overlooking his advantage over the public as a dealer in such issues, while his dealer position in another group of stocks runs contrary to the public interest In actively traded issues where a sufficient number of buyers and sellers exists to assure a continuous market with each sale price related to the prior sale, Vernon reasoned, little justification for the specialist function exists. He recognized the need for greater study to effectively develop such segmented rules regulating the specialist’s activity.

Little was written on the specialist system in the exhaustive manner of the Twentieth Century Fund, the Segregation Report, and Vernon’s book until 1963 when the Commission’s Special Study reported that “in its present form, [the specialist system] appears to be an essential mechanism for maintaining continuous auction markets and, in broad terms, appears to be serving its purposes satisfactorily.”‘ With the adoption of rule 1 lb-110 which recognized both the dealer and broker functions of the specialist, the issue seemed finally settled, at least from a legal standpoint, that the specialist system’s beneficial effects surpassed any defects.

ECONOMIC ROLE OF THE SPECIALIST

Several important questions should be examined to acquire an understanding of the economic motivations -present in the specialist system and of the impact of the specialist on market prices. To what extent is the specialist’s monopolistic, or oligopolistic power to administer the price of his specialty stock limited by his obligation to maintain a fair and orderly market? Can a specialist be a speculator and still meet this obligation? What do the terms “fair market” and “orderly market” mean?

In any economic categorization of the specialist’s function, the specialist’s position as the price administrator of his specialty stock requires analysis. To the extent that he is a sole” price administrator, he may be considered a monopolist Professor Baumol comments that “the specialist must be treated not as a competitor, but, on the contrary (at least for a narrow ‘normal’ price range) as a price administering monopolist or oligopolist.”‘ In part his conclusion depends on the assertion that the specialist knows the demand and supply curves through his “book” and can “choose to end up at the spot which is most favorable to him from among all the points that constitute the market’s offer curve.”‘

Any economic analysis of the specialist’s role must also consider the obligations of the specialist both under the securities laws and the applicable rules of the stock exchanges. While economic theory is practically limited by the specialist’s legal obligation, that theory should be influential in interpreting or formulating particular rules within the legal framework. Since obligations may differ as the time period is lengthened, the specialist’s economic role can be classified into three time periods: short, intermediate, and long run. The unique nature of the specialist’s function suggests a fourth classification-sudden price fluctuations.

While the latter category generally occurs within the short run, it warrants special attention because it involves unique legal and economic considerations.

Short Run

The primary emphasis on the role of the specialist has always been on his short run” value to the market.6 He is obligated to reduce temporary disparities between supply and demand in order to facilitate a fair and orderly market. However, the meaning of “temporary disparities” is unclear, since the time duration of the specialist’s short run obligation may depend upon the particular facts of the situation. Arguably, in certain instances, his obligation may be for only a few hours or less if his economic capability as a dealer is threatened by a deluge of orders. Thus the specialist’s obligation to maintain a fair and orderly market is limited in the sense that no one expects him to go bankrupt performing his daily duties. His monopolist’s or oligopolist’s role is further limited since the direction in which he is obligated to administer the price of his specialty stock is against the market trend.

To evaluate the specialist’s performance the NYSE uses the “tick test” to determine if he is acting to maintain a fair and orderly market. By this test, specialist purchases below and sales above the last different price are deemed stablizing and therefore proper.”

The specialist has a certain amount of discretion in exercising his short run obligation. In some situations, he has no choice but to enter the market as dealer and consequently is obliged to be a price administrator.

Other situations, however, do not necessarily require his entry into the market nor do they foreclose his participation. For example, if the highest bid on the “book” is for 100 shares at 20 and the lowest public offer is at 20 3/8, the specialist might in certain cases have discretion to either place his own bid or withhold himself from the market. If the situation were changed so that the lowest offer was at 24, making the spread four points, the specialist would be obliged to enter the market as dealer. In this instance he would be required to administer the price of the stock. But depending on numerous considerations including the last sale price of the stock, competition from both regional stock exchanges and the third market, and volatility of the stock, he has a certain amount of discretion in determining how to enter the market-as a bidder, offeror, or both-and at what price. Hence, even when he is under an obligation to administer the price of the stock, the manner in which he exercises this obligation is somewhat discretionary so long as his action ultimately promotes a fair and orderly market.

It should be noted that while many monopolists and oligopolists are regulated as to the price they may charge, the specialist, because of the very nature of the “free market'” could not be so regulated.

In considering the specialist’s short run value to the market, a problem arises in determining when “temporary disparities between supply and demand” cease to be temporary. The answer arguably appears after the situation has occurred, making the short run obligation as nebulous as the actions of market prices themselves.

Sudden Price Changes

The possibility of sudden large shifts in market prices provides a major justification for the specialist’s existence.

The shift may result on an individual stock-by-stock basis due to a public announcement by management or from a sudden rise or decline in the general market. While suspension of trading in the specialist’s stock or in all stocks will release the specialist from his obligation, 9 a considerable economic dislocation will undoubtedly occur between the influx of orders and the eventual suspension of trading. In the interim the specialist is expected to add depth and liquidity to a market which would otherwise be devoid of these characteristics. In two previous sharp declines specialists have been net purchasers, but their participation probably depended not only upon their obligation but upon their economic outlook. Although specialists were net buyers immediately after President Eisenhower’s heart attack and during the sharp market decline of May 28, 1962, their stabilization effect on these two occasions differed greatly.

According to the Special Study, one reason for the lack of substantial purchases by the specialists on May 28 was their belief that this decline was non-temporary in nature!’ The stabilizing effect of the specialists on May 28 was widely publicized by the NYSE, implying that at least the Exchange felt that most specialists had met their obligations n The emphasis placed on net purchases by both the NYSE and the Special Study indicates that the characterization of the specialist as a stabilizing monopolist or oligopolist definitely includes the daily periods of sudden price movement. The extent to which the specialist must meet this obligation is difficult to determine; numerous factors including his capital status must be considered. The Special Study commented; “Obviously, no one person has the capital to stem a selling wave such as that of May 28, but with his central location, the specialist is in a position to cushion the public’s selling by giving depth to the markets.

The Intermediate and Long Run

The specialist’s obligation to stabilize the market is reduced as the long run is approached. Indeed, if such an obligation exists in the long run, the auction market would be a manipulated, rather than a free, market. The terms used to describe the specialist’s function-“fair and orderly market;” “temporary disparities between supply and demand;” “liquidity and continuity,—as well as the “tick test” and the limited capital requirement of the specialist place emphasis on the specialist’s economic role over the short run.

Regardless of the duration of the specialist’s obligation, economic .analysis of the specialist’s role must necessarily consider Congress’ two basic aims that the stock market be “fair” and “orderly.”‘

Professor Vernon commented:

  1. A “fair” market . . . bears the connotation of a market in ,which the individual investor need not fear for the integrity of his broker, the safety of his funds, or the possibility that price movements are being artificially controlled.
  2. An “orderly” market is regarded as one in which there are no “sudden and unreasonable fluctuations in the prices of securities” and consequently a market which makes no unnecessary adverse contribution to the stability and well-being of the public at large. The two major functions of regulation, therefore, are carefully distinguished; the goal of fairness, directed primarily at the protection of the individual, may be looked upon as something in the nature of a police function, while the “orderly market” aim, an aim intended to benefit the general public interest, is more suggestive of the use by Government of economic controls.

Clearly, [orderly market] was intended in some way to represent a market which was free from “excessive speculation,” a type of speculation which, we are told, results “in sudden and unreasonable fluctuations in the prices of securities.”

No agreement exists concerning the effect of speculation on stock prices. Under one theory, the speculator stabilizes prices by purchasing or selling as necessary to move prices toward an equilibrium position. A contrary theory assumes that the speculator will continue to follow trends past the equilibrium. Under the latter hypothesis the mere presence of traders in the market can accentuate, rather than dampen, fluctuations.2 Thus generalities are not possible.

Not all speculators follow, or in the case of specialists, should be permitted to follow, a destabilizing pattern. The “bad” speculator aggravates price trends by going with the trend; the “good” speculator goes against the trend, thereby adding stability to the market.  The “bad” speculator may have prompted Congress’ adoption of the “orderly market” standard. To the extent that the specialist is not permitted to buy or sell except to promote a fair and orderly market, he is prevented, at least on a trade-by-trade basis, from being a “bad” speculator. Thus, the scope of his obligation under the applicable rules of his exchange and the obligation imposed by the 1934 Act and Commission rules thereunder are of importance in limiting instability due to speculation?

Some economists, including Professor Stigler, believe that the specialist’s ability to “predict changes in equilibrium prices, or, in other words, how closely does he keep bid and ask prices to the levels which in retrospect were correct” should be a criterion for judging his efficiency. To the extent specialists are able to estimate the future course of events they would “smooth the path of the price quotations.  Hence, the specialist’s own profit motive as a speculator, rather than any imposed obligation, would enable him to perform his economic and legal roles. Stigler further criticized the suspension of trading in a stock in an emergency situation, believing that the mechanics of speculation would work as effectively here as in a normal market.

Some disagreed with Stigler’s approach. Considering the proposed standard of market efficiency-the success of the speculator in judging changes in equilibrium prices-commentators argued that Stigler implicitly assumes that speculators do not affect equilibrium price, so that the existence of speculative profits is necessarily a reflection of the success of speculators in anticipating movements in equilibrium price . . . .This is a basic assumption . . . without justification . . . .There are both theoretical and empirical grounds for believing that the demand schedule of investors in the stock market is greatly influenced by price movements, so that speculators can profit substantially by trading actively which is destabilizing. For example, if speculators make heavy net purchases of a security in a period when its equilibrium price has risen moderately as a result of favorable financial news, their activity may drive the price much higher than it would otherwise have gone 3

Replying to this criticism, Stigler stated that he did consider the effect of the speculator’s activity by assuming “that the speculator’s balances are equal at the beginning and at the end of a speculative interval.”” The rebuttal to Stigler’s reply concluded that Stigler’s economic model “assumes that the equilibrium price of investors is not affected by price movements or by the speculator’s effects on such liquidity of the auction market in which specialists play a pivotal role. In this connection, they are considering an increased role for block positioning firms with specialists. In that case, the specialist rules which evolved to fit the needs of individuals may have to undergo profound changes to satisfy the new situation and the increasing role
of block positioners. Even if the exchanges succeed in their efforts to bring and keep blocks on the floor of the exchange, the changes in structure due to the growth of blocks may result in the growth of a situation which many feel currently exists-that is, two de facto separate markets, a negotiated market for blocks and the traditional specialist auction market for individuals.movements,” notwithstanding Stigler’s contrary assertion. Reference was again made to the substantial evidence indicating that the speculator could indeed aggravate price movements and thereby be destabilizing.

Reprint of The Stock Exchange Specialist: An Economic and Legal Analysis, by Nicholas Wolfson and Thomas A. Russo

Click here to read full copy with footnotes and sources.

Click here to learn how the Specialist system works in today’s modern markets.

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To Clean Watch Chains.

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Indian Mode of Hunting.

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Fresh Water Angling – The Two Crappies

 

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Wine Making

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Commercial Fried Fish Cake Recipe

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Country House Christmas Pudding

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The Stock Exchange Specialist

New York Stock Exchange Floor September 26,1963

The Specialist as a member of a stock exchange has two functions.’ He must execute orders which other members of an exchange may leave with him when the current market price is away from the price of the orders. By executing these orders on behalf [...] Read more →

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The Ardabil Carpet – Made in the town of Ardabil in north-west Iran, the burial place of Shaykh Safi al-Din Ardabili, who died in 1334. The Shaykh was a Sufi leader, ancestor of Shah Ismail, founder of the Safavid dynasty (1501-1722). While the exact origins of the carpet are unclear, it’s believed to have [...] Read more →

List of the 60 Franklin Library Signed Limited Editions

The following highly collectible Franklin Library Signed Editions were published between 1977 and 1982. They are all fully leather bound with beautiful covers and contain gorgeous and rich silk moire endpapers. Signatures are protected by unattached tissue inserts.

The values listed are average prices that were sought by [...] Read more →

The Kalmar War

Wojna Kalmarska – 1611

The Kalmar War

From The Historian’s History of the World (In 25 Volumes) by Henry Smith William L.L.D. – Vol. XVI.(Scandinavia) Pg. 308-310

The northern part of the Scandinavian peninsula, as already noticed, had been peopled from the remotest times by nomadic tribes called Finns or Cwenas by [...] Read more →

Public Attitudes Towards Speculation

Reprint from The Pitfalls of Speculation by Thomas Gibson 1906 Ed.

THE PUBLIC ATTITUDE TOWARD SPECULATION

THE public attitude toward speculation is generally hostile. Even those who venture frequently are prone to speak discouragingly of speculative possibilities, and to point warningly to the fact that an overwhelming majority [...] Read more →

U.S. Coast Guard Radio Information for Boaters

VHF Marifoon Sailor RT144, by S.J. de Waard

RADIO INFORMATION FOR BOATERS

Effective 01 August, 2013, the U. S. Coast Guard terminated its radio guard of the international voice distress, safety and calling frequency 2182 kHz and the international digital selective calling (DSC) distress and safety frequency 2187.5 kHz. Additionally, [...] Read more →

English Fig Wine

Take the large blue figs when pretty ripe, and steep them in white wine, having made some slits in them, that they may swell and gather in the substance of the wine.

Then slice some other figs and let them simmer over a fire in water until they are reduced [...] Read more →

Historic authenticity of the Spanish SAN FELIPE of 1690

San Felipe Model

Reprinted from FineModelShips.com with the kind permission of Dr. Michael Czytko

The SAN FELIPE is one of the most favoured ships among the ship model builders. The model is elegant, very beautifully designed, and makes a decorative piece of art to be displayed at home or in the [...] Read more →

A Creative Approach to Saving Ye Olde Cassette Tapes

Quite possibly, the most agonizing decision being made by Baby Boomers across the nation these days is what to do with all that vintage Hi-fi equipment and boxes full of classic rock and roll cassettes and 8-Tracks.

I faced this dilemma head-on this past summer as I definitely wanted in [...] Read more →

The Black Grouper or Jewfish.

 

Nov. 5. 1898 Forest and Stream Pg. 371-372

The Black Grouper or Jewfish.

New Smyrna, Fla., Oct. 21.—Editor Forest and Stream:

It is not generally known that the fish commonly called jewfish. warsaw and black grouper are frequently caught at the New Smyrna bridge [...] Read more →

Tobacco as Medicine

The first published illustration of Nicotiana tabacum by Pena and De L’Obel, 1570–1571 (shrpium adversana nova: London).

Tobacco can be used for medicinal purposes, however, the ongoing American war on smoking has all but obscured this important aspect of ancient plant.

Tobacco is considered to be an indigenous plant of [...] Read more →

A History of the Use of Arsenicals in Man

The arsenicals (compounds which contain the heavy metal element arsenic, As) have a long history of use in man – with both benevolent and malevolent intent. The name ‘arsenic’ is derived from the Greek word ‘arsenikon’ which means ‘potent'”. As early as 2000 BC, arsenic trioxide, obtained from smelting copper, was used [...] Read more →

King James Bible – Knights Templar Edition

Full Cover, rear, spine, and front

Published by Piranesi Press in collaboration with Country House Essays, this beautiful paperback version of the King James Bible is now available for $79.95 at Barnes and Noble.com

This is a limited Edition of 500 copies Worldwide. Click here to view other classic books [...] Read more →

Painting Plaster Work and the History of Terra Cotta

The 1896 Victorian terracotta Bell Edison Telephone Building – 17 & 19 Newhall Street, Birmingham, England. A grade I listed building designed by Frederick Martin of the firm Martin & Chamberlain. Now offices for firms of architects. Photographed 10 May 2006 by Oosoom

[Reprint from Victoria and Albert Museum included below on [...] Read more →

Sea and River Fishing

An angler with a costly pole Surmounted with a silver reel, Carven in quaint poetic scroll- Jointed and tipped with finest steel— With yellow flies, Whose scarlet eyes And jasper wings are fair to see, Hies to the stream Whose bubbles beam Down murmuring eddies wild and free. And casts the line with sportsman’s [...] Read more →

History of the Cabildo in New Orleans

Cabildo circa 1936

The Cabildo houses a rare copy of Audubon’s Bird’s of America, a book now valued at $10 million+.

Should one desire to visit the Cabildo, click here to gain free entry with a lowcost New Orleans Pass.

Home Top of [...] Read more →

The Real Time Piece Gentleman and the Digital Watch Vault

Paul Thorpe, Brighton, U.K.

The YouTube watch collecting world is rather tight-knit and small, but growing, as watches became a highly coveted commodity during the recent world-wide pandemic and fueled an explosion of online watch channels.

There is one name many know, The Time Piece Gentleman. This name for me [...] Read more →

Fruits of the Empire: Licorice Root and Juice

Liquorice, the roots of Glycirrhiza Glabra, a perennial plant, a native of the south of Europe, but cultivated to some extent in England, particularly at Mitcham, in Surrey.

Its root, which is its only valuable part, is long, fibrous, of a yellow colour, and when fresh, very juicy. [...] Read more →

Mocking Bird Food

Mocking Bird Food.

Hemp seed……….2 pounds Rape seed………. .1 pound Crackers………….1 pound Rice…………….1/4 pound Corn meal………1/4 pound Lard oil…………1/4 pound

 

Home Top of Pg. Read more →

Copper Kills Covid-19 and the Sun is Your Friend

The element copper effectively kills viruses and bacteria.

Therefore it would reason and I will assert and not only assert but lay claim to the patents for copper mesh stints to be inserted in the arteries of patients presenting with severe cases of Covid-19 with a slow release dosage of [...] Read more →

British Craftsmanship is Alive and Well

The Queen Elizabeth Trust, or QEST, is an organisation dedicated to the promotion of British craftsmanship through the funding of scholarships and educational endeavours to include apprenticeships, trade schools, and traditional university classwork. The work of QEST is instrumental in keeping alive age old arts and crafts such as masonry, glassblowing, shoemaking, [...] Read more →

Palermo Wine

Take to every quart of water one pound of Malaga raisins, rub and cut the raisins small, and put them to the water, and let them stand ten days, stirring once or twice a day. You may boil the water an hour before you put it to the raisins, and let it [...] Read more →

How Long is Your Yacht?

Dominion, Royal St. Lawrence Yacht Club,Winner of Seawanhaka Cup, 1898.

The Tail Wags the Dog.

The following is a characteristic sample of those broad and liberal views on yachting which are the pride of the Boston Herald. Speaking of the coming races for the Seawanhaka international challenge cup, it says:

[...] Read more →

What is the Meaning of the Term Thorough-bred Fox-hound

Reprint from the Sportsman Cabinet and Town & Country Magazine, Vol.1, Number 1, November 1832.

MR. Editor,

Will you allow me to inquire, through the medium of your pages, the correct meaning of the term thorough-bred fox-hound? I am very well aware, that the expression is in common [...] Read more →

Banana Propagation

Banana Propagation

Reprinted from the International Institute of Tropical Agriculture (IITA.org)

The traditional means of obtaining banana planting material (“seed”) is to acquire suckers from one’s own banana garden, from a neighbor, or from a more distant source. This method served to spread common varieties around the world and to multiply them [...] Read more →

Fed Policy Success Equals Tax Payers Job Insecurity

The low level of work stoppages of recent years also attests to concern about job security.

Testimony of Chairman Alan Greenspan The Federal Reserve’s semiannual monetary policy report Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate February 26, 1997

Iappreciate the opportunity to appear before this Committee [...] Read more →

Salmon Caviar

Salmon and Sturgeon Caviar – Photo by Thor

Salmon caviar was originated about 1910 by a fisherman in the Maritime Provinces of Siberia, and the preparation is a modification of the sturgeon caviar method (Cobb 1919). Salomon caviar has found a good market in the U.S.S.R. and other European countries where it [...] Read more →

A Couple of Classic Tennessee Squirrel Recipes

FRIED SQUIRREL & BISCUIT GRAVY

3-4 Young Squirrels, dressed and cleaned 1 tsp. Morton Salt or to taste 1 tsp. McCormick Black Pepper or to taste 1 Cup Martha White All Purpose Flour 1 Cup Hog Lard – Preferably fresh from hog killing, or barbecue table

Cut up three to [...] Read more →

A Cure for Distemper in Dogs

 

The following cure was found written on a front flyleaf in an 1811 3rd Ed. copy of The Sportsman’s Guide or Sportsman’s Companion: Containing Every Possible Instruction for the Juvenille Shooter, Together with Information Necessary for the Experienced Sportsman by B. Thomas.

 

Transcript:

Vaccinate your dogs when young [...] Read more →

Fly Casting Instructions

It is a pity that the traditions and literature in praise of fly fishing have unconsciously hampered instead of expanded this graceful, effective sport. Many a sportsman has been anxious to share its joys, but appalled by the rapture of expression in describing its countless thrills and niceties he has been literally [...] Read more →

Some Notes on American Ship Worms

July 9, 1898. Forest and Stream Pg. 25

Some Notes on American Ship-Worms.

[Read before the American Fishes Congress at Tampa.]

While we wish to preserve and protect most of the products of our waters, these creatures we would gladly obliterate from the realm of living things. For [...] Read more →

Guaranteed 6% Dividend for Life. Any takers?

Any prudent investor would jump at the chance to receive a guaranteed 6% dividend for life. So how does one get in on this action?

The fact of the matter is…YOU can’t…That is unless you are a shareholder of one of the twelve Federal Reserve Banks and the banks under [...] Read more →