So Prosperous It Hurts
A sure way to turn stockbrokers into reticent men is to broach the sensitive subject of their profits. Securities dealers owe much of their livelihood to investor confidence built up by public disclosure of corporate earnings. Yet the overwhelming majority of them consider their own net incomes to be nobody else's business. This double standard is well entrenched, wholly legal and--at least from a broker's view point--eminently logical. After all, partly by resisting demands for more such data, Wall Street has so far fended off the Securities and Exchange Commission's four-year-old proposal for lower fees on big-lot stock trading, the most profitable kind.
While overall corporate profit margins have been squeezed this year between rising costs and idle industrial capacity, brokerage profits have soared along with stock trading volume. At the New York Stock Exchange, which accounts for 80% of U.S. activity on registered securities exchanges, this year's trading two weeks ago topped the old full-year record, which had been set in 1966. Last week the 1,964,637,-738th share changed hands on the Big Board, lifting its average daily volume for the year to 9,862,277 shares. If that fast pace continues, along with increasing activity on the American Stock Exchange and the nation's seven major regional exchanges, some 4.5 billion shares of stock will be traded this year in the U.S.
On the Rebound. As a result, the SEC predicts, stockbrokers' total revenues will rise from about $4 billion in 1966 to $4.5 billion this year. The SEC figures that income from commissions on security transactions should come to $2.7 billion, and profit to be divided on that income between partners, brokers and salesmen should reach $675 million, compared with $600 million in 1966. Moreover, with stock trading hitting a furious pace, SEC analysts expect a sharp rebound in the industry's aftertax profits on its main business of securities trading, which slipped from 5.8% in 1965 to 5.7% last year, according to an N.Y.S.E. survey. "Brokers tell us they're making a great deal of money," says one SEC official.
"So far, 1967 is the best year in the firm's history," agrees Managing Partner Charles Moran of the Manhattanbased brokerage house of Francis I. du Pont & Co., one of the four who have overcome the general passion for secrecy. Last year Du Pont's profits climbed 19 1/2% to $4,340,152, while its revenues rose 12% to $70,637,738. That may sound like a bundle, but it actually amounted to a mere 6.1% profit ratio, well below the amount of revenue that most industrial companies keep after taxes. Still, it was a considerably better performance than that of the typical advertising agency, which retains only 4.9%.
After the Rush. This year's brokerage bonanza is aided by a slowdown in the costly rush to open new branch offices and by increased computerization of the heavy "back-office" load of paperwork. Above all, the prosperity is propelled by the unprecedented splurge of buying and selling by institutions that trade in large blocks of stock. Deals involving more than $100,000 worth of shares constitute less than 1% of Big Board transactions, yet generate 15% of the commissions. Brokers' round-lot transaction commissions include both a percentage fee, which begins at 2% and decreases as the total purchase price of the stock increases, and a rising fixed charge that ranges from $3 for 100 shares of stock worth up to $400 to $39 for the same amount of stock worth $5,000 or more; the complex combination works out to a minimum possible fee per 100 shares of $6 and a maximum of $75. On odd-lot transactions, brokers are allowed to charge a differential of from 12-c- to 25-c- per share of stock in addition to the regular commission. Brokers like the big deals because the cost of paperwork runs about the same for 100 shares as for 10,000.
Though commissions on the New York Exchange swelled to an estimated total of $1.27 billion last year, they accounted for only 62% of the revenues of its 648 member firms. Brokers take in another 12% from the interest paid by customers who borrow to buy stocks on margin; on the last day of business in 1966, Big Board members had $4.9 billion in such loans outstanding. The remaining 26% comes from underwriting fees, commodities' income, mutual-fund sales, trading on their own accounts. Curiously enough, 82 Big Board firms reported that they actually lost money last year on their commission operations. The exchange refuses to divulge any figures, but Wall Street sources call such losses "very slight."
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