Converging Pressures

Summer is a traditional time for exuberance in the stock market, but this season is one Wall Street would like to forget. Last week despite a feeble two-day rally, the Dow Jones industrial average fell 1.62 points, to wind up at 869.65. It was the fourth week in a row of steady losses that have erased more than half of the Dow's spring gains. From a peak of 923.72 on July 15, the average has dropped 54.07 points, reflecting a $7 billion loss in the market value of 30 blue-chip industrial stocks. Most other market indicators show remarkably similar declines of 5% to 5 1/2%.

So many pressures have converged on stock prices that few brokers last week foresaw much chance of a quick rebound, though fewer still expected the slide to grow into a severe plunge. "The market is awash in a sea of doubt," said Vice President Robert T. Allen of the Manhattan firm of Shearson, Hammill. Along with the prospect of an economic slowdown because of the 10% income tax surcharge, there were worries over declining profits, falling interest rates (which help to suck investable funds back into bonds), and reduced business spending on expansion. With many big institutional traders sitting on the sidelines, trading volume slumped along with prices. On the final day of the week, transactions on the New York Stock Exchange sank to a four-month low of 8,390,000 shares.

Forbidden Sales. The shrinking volume gave Wall Street a breather to dig into its massive paperwork pileup. Despite Wednesday trading recesses, which will continue at least for the rest of the month, the problem of undelivered securities and accounting confusion remains so severe that two organizations last week took drastic steps to overcome it. Merrill Lynch, Pierce, Fenner & Smith, the largest U.S. securities firm, imposed a "house rule" forbidding its salesmen to sell over-the-counter stocks for customers unless they first have physical possession of the certificates involved. The National Association of Securities Dealers, a trade group which polices the over-the-counter market, drafted a similar rule for its 3,700 member firms--but set no date for the procedure to become effective.

However unhappy the NASD edict may make some investors, there are good reasons for it. Unlisted stocks account for at least 60% of the maddening delays in delivering stock certificates. Moreover, the Securities and Exchange Commission virtually dictated some sort of crackdown. Two weeks ago, as part of a stern warning that dealers may be violating the antifraud provisions of federal securities law if they knowingly trade shares they cannot deliver promptly, the SEC suggested that a possession-before-sale policy would be "appropriate."

Giving Up $150 Million. SEC pressure last week won a much more costly concession from Wall Street. For the first time in its 176-year history, the New York Stock Exchange proposed a reduction in its sacrosanct brokerage commissions. The cuts would apply only to orders involving more than 1,000 shares of stock. Even so, Big Board President Robert W. Haack estimated that the plan would cut U.S. brokers' total commissions about $150 million annually, or 7% of the $2.1 billion they took in last year from exchange trading. As of now, the same rates (varying with the price of the security) apply to each round lot of 100 shares, no matter how large the total trade. Thus the commission for buying or selling 100 shares of stock priced at $50 is $44--and for 10,000 shares at $50 it is $4,400. Under the complex N.Y.S.E. proposal, the fee for a 10,000-share trade of a $50 stock would fall to $2,960.

By offering its own proposal, the Big Board hopes to fend off an even sharper cut in commissions proposed by the SEC, which contends that today's rate schedule is too high. The regulatory authority would cut fees on orders for more than 400 shares, starting Sept. 15. Much to Wall Street's embarrassment, the SEC has shown in a month of Washington hearings that brokers generally give up most of their commissions on big block trades. The money goes instead to other brokers, who perform unrelated services for the customer, such as research or selling mutual-fund shares. As part of its rate-cutting plan, the Big Board last week endorsed a ban on all such customer-directed fee splitting-just as the SEC has long urged.

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