A New Campaign to Repave Wall Street

THAT Wall Street must undergo fundamental reforms if it is to survive as the securities-trading capital is almost universally accepted. Woe to him, however, who tries to translate broad truism into specific truth. Robert Haack, president of the New York Stock Exchange, discovered the danger last week when he proposed some basic revisions in exchange rules. Though some members supported him, many reacted as if he were ordering tumbrels to convey them to the guillotine. Among the insults flung at him were "panderer," "out of his mind" and "he makes me sick." Bernard Lasker, chairman of the N.Y.S.E. board of governors, observed that the board, not the president, makes policy.

Haack had suggested the eventual scrapping of one of the Big Board's most cherished principles: that all member brokers must charge the same commissions on stock trades. The rule originated in 1792, when 24 brokers met under a buttonwood tree in downtown Manhattan to found the organization that later became the exchange. They agreed, among other things, not to try to undercut one another's commission rates. Ever since, the fixed-commission system has been generally viewed as essential to the Big Board's existence.

Chicanery Problem. Haack in the past has voiced that sentiment himself, but last week he argued that the fixed-commission system loses business for the exchange and its members. Unable to get discounts on the Big Board, mutual funds, pension funds and other institutional investors are channeling a growing share of their business to regional exchanges and the so-called third market, where brokers arrange private trades of listed stocks. Some 20% of all trading in N.Y.S.E.-listed stocks, and 35% to 45% of the large-block trades (10,000 shares or more), now take place away from the exchange floor. That is bad for the public as well as the N.Y.S.E., Haack argues, because trading on the regional exchanges is more loosely regulated than on the Big Board, and third-market trades are not regulated at all.

Pursued to the extreme, the trend toward fragmentation of trading could return markets to a primitive condition, in which investors would have to guess how many shares of what securities were traded and at what price. Few, if any, of the other markets have the prompt reporting of price and volume information that the Big Board does. They also lack the elaborate mechanisms that the N.Y.S.E. has developed to guard against chicanery.

One obvious solution would be tighter Securities and Exchange Commission regulation of the other markets, and Haack called for that. But he also proposed that the Big Board do something on its own to win back business. Hence the idea of letting member brokers negotiate commissions individually with clients on large trades--and an "ultimate objective" of switching to negotiated commissions on all trades. Commissions then would be set entirely through bargaining; rates to institutional investors, who have massive negotiating power, probably would go down, while rates to small individual investors might well rise. To offset that effect partially, Haack also suggested "unbundling" some fees. That means charging separately for such services as research, rather than trying to cover them all by standard rates.

The exchange cannot alter fixed-commission rates rapidly enough to keep up with changing conditions, he insisted; the Big Board has been trying for almost eight years to come up with a new commission schedule that would please both its members and the Securities and Exchange Commission, but still does not have one.

Haack's views are not entirely novel.

The Justice Department argued for negotiated commissions in 1968, contending that fixed commissions were against the spirit of the antitrust laws. Last month the SEC proposed testing negotiated commissions on trades involving more than $100,000. But coming from one of their own, the negotiated-commis-sion argument is tantamount to treason to many Wall Streeters. Their point is that now--when at least ten brokerage houses are being liquidated, others have survived only through forced mergers and still others are rumored to be tottering--the industry is in no financial shape even to begin thinking of negotiated commissions.

Haack's critics fear that whole platoons of smaller brokerage houses would be wiped out because some of the bigger firms would be able to underbid them for vital institutional business.

In the same speech in which he shocked his constituents, Haack also chastised some of them for indulging in "blatant gimmickry." He was referring to the practice of some exchange members, when trading in other markets, of granting discounts they cannot offer on the Big Board. Then he threw in a proposal to change the ways in which exchange members elect governors, so that the exchange could get rid of the last vestiges of a "private club" atmosphere.

Though such ideas will not increase Haack's popularity with many exchange members, they could increase his clout with the big houses, some of whose officers also are not averse to negotiated commissions.

Haack has support on the SEC, too, but how effective it will be cannot be gauged until President Nixon picks a successor to Hamer ("Judge") Budge, who has announced his resignation as chairman. Budge, a former Idaho Congressman and judge, had a predisposition to move cautiously that caused some Wall Streeters to dismiss him as a do-little regulator, but he will leave with some accomplishments to his credit. He soothed the SEC's formerly abrasive relations with Congress enough to bring to the edge of passage a bill tightening regulation of mutual funds. His predecessors had failed to sell the idea. Toward the end, he also had begun to push Wall Street toward some reforms.

Whoever the new chairman is, he will have to deal with a securities industry that is much in need of firm guidance. Congressional passage this session of the bill to set up a Securities Investor Protection Corp.--to safeguard customers of insolvent brokers--would take some of the pressure off Wall Street. The bill's chances improved last week after an aide to Representative John Moss, a sponsor of the legislation, telephoned Haack. He wanted to know why the Big Board had gone to great lengths to persuade Merrill Lynch to take over Goodbody & Co., a failing major house, but had hesitated to aid customers of three smaller houses: First Devonshire, Robinson & Co., and Charles Plohn & Co. Haack replied that customers of the three houses would be rescued.

Whatever aid it may get from SIPC, Wall Street is still reeling from the impact of brokerage failures and debating how to organize itself. The views of the new SEC chairman, whose agency must approve all commission-rate changes, could be decisive in resolving it.

It is well known that the New York Stock Exchange has had to scramble desperately to arrange mergers for some brokerages threatened with collapse --but FORTUNE this week discloses how far the N.Y.S.E. had to go in one case that its officials tried hard to keep secret. Newspaper stories had disclosed that the exchange earlier this year lent Hayden, Stone $5,000,000 out of a special trust fund earmarked for investor indemnification. The attempt to keep the firm afloat failed, and Hayden, Stone was later taken over by two other firms, Walston & Co. and Cogan, Berlind, Weill & Levitt.

FORTUNE now reveals that, just before the merger, the trust fund put another $7,600,000 into Hayden, Stone, and that most of this money then went to Cogan (now renamed CBWL-Hayden, Stone Inc.) as a condition of the sale. "In other words," says FORTUNE, "the exchange chose to buy itself a rescue." But the tactic resulted in a curious arrangement: through the trust fund, FORTUNE notes, the exchange now holds an indirect interest in CBWL --a firm that it is supposed to regulate like any other member.

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