Setting a Deadline for Reform

FOR years a bitter debate has been raging over how to reform the operations of the nation's stock-trading business so that it can handle efficiently the diverse needs of more than 32 million investors. The need became obvious when the 1969-70 bear market forced more than a hundred brokerages into financial failure or shotgun mergers. The causes were numerous, but one overriding factor was that Wall Street was still geared to a bygone age of relatively slow trading by individual investors dealing in 100-share lots; the stock exchanges could not cope with the demands of a new era in which big-block trading by institutions THE NEW YORK such as mutual funds, pension funds, university endowment funds and insurance companies regularly pushes volume on the New York Stock Exchange over 15 million shares daily.

Within the past year, reform plans have been advanced by the Securities and Exchange Commission and the exchanges themselves. Late last month the House Subcommittee on Commerce and Finance, headed by California Democrat John Moss, weighed in with a 170-page blueprint for the securities industry's future. Now that nearly all interested parties have spoken, it is clear that the largely self-regulated industry must make sweeping changes rapidly or be forced into them by legislation, possibly soon after Congress convenes next January.

Some badly needed reforms are already in the works. In order to remove their private-club image, the exchanges are opening formerly broker-dominated governing boards. This summer the New York Exchange chose a 20-member board divided equally between Wall Streeters and outsiders, mostly from corporations whose stocks are traded on the Big Board. In addition to senior executives of such giant companies as G.M., RCA and A.T.& T., the new people include Duke University Professor Juanita Kreps, the N.Y.S.E.'s first woman director, and outgoing Ambassador to Sweden Jerome H. Holland, the first black director. The exchanges also are selecting new bosses. Last week James Needham, an accountant and a former SEC commissioner, became chairman of the N.Y.S.E.; later this year, Paul Kolton, onetime public relations vice president of the Big Board, is expected to be named chairman of the American Stock Exchange.

Within a year, according to SEC Chairman William Casey, a single national stock-market ticker tape will be reporting the prices and volume of all major stock trades, wherever they take place. Most exchanges now have their own separate tapes that go mainly to brokerage houses in the immediate area; an investor buying stock in New York, say, rarely has any idea at what price the shares are changing hands in Chicago or San Francisco. The SEC's idea is to publish all this information on a single tape so that investors can get a feel of the total market and make more informed buying and selling decisions. There are technical difficulties in setting up such a system, but no important resistance to the plan.

Hot controversy, however, still swirls around two other issues: negotiated v. fixed brokerage commissions, and the desire of institutional investors to buy memberships on stock exchanges. The arguments reflect the growing clout of the institutions. A decade ago, they traded one-third of all the shares on the New York Exchange; last year they accounted for 60%. The institutions have long chafed under the necessity of paying commission rates that are set by the exchanges to meet the costs of handling small orders from individual investors rather than the institutions' big-block trades. In addition, many institutions want to buy seats on the exchanges--a practice now barred by the Big Board and Amex--to enable them to handle their own trades and pocket the money they would otherwise have to pay to independent brokers in commissions. Presumably these savings would be passed on to individual investors in the form of lower management fees or sales commissions. The SEC and Representative Moss have made specific recommendations on each issue, but they differ in important detail.

On commissions, the SEC settled for a slightly altered version of the present hybrid system. Brokers must now bargain on commissions with customers who make trades worth more than $300,000, a slight cut from the previous minimum of $500,000. The SEC plans to reduce the cutoff point gradually to $100,000 by April 1974. Congressman Moss, on the other hand, wants to abolish fixed commissions entirely and have fees bargained between broker and investor on every trade.

Negotiated commissions would probably be a fiction for most individual investors. I.W. Burnham II, senior managing partner of Burnham & Co., a Manhattan-based investment house, says that "negotiation for the public is not in the cards" because the small investor has little bargaining power. Institutions, though, have plenty; they have already bargained commissions down an average 50% from the old fixed-rate schedule on the biggest trades. Many Wall Streeters fear that an extension of negotiated commissions would cause another wave of brokerage failures because rich brokerages would underbid weak ones for the all-important institutional business. Nevertheless, some major extension of negotiated commissions seems sure to come.

Both the SEC and the Moss subcommittee would allow institutional membership on exchanges, but under strict conditions that would limit the ability of the institutions to execute their own trades. The SEC would allow brokerage-house affiliates of the institutions to join exchanges only if four-fifths of their business came from the public rather than from the parent institutions. The Moss subcommittee would forbid institutions that joined exchanges from handling any of their own business at all. What the subcommittee wanted to avoid was "devilish bookkeeping" practices that might arise as institutions merged with brokerage houses.

For the moment, the SEC has the authority to order into effect its own proposals on negotiated commissions and institutional membership. But in the next few months, it must iron out the differences that exist between its proposals and those of Congressman Moss or face the prospect of seeing its own ideas overridden by legislation. Besides Moss' proposals, the Senate Securities Subcommittee has held hearings on Wall Street's problems and seems ready to back legislation that would force the securities industry to overhaul its archaic structure.

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