Prosperity Blunts 'Mayday's' Edge

After almost six years of drift, depression and disaster, prosperity seems to have returned in force to the U.S. stock market. Paced by a swelling optimism that the worst of the recession could well be over, Wall Street's fortunes have turned decidedly upward. Last week, in a bullish performance typical of many since the beginning of the year, the Dow Jones industrial average spurted 29 points to 819, a high for the year, before backing off to 808 on Friday. Still, that was 230 points above the widely watched index's twelve-year low of 578 last Dec. 6. In little more than four months, the average has retraced more than half of its precipitous drop from the alltime high of 1052 in January 1973.

No one is discounting the possibility that the surge on Wall Street could be short-lived. As American Stock Exchange President Paul Kolton put it cautiously last week, "You can't have three good months and say it [Wall Street's tailspin] is over." But brokers nonetheless have good reason to feel happy. Prices for stocks in the Dow Jones industrials are up 30% so far this year, and even long-suffering mutual funds are doing nicely. Once again, brokers are making money. Figures to be released soon by the New York Stock Exchange will probably show that its 425 member firms earned pretax profits of around $300 million through March, a record for any quarter. By comparison, Big Board member firms earned a mere $45.8 million during all of last year and lost $49 million in 1973.

Life-giving trading volume, which loped along through most of last year at below subsistence levels, helping to drive 45 firms out of business or into merger, raced along at an average of 22 million shares on the N.Y.S.E. in February and March. One day in February, volume jumped to an improbable 35 million shares, the highest ever; last Thursday 32 million shares changed hands. The price of a seat on the New York Stock Exchange climbed back up to $95,000 last week, from $72,000 in January.

New Era. The prolonged upswing has also dulled the cutting edge of a long-feared change in Wall Street's business practices that is scheduled to go into effect next week. By order of the Securities and Exchange Commission, the industry's watchdog, what remains of Wall Street's barnacled century-old system of charging uniform, fixed commissions for buying and selling stock will end. On May 1, negotiated commissions between brokers and the investing public will begin on all trades. Investors will be able to shop among competing brokers for the lowest commissions and the best services. Wall Streeters, who have done battle with the Government for a decade over negotiated rates, had given the event a designation that in itself is a distress signal: "Mayday."

To stockbrokers, Mayday means nothing less than the abolition of the system that has enriched them in good times and pulled many of them through during long periods of market slack. What is more, negotiated--or "unfixed" --commissions will begin a drastic restructuring of the securities markets.

That shake-up will be paced by legislation now pending in Congress that in many ways is even more sweeping than the stringent measures passed during the New Deal in reaction to the stock market excesses of the Roaring Twenties. The new competitive era for Wall Street arrives as brokers scramble for capital to offer fresh investment ideas in new ways to U.S. investors.

Lean and Hungry. Yet for all the fear that precedes it, Mayday could well prove to be, at least for the moment, a massive "non-event." Commissions draw less attention from customers in strong markets, when heavy trading generates healthy incomes for brokers. More significant, Wall Street is tougher and more efficient than it was a few years ago, when poor market conditions heightened the dread of losing the crutch of fixed commissions. In the early '70s, for example, many sloppily managed firms were driven out of business because they were not automated enough to handle swelling trading volume. There followed destructive "back office" paper jams, missing stock certificates and theft. In recent weeks, firms have easily shouldered daily trading volume that would have smothered many of them a few years ago. Even so ardent a foe of negotiated commissions as James J. Needham, chief of the New York Stock Exchange, concedes that brokers are ready for Mayday. Says he: "They're about as trim as they could be."

Still, the Street's dependence on fixed rates is axiomatic; were it not for an emergency 8% commission increase granted last November by the SEC--a fillip that boosted fourth-quarter profits in a withering market--Wall Street as a whole would probably have lost money last year. And there is little comfort for the Street in knowing that negotiated rates are really nothing new. They went into effect four years ago on trades of $500,000 and above, a move that benefited large institutional investors such as life insurance companies, pension funds, mutual funds and banks. In 1972, the breakpoint was lowered to $300,000. Last year fixed commissions were removed on small trades--$2,000 and below. What becomes unfixed next week is everything else--commissions on deals between $2,000 and $300,000, the bulk of business. "Most of the lumps are still to come," says George D. Gould, chairman of New York's DLJ Securities, a division of Donaldson, Lufkin & Jenrette, a major institutional broker.

No one knows what shape Wall Street will be in after six months or a year of negotiated commissions. If trading volume turns down, price wars could still drive many small firms out of business or into merger. As of now, brokers are guarding their post-Mayday plans as if they were state secrets. All eyes are on the securities industry's General Motors--Merrill Lynch, Pierce, Fenner & Smith.

Merrill Lynch officials will not confirm it, but there are signs that the firm will "unbundle"--that is, begin charging separately for services such as maintaining certain kinds of records, sending out market letters or investment advice. Charges for at least some of these services were buried in the old fixed commissions. If Merrill Lynch does unbundle, the rest of the industry is sure to follow. The one certainty about Mayday is that brokers and investors will change the ways in which they do business. The three major changes:

AVERAGE INVESTORS, who have little bargaining power now, will not gain any under unfixed rates. But they will no longer pay an automatic industrywide commission to buy, say, 100 shares of General Electric. Instead, they will face a dizzying array of fee schedules differing from broker to broker and varying with the kinds of services offered. In most cases, they will probably pay more in commissions instead of less as brokers unbundle their services and charge for them. In most cases, investors will probably choose to stick with a familiar broker and his services rather than shop for bargains.

INSTITUTIONAL INVESTORS, who account for about 70% of the market's volume, will remain the muscular hagglers they have always been. But they are not likely to save much more than they do now because brokers will only be able to shave their costs so much. Typically, institutions have paid brokers 50% to 70% of old rates on trades above $300,000 that are negotiated now. Roughly the same pattern is expected to prevail after Mayday. An institution might prefer to pay more in commissions for better service from a broker who consistently performs well and gives helpful investment advice. But there are legal risks. By law, institutions have a fiduciary responsibility to get the most for their clients' money--and are vulnerable to being sued if they fail. Pending legislation would allow institutions leeway in seeking the best service, which might not always be obtainable for the lowest commission. But even with that, lawyers may be kept busy in squabbles over whether commission dollars are being used wisely.

BIG BOARD BROKERS will be in a better position generally to compete with "third market" dealers, who do business off the exchanges and do not charge commissions; they make their money on the difference between their buying and selling prices. The third market sprang up in the 1960s to serve institutions who were seeking ways to avoid paying the Big Board's high fixed commissions.

Whatever their impact, negotiated commissions are only one element in a Wall Street picture that has been rapidly changing during the past five years. In the rush to lure investors back to a market that until recently has been anything but alluring, the financial community has been offering new services to attract attention. The result: everybody is getting into everybody else's business. Banks, for example, offer stock-purchase plans to depositors. Life insurance companies are selling mutual funds. Merrill Lynch went so far as to buy Family Life Insurance Co. of Seattle, and is now considering registering the life insurance salesmen as stockbrokers.

The American Stock Exchange in January began trading odd-lot Treasury securities in denominations of $1,000 to $99,000. Its hottest new product is the listed option, a way of betting on the future rise or fall of a stock just as commodity speculators gamble on wheat or soybean futures. So far, the Amex's listed option volume has risen to nearly 20% of that on the Chicago Board Options Exchange, where listed options were born two years ago. On the C.B.O.E. itself, volume is doing nicely; in 1974, its first full year of business, it traded 5.6 million contracts representing 560 million shares of 32 companies.

Central Market. Much of Wall Street's long-range future will be determined by pending legislation that would drastically alter the structure of the securities markets. Stalled last year because of successful lobbying efforts by the securities industry, the revived measures have now cleared the Senate and are likely to pass the House by the end of this month. Among their many features would be an order to the SEC to begin moving toward establishing a single, truly national securities market, supplanting the hodgepodge of regional exchanges that now exist. Some actions have already been taken toward the "central market." In June, transactions on other exchanges will appear on the same ticker tape as those on New York's Big Board. Investors will then be able to see where they can get the best deal and steer their business to the proper exchange.

Despite the coming reforms--and the current revival of stock prices and trading volume--there is still a pervasive worry over the future of the stock market as a capital-raising mechanism. The Big Board's Needham fears that negotiated commissions and a central market could decrease incentive to belong to the N.Y.S.E. and weaken the nation's oldest and most important stock exchange. He worries also that the changes will tend to increase institutional dominance of the market, making it increasingly inhospitable to individuals. They will continue doing what they have been doing for some time: investing elsewhere--in commodities or funds that buy interest-bearing securities. Small investors have apparently not been too impressed by the booming market. All the evidence is that the institutions, not individuals, have dominated the rebound.

This file is automatically generated by a robot program, so viewer discretion is required.