Squeezing the Small Investor

Hurt by a severe decline in profits, Wall Street brokers plan to squeeze more money in commissions from their small customers, while giving greater discounts to big stock traders. The New York Stock Exchange last week voted to raise commission rates on transactions of 200 shares or less and cut them on all larger trades. For example, commissions on a 100-share order would go up 68%, while a 1,000-share trade would cost 37 1/2% less than it does now. The overall effect would be to raise brokerage charges an average 10%. The proposal was forwarded to the Securities and Exchange Commission, which has the power to object--and may very well do so.

Flak from Washington. The proposed commissions are highly controversial and have already caused considerable infighting among brokers. The stock exchange based its recommendations on an analysis of how much it costs to put through a given order. It found commissions on large trades too high and on smaller orders not high enough. Opponents of the rise in rates for the small investors fear that it would lead more and more of them to shift away from doing business with brokers and to patronize mutual funds. On the other side, many brokers argue that they lose money on small investors and have no incentive to serve them well. The minimum commission set by the exchange at present is $6 on a trade. Francis I. du Pont has boosted that to $15 and Eastman Dillon to $20.

Merrill Lynch, which has become the nation's biggest broker largely by wooing small accounts, is unenthusiastic about the stock exchange plan. Says the firm's Board Chairman James Thomson: "We would support a moderate increase in rates provided that it is not solely at the expense of the small investor." Thomson believes, as do officials of other well-managed firms, that Wall Street's trouble is primarily the result of inefficiency in some brokerage operations--and not inadequate commissions. William Donaldson, president of Donaldson, Lufkin & Jenrette, is sharply critical of the discriminatory way in which commissions would be changed. "To propose a cut on large trades while at the same time increasing commissions on the small investor," he says, "is totally unrealistic and indefensible."

The SEC is not at all sure that higher commission income would really be used to alleviate the snarl of paper and general disorder in the back offices of many brokerage houses. There is a feeling in the SEC that brokerage houses in recent years have advertised for business from small investors without gearing up to handle them. The regulators question whether the small investor should subsidize such inefficiency in a fixed-price industry. The situation is bound to make small investors wonder whether the Justice Department may not be right in arguing that fixed commission rates ought to be eliminated.

Painful Recession. The new rates are designed as an antidote for the painful recession that Wall Street slipped into in 1969 while it was enjoying its second biggest trading year in history. Even Merrill Lynch's profits dropped 41%. Bache & Co., the second largest U.S. brokerage house, suffered a $7 million operating loss for the nine months ended Oct. 31. I. Du Pont, the third biggest firm, had a $7.7 million operating loss in 1969. Some firms have gone out of business, and others have had to withdraw from the stock exchange in order to merge with companies outside the securities business. Gregory & Sons closed its doors abruptly last October. Schwabacher found refuge with Blair &Co.

What many brokerages need now is not just an immediate boost in income but a fresh infusion of long-term capital in order to finance automation. To get it, a number of leading brokers would like to sell shares in their own firms to the public. Until last year the Big Board was still wedded to the gentlemen's-club philosophy of opposing moves to raise capital from outside. Tradition was challenged last year by Donaldson, Lufkin--a ten-year-old, highly successful firm that has specialized until now in advising institutional investors. Its three founders--Donaldson, Dan Lufkin and Richard Jenrette--announced a plan to sell their shares to the public. After fretting over the question for months, the stock exchange's board of governors approved public ownership for its firms in principle and last week followed through by agreeing to let its membership vote on the proposal.

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