Blue Days for Brokers

Prosperity reached almost embarrassing proportions for Wall Street during the bull markets of the past couple of years. As stock prices climbed and trading volume rose to unprecedented heights, brokerage commissions swelled to $5 billion a year, and six-figure in comes became commonplace among customers' men. Now the securities busi ness is mired in a painful recession. Caught between sharply rising costs and a sluggish volume of trading in the ner vous market, brokerage houses have closed scores of branch offices, laid off hundreds of workers and rushed into mergers to fight a flood of red ink.

Money Wanted. Last week the two firms that handle almost all of the odd-lot trading on the New York Stock Exchange agreed to join forces as "a matter of economic necessity." De Coppet & Doremus and Carlisle & Jacquelin said that their decision was forced by in creasing costs plus dwindling odd-lot trading, which now amounts to less than 10.7% of the Big Board's volume. Other merger plans have undoubtedly been hastened by the tendency of small investors in a declining market to with draw from direct trading and turn their business over to mutual funds and other professional investment management services (see following story). A great deal of Wall Street's retrenching involves firms that rely on retail brokerage for much of their revenue. So far this year, Manhattan-based H. Hentz & Co. has closed five of its 38 branches. Blair & Co. has dismissed 45 employees, and Thomson & McKinnon has furloughed 40 employees and suspended its training program for salesmen. Last week, Francis I duPont & Co., No. 3 among the nation's retail brokerage firms, announced that it had dismissed some 200 workers and will close eight of its 111 branch offices.

Two major firms have run into severe difficulties. Heavy losses in both stocks and bonds last month forced Nuveen Corp. to arrange a major infusion of capital from Paul Revere Life Insurance Co. Nuveen had to resign its memberships in both the New York and American Stock Exchanges, which prohibit member firms from borrowing more than 25% of their capital from the outside. Though Nuveen plans to continue its brokerage activity through the Midwest Exchange, which has more lenient rules, the firm has laid off some 10% of its 450 employees. Meanwhile, McDonnell & Co., beset by financial and operating problems, recently sold one of its three Big Board seats (for $375,000) and laid off 70 employees, including about half of its research staff. To increase its capital to the level required by the New York Stock Exchange, the firm also borrowed $600,000 from another brokerage house, Scheinman, Hochstin & Trotta, and arranged for up to $10 million more from private sources.

Paper Snarl. Brokers' profits have also been reduced by the high cost of battling Wall Street's paperwork foulup, which for nearly two years has snarled delivery of shares from broker to broker and from broker to customer. The number of employees involved in securities processing for Big Board firms rose 36% last year, and average clerical salaries climbed 12%. In a belated rush, brokerage houses are investing more than $100 million a year in automated equipment.

Even so, at the last count by the New York Stock Exchange in June, about $2.18 billion worth of stock was involved in failures to deliver within the required five days after each trade. Most of the snags involve over-the-counter shares, delivery of which is hampered by the lack of a clearinghouse outside New York City. Because of such jams, 18 member firms are operating under exchange-imposed restrictions. These variously mean that the firms cannot accept new accounts, cannot advertise, or must limit the number of trades per day. Since last December, the exchange has also required brokers to set aside capital to cover 10% of the market value of stock snagged in failures to deliver that are 40 to 49 days behind schedule and the penalty rises to 30% on "fails" that go 60 days or more uncorrected. Some firms have been forced to borrow to satisfy this requirement, and high interest charges eat further into profits. For Philadelphia's Drexel Harriman Ripley, Inc., for example, interest paid on borrowed money amounted to 13% of gross revenues in the first half of 1969.

Computer Breakdowns. An obvious solution to the back-office snarl would be to computerize the transfer of securities among brokerage firms, thus converting a cumbersome manual task to a mere bookkeeping operation. The Big Board started a Central Certificate Service in February that is intended to operate as just such a clearinghouse. But computer breakdowns and other snags slowed the system until last week, when the C.C.S. resumed full operation. The brokerage business may face more financial woes before happy days return. Profits seem likely to continue their fall until rising stock prices bring an upturn in trading volumes, and there are fears on the Street that more firms may be forced into consolidations. Wall Street is paying a considerable price for decades of neglecting almost everything but selling. Still, when volume does rebound, the securities industry will be in a stronger position than ever before to cope with it.

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