Tightening the Rules

FOR years, the largely self-regulated stock-trading business has nurtured practices and procedures that have seemed increasingly inadequate to the needs of the growing army of U.S. investors. After the recent recession caused more than a hundred brokerage firms to merge or go under, a clamor arose for tighter Government regulation. Last week the Securities and Exchange Commission unbundled a set of proposals that could drastically alter exchange operations and the way that stocks are traded.

Most significant for the individual investor is a recommendation that all the national and regional U.S. exchanges be tied together electronically to form, in effect, a single central market. At present, the same stock may be traded on exchanges in New York, Boston, San Francisco and Chicago, and each exchange will publish information on its prices and trading volume on a separate tape that mostly goes to brokerage houses in the immediate area. As a rule, an investor buying or selling stock in New York, say, will see only what is happening to that stock on the New York exchange and will have no knowledge of how actively it is trading in the other markets or at what prices; thus he cannot get a feel for the total market. In addition, many exchange-listed stocks are traded in the so-called "third market" by brokers who are not members of any exchange and who do not report any price or volume information at all.

Under the SEC plan, all trades in listed stocks on any exchange or in the third market would be reported continuously on a single unified tape that would be available all over the country. Committees made up of SEC members and securities men are now studying ways to set up and operate such a complex tape system and are expected to make their initial set of suggestions in three months.

The SEC also decided to hack further into the system of fixed commissions that brokers charge on stock transactions. Starting in April, brokers will have to negotiate fees with customers who buy or sell stock in blocks worth more than $300,000; the minimum now is $500,000. Though the new rule is less stringent than some Wall Streeters had expected, it still will cut brokers' revenues by practically forcing them to reduce commissions on more trades executed for hard-bargaining mutual funds and other big investors. Richard Jenrette, president of Manhattan's Donaldson, Lufkin & Jenrette, predicts that the new rule will "accelerate the trend toward smaller houses closing down or merging with bigger firms."

No Satisfaction. The most technical and most controversial of the SEC proposals is a plan to permit institutional investors such as mutual funds and insurance companies to own brokerage houses that are members of stock exchanges--though only under tight limitations. An institution with such a brokerage subsidiary can in effect pocket the commissions that it otherwise would have to pay independent brokers. Institution subsidiaries now hold seats on some regional exchanges but are rigidly barred from the New York and American exchanges.

The SEC attempted to reach a compromise on the issue and satisfied nobody. It would let institution-owned brokerages hold exchange seats only if "significantly more than half"--and maybe as high as two-thirds--of their trading business comes from the public rather than from the parent company. That rule would give institutions a toe in the door of the major exchanges but force them off some of the regional exchanges that have pre-invited them under less rigid rules.

The SEC can put its unified-tape and negotiated-commission proposals into effect on its own, but it may need congressional approval for its recommendation on institutional membership. In Congress, however, its proposals are already under fire. Senate Banking Subcommittee Chairman Harrison Williams and House Banking Subcommittee Chairman John Moss agree that the SEC proposals are too wishy-washy, though for different reasons. Williams wants the limit on negotiated commissions lowered to $100,000; Moss had hoped that the SEC would flatly forbid institutional membership on any exchange. Both plan to hold hearings, out of which may come a congressional program for restructuring the securities industry that is based on a model different from any of the SEC proposals.

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