Reforming the Exchanges

Economists have long defined a "perfect" market as one in which, among other things, all buyers are equally well-informed about what is for sale at what price. In theory, the stock market is supposed to be that kind of market, but in practice some investors are more equal than others. For one thing, big ones almost always have better information about what stocks to buy than the little guy. Also, during a typical trading day a stock may sell for slightly varying prices on exchanges in New York, Chicago and Los Angeles, with potential buyers in various parts of the country none the wiser because there is no common ticker tape simultaneously reporting all trades.

These and other inequities are the targets of reform legislation that has already cleared both houses of Congress and was being smoothed out in a House-Senate conference committee last week. Lawmakers hope to have a bill ready for President Ford's signature by the end of the month.

Another Blow. Bitterly contested by Wall Street, the omnibus legislation challenges the established securities industry on almost every front. In an effort to shed light on the activities of powerful institutional investors, who do around 70% of the market's business, the act would require major money managers to tell the Securities and Exchange Commission what they are buying and selling. The SEC would be required to make the information public.

Another measure would eliminate the New York Stock Exchange's Rule 394, which has the effect of forcing Big Board member firms to do most of their trading on the exchange floor instead of doing business off the exchange with dealers in the so-called third market. Opponents say that elimination of this rule would weaken the nation's oldest (183 years) and most important stock exchange. The House version would strike still another blow at Big Board "clubbiness" by eliminating the limit on the number of N.Y.S.E. seats, now at 1,366.

The legislation's most important feature would mandate the SEC or the securities industry--just which must be worked out in conference--to set up an advisory board to study ways of establishing a truly central, national stock exchange. On it would be listed stocks of all public companies, not just those on the ticker tapes of the bigger exchanges. Prices would be flashed to all investors simultaneously. The central market will be foreshadowed in June when a consolidated ticker tape will begin showing trades on the New York and other stock exchanges.

The legislation will climax a turbulent period of reform, most of it a reaction to market inefficiencies of the 1960s. Just last week there came one of the most important changes in more than a century. By order of the SEC, Wall Street's barnacled fixed-commission system ended, leaving investors free to negotiate with brokers over what fees they will pay to buy or sell stock.

Record Profit. Unfixed commissions had been resisted by much of Wall Street for years, and their May 1 advent had been ominously labeled "Mayday" (TIME, April 28). Yet Mayday came and went with few surprises. Some firms raised commissions to small investors. Merrill Lynch, Pierce, Fenner & Smith, the industry's leader, increased rates an average of 3% on orders of up to $5,000. But Blyth Eastman Dillon held commissions at present levels for small investors, trimmed them by 8% or more on larger deals for institutional clients. Bargain brokers popped up; one advertised commission cuts of 75% on "all but the smallest trades."

Wall Street is in good shape to withstand the intensified competition. Helped by heavy trading volume, member firms of the N.Y.S.E. scored a record profit of $287.9 million in the first quarter. And the Dow Jones industrial average, spurred partly by traders' hopes that new rivalry on commissions would bring more small buyers back into the market, spurted 36 points last week, to close at an eleven-month high of 848.

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