A New Chief for Change

As the determined chairman of the Securities and Exchange Commission, Ray Garrett Jr. pushed through reforms long opposed by Wall Street. He also moved the watchdog agency into such new activities as demanding disclosure of bribes paid to Government officials by U.S. corporations. When Garrett leaves to rejoin his Chicago law firm, he will be succeeded by a corporate lawyer who may ruffle almost as many feathers. Last week President Ford nominated as the SEC's new chief Roderick M. Hills, 44, a presidential assistant and head of a White House task force looking into ways to reform federal regulatory agencies like the SEC. If the Senate confirms Hills, which is likely, Ford will have created Washington's most formidably titled husband-wife team ever: Hills' wife Carla is Secretary of Housing and Urban Development. Though Hills was backed by several powerful Wall Streeters, his philosophy is much the same as Garrett's. He probably will keep up the pressure for change that has thrown the securities industry into turmoil for the past five years. Says Hills of Garrett: "I know of no activity he's been engaged in that I disagree with."

Hills' nomination comes as Wall Street prepares to do battle with the SEC over one of the last vestiges of the brokerage community's old "private club" organization: New York Stock Exchange Rule 394, which forces member brokers of the Big Board to do most of their trading only on the exchange floor. The SEC will open hearings on possible abolition or modification of the rule later this month. The agency has long believed 394 tends to prevent brokers from getting the best possible prices for their clients by forcing them to deal for the most part only with other Big Board members. But many Wall Streeters contend that without 394, markets for stocks would become disorderly: more than half the business of the N.Y.S.E. would drift from the floor to the offices of individual brokers, where stocks would be traded at wildly varying prices.

Hills concedes that any change in 394 must be done carefully, but does not believe its abolition would mean the end of the N.Y.S.E. Even in advance of any change in the rule there are already signs of a trend away from the floor. Merrill Lynch, Pierce, Fenner & Smith, the nation's largest broker, is on the verge of starting a plan under which it would trade odd-lot orders (those for fewer than 100 shares) in its own offices. That would save odd-lot buyers and sellers an eighth of a point price differential that they must now pay to get their orders acted upon on the floor. Investors would pay $6.25 less in commissions on a 50-share order.

Meanwhile, the securities industry is still struggling with the aftereffects of a major Garrett-ordered reform: the abolition last May 1 of fixed commissions on all stock trades. Since "Mayday," brokers have received 40% to 50% less in commissions on many stock deals from such big institutional investors as pension funds and life insurance companies. That trend, combined with a sharp drop in daily trading volume (13.5 million average last week v. 21.4 million earlier this year), forced Big Board member firms as a group $10 million into the red for August, according to a preliminary estimate in the Wall Street Letter. This was not as bad as had been feared. But it was a sharp comedown from the $606.5 million earned during the year's first half.

Bush Beaters. Over the next year or so, losses from reduced commissions could total $400 million, estimates Roger Klein, an officer of the Securities Industry Association. I.W. Burnham II, chairman of Drexel Burnham, calculates the potential loss at $700 million to $1 billion.

The waning institutional market has forced a healthy, overdue reorientation of Wall Street toward the "little customer." Once almost ignored by most of Wall Street in favor of institutional investors, who do nearly 70% of the market's business, the average investor actually pays a bit more in commissions now than before Mayday, primarily because he lacks the bargaining power of institutions. But he is being courted as never before. Asserts Terry Liebman, partner in Boston-based Burgess & Leith: "The retail business is the place to beat the bushes."

Such established institution-oriented houses as Mitchell Hutchins Inc., and Donaldson, Lufkin & Jenrette have stepped up retail operations; Quick & Reilly went into retailing as a result of Mayday. Firms that have long catered to individual investors are showing handsome profits, among them Bache and E.F. Button. Merrill Lynch, long the leader in doing business with average investors, expects a "banner year." Firms dealing solely with institutions are hurting. Coleman & Co. was forced to give up most of its highly regarded research operation; it could not support the costs under slashed commissions. If the trading volume continues low, more casualties are expected.

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