Tantrums Among the Giants

Though the New York Stock Exchange boasts of being the financial hub of capitalist free enterprise, it still tries to operate as a quasimonopoly. For 179 years, the exchange has been run as a private club in which membership is restricted and price competition forbidden. Two years of losses and a near crisis of public confidence have led the brokerage community to conclude that reform is essential. The Big Board is reluctantly edging toward more liberalized membership rules and competitive pricing, but these ideas are still heresy in some quarters. Consequently, the nation was treated last week to the rare spectacle of a kick-and-gouge squabble among the millionaire gentlemen who lead Wall Street.

Two related controversies are involved. First, should the exchange admit the mutual funds and other increasingly dominant institutions that are clamoring for membership? And should the exchange end its fixed commission rates, at least on large trades? Subsidiaries of both the Dreyfus Corp. and Investors Diversified Services, managers of the nation's two largest mutual funds, have applied for exchange membership, which would save them millions of dollars a year in commissions. IDS has threatened antitrust action if its bid is denied.

"Inept, Untimely." The exchange's board of governors two weeks ago named William McChesney Martin, 64, the globally respected former Federal Reserve Board chairman and onetime (1938-41) reform president of the N.Y.S.E., to spend until September studying the two basic controversies. He will also examine all exchange procedures and recommend reforms. The applause for the Martin appointment changed to tantrums last week after a special advisory committee of the exchange surprised almost everybody by endorsing institutional membership and freely negotiated commission rates.

John L. Loeb, the boss of Loeb, Rhoades & Co., told TIME'S Nancy Jalet that the endorsement was "inept, untimely and impolite to Bill Martin. The men who made the recommendation must have a death wish." Added Gustave Levy, senior partner of Goldman, Sachs & Co.: "I understand their fears, but they're acting too precipitately." Levy's remark drew a fast rebuke from Managing Partner William R. Salomon of Salomon Bros., the bond house and big block trader. "The vote in the special committee was 16 to 4," said Salomon. "If Levy wants to dissent he should resign from the committee. Everyone seems to be forgetting the public interest."

Exchange Chairman Bernard J. ("Bunny") Lasker, who had voted with the 16-man majority, got into the act by declaring: "Bill Martin will have plenty to do, and we'll be consulting him along the way, but the tide of events is running too swiftly to put off vital decisions for nine months." Replied John Loeb: "The tide of events is not running too swiftly. Bunny Lasker is."

Underbidding the Weak. The acrimony reflects the deep split among Wall Streeters over proposals for the most fundamental changes in their business since the '30s. Millions of investors have a considerable stake in the outcome because the future of the New York Stock Exchange is in question. It has been weakened lately by the rise of regional exchanges and the "third market," where brokers arrange private trading of listed securities. As the nation's central market for securities, the New York Exchange is subject to much stricter public scrutiny than other markets. But in order to pay lower commissions and to avoid the Government's ban on fee splitting on the Big Board, the large institutions are shifting their business away from the exchange. The amount of stock traded in blocks of 10,000 shares or more off the exchange floor has risen in the past two years from 28% to 37% of the total. The mutual funds would have less incentive to bypass the central marketplace if they could get either lower rates or membership in the exchange.

To regain some of the lost business, an activist faction in the exchange's power structure--including Lasker, Salomon and Merrill Lynch Chairman Donald Regan--is willing to reduce commissions on big trades and liberalize the membership rules. Says Regan: "This is the solution for the exchange--the only way that it can get back that business." But the go-slow camp--including Loeb and Levy--fears that lower, negotiated commissions might lead to collusion between some brokers and big traders. Others argue that the change would cause more failures among brokerage houses because strong firms would underbid the weak for available business. Some securities executives figure that if fees are cut on lucrative big trades, either small investors will have to pay more or brokers will have to make sharp reductions in their already spotty securities research.

Regulatory Paralysis. There are no easy answers to these dilemmas. The Securities and Exchange Commission has so far dickered with the exchange for eight years over commission-rate revisions without reaching a final decision. The regulatory paralysis has only been increased by President Nixon's delay in appointing an SEC chairman to succeed the procrastinating Hamer Budge, who resigned Dec. 31 to join Investors Diversified Services. The White House has offered the chairmanship to William J. Casey, 57, a Manhattan and Washington tax lawyer who is a partner of Leonard Hall, Republican national chairman during the Eisenhower Administration. At week's end Casey had not yet accepted the SEC post. The commission could use a firm hand. Moving into the void left by SEC dallying, a Senate Banking subcommittee headed by New Jersey Democrat Harrison Williams last week started a "major investigation" of the securities industry.

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