Banks As Brokers

Reforms have largely abolished the "private club" nature of Wall Street's brokerage community and made it far less important than it once was. Last December, for example, the Securities and Exchange Commission threw out the New York Stock Exchange's Rule 394, which had effectively limited competition by requiring that most stock transactions take place on the Big Board's floor. Now brokers face another threat to their exclusivity: competition from banks in the business of buying and selling stocks.

Soon New York's Chemical Bank, the nation's sixth largest (assets: $23.9 billion), is expected to announce a plan that will enable checking-account customers to buy or sell stocks at bank order desks at commission rates far beneath those charged to the typical small investor by most Wall Street brokers. For a commission of about $35, Chemical's customers would be able to buy or sell up to 500 shares of any stock, with the rate rising to $60 for 1,000share orders. Thus the commission for buying 100 shares of AT&T at, say, $60 per share would be $35, compared with about $80 at most large brokers. Even allowing for the commission discounts of up to 20% that major brokers sometimes offer their best customers, Chemical's charge would be very low. On cheaper stocks, Chemical's rate would not be much different from the going Wall Street commission for 100-share lots, but savings could be considerable in the 300-to 400-share range.

Chemical will offer brokerage on an "unbundled" basis, meaning that extra fees will be charged for safekeeping of stock certificates and research--services that brokers offer "free" as part of their commission charges. In addition, Chemical's customers would pay $30 or $35 annually as a kind of membership fee to trade stocks through the bank.

Direct Assault. Initially, Chemical plans to retail stock at only half a dozen of the bank's 259 branches in the New York area. In the end, whatever business the bank generates will go to regular brokerage houses anyway. By law, banks cannot buy or sell stocks for their own accounts; all they can do is act on behalf of customers. The bank will channel orders to a Wall Street broker--presumably a deep discounter willing to work for Chemical's rock-bottom prices, with the bank sharing some of the bookkeeping costs.

Nonetheless, brokers do worry about Chemical's move. They see it as a direct assault on the Street's retail commission price structure, which was set up for the average investor. Big institutional investors--banks, life insurance companies, pension funds--have long received the benefits of negotiated commissions, and the SEC more than a year ago abolished what few vestiges there were of the old fixed-commission system. But the typical small investor, lacking the muscle of large institutions, received no such break on commissions and in many cases pays even more to buy or sell stock today than before fixed rates were scrapped. W. Perry Neff, a Chemical executive vice president, says the plan would provide "the benefit of a commercial bank's ability to command substantially more attractive commission rates on small transactions than the individual investor could generally hope to achieve on his own."

Some brokers argue that Chemical's commissions are unrealistically low and that the bank will eventually be forced either to raise rates or get out of the retail stock-trading business. Others charge that the bank plans to use the service as a loss leader to attract depositors or, of even more concern, as a wedge to get back into the investment-banking business, from which all banks have been banned since the passage of the Glass-Steagall Act of 1933. Some reformers have argued for revision of that law to allow the creation of "financial supermarkets" that would perform every service from commercial banking to stock underwriting. Chemical could go on selling stock, for instance, but Merrill Lynch, the nation's largest stockbroker, would also be free to buy a bank. Presumably, it would not be Chemical.

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