April Fool for Small Trades

A subject of speculation for months.

Wall Street's experiment to woo back small investors with competitive commissions arrived last week--on little cat feet. The Securities and Exchange Commission ordered that, beginning April 1, brokers who are members of the New York or American Stock Exchange must substitute flexible rates for their old fixed commissions on trades under $2,000. The idea is to get more firms to vie vigorously for small transactions and to give customers of modest means a saving on trading costs. Yet, reflecting the caution of the ailing securities industry, the effort got off to a sluggish start. Only a few major brokerage firms unveiled cut-rate commission plans--and those were hedged about by so many restrictions as to make them seem an April Fool's joke.

The most aggressive offer came from Merrill Lynch, Pierce, Fenner & Smith, the industry giant. It reduced its rates by 16% to 25% below fixed levels on some orders of less than $2,000. A $100 buy or sell order, which would cost an investor $7.04 under the old system, now costs $4.31; a $2,000 transaction that formerly entailed a $39.60 commission can be effected for $32.51. But for those who avail themselves of these cheaper rates. Merrill Lynch imposes stiff requirements designed to cut its own costs. Stock certificates must be held by the firm to avoid the paper work of transferring ownership; no credit or margin purchases are offered; customers must send their cash or stock in advance instead of being granted the usual five-day grace period to pay up. To eliminate the expense of executing many small transactions, Merrill Lynch fills most cut-commission orders in a bunch at the opening of trading the day after the money arrives. Under this arrangement, an overnight rise of only half a point could wipe out whatever saving the customer would realize from the cheaper commissions.

Similar restrictions are included in a plan offered by Paine, Webber, Jackson & Curtis, but the rate reduction is only about 10% on certain trades. On the other hand, Paine, Webber increased by roughly 4.5% its basic commission on trades up to $5,000, so many of its small investors will pay higher commissions, not lower ones. Bache & Co. offers only a 25% reduction to in-and-out traders who are willing to make at least two transactions--one buy and one sell--in any 35-day period, and the cut applies only to the second trade. Most brokerage houses, while technically unfixing their rates, still charge about the same fees as before on small trades on a take-it-or-leave-it basis.

Scant Interest. Not surprisingly, investors round the country have shown scant interest in the new cut-rate packages, which the houses have made little effort to promote. One small shareholder, Ditria Ilario of Manhattan, notes sourly: "You can make more money by putting your cash in the bank." Brokers are equally unmoved. Says Harvey Bettis, chief of Harris, Upham & Co.'s Chicago operation: "There's a possibility that we will just leave the damn thing alone."

Most brokerage firms, however, are looking ahead with some trepidation to May 1975, when fixed rates are scheduled to be abolished on all trades. Three years ago, under pressure from the SEC and the Justice Department, brokers' fees on big transactions--at present $300,000 or more--were unfixed. That move led to genuine rate-cutting competition for the business of such big-block traders as insurance companies and pension funds. The drop in commissions has cost New York Stock Exchange member firms alone an estimated $80 million a year in lost revenues.

Open competition on all trades in 1975 is likely to be a major jolt for the already troubled industry; Big Board members last year posted losses of $49 million v. profits of $786 million the year before. Competitive rates eventually are all but certain to wipe out many marginal firms, but that process, however painful, should strengthen the industry as a whole. Still, most experts agree that real prosperity is unlikely to return to the brokerage business until the average investor is convinced that the lagging stockmarket is generating returns equal to those on other types of investments, such as bonds and savings.

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