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SEC Rate Reformation

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During the 1970s Kidder, Peabody's international financings grew substantially. The increased liquidity of the banking system-particularly in Eurodollars-provided international investment houses with new business opportunities which they were quick to cultivate. Kidder, Peabody's close, continuous ties with the world's principal capital markets, maintained through a network of foreign subsidiaries that also kept it informed of the needs of both users and suppliers of long-term funds, gave it strength as an international investment house, as did its "marketing muscle" in the United States and abroad. The fact that it was a diversified firm able to design and place different types of securities and provide a variety of financial and investment advisory services also added to Kidder, Peabody's ability to recruit foreign clients. Kidder, Peabody's long experience in mergers and acquisitions, for example, allowed it to compete effectively for the business of United States corporations interested in acquiring foreign companies and, when the dollar weakened, for overseas concerns seeking to buy American businesses. Transactions of this type helped swell the volume of Kidder, Peabody's foreign security issues. In the six year period 1970 through 1975 the firm and its foreign subsidiaries managed public offerings and negotiated direct sales of corporate and government securities totaling nearly $1.45 billion, making Kidder, Peabody one of the top twenty-five international investment banking houses in the United States.

Foreign and domestic investment banking activities helped moderate the trauma of radical, far-reaching changes in the brokerage business, not only for Kidder, Peabody but for other large houses as well. In December 1968 the SEC ordered the New York Stock Exchange to rescind its 179-year rule on fixed commissions and permit negotiated rates on trades of $500,000 or more. The new era of competitive pricing, which started in April 1971 after the Exchange's members bowed to the inevitable and voted it into effect, brought an immediate and considerable reduction in commission charges-in some instances 50 percent or more. Such large cuts in fees, obviously, forced down the profits brokerage houses earned from this business. Least affected were diversified firms like Kidder, Peabody whose brokerage clients included both individuals and institutions insurance and investment companies, pension funds, and bank trust departments.

But even some of these firms, though not badly hurt by negotiated commissions on large trades, were concerned that the SEC, intent upon making the brokerage business more competitive and reducing the New York Stock Exchange's long dominance over the country's securities markets, would press for an early lowering of the $500,000 level, perhaps bringing it down as far as $100,000, the amount originally considered. Continuing pressure from a reform-minded SEC and some Capitol Hill leaders, consumer advocates, as well as a few Wall Street spokespeople anxious to stem the flow of business away from the Big Board by making it more competitive, soon led to a further breakdown in fixed commissions. In April, 1973, the Exchange, adhering to SEC orders, extended negotiated rates to trades of $300,000 or more, and on May 1, 1975, the Big Board accepted the inevitable and abolished fixed commissions on all transactions of whatever size.

Competitive rates brought small investors few immediate benefits; in some cases they actually had to pay a higher fee to buy and sell stock than they did under the old fixed-rate structure. Many firms, including Kidder, Peabody, established a minimum per-trade fee, usually $25. These and other efforts to hold the line, to avoid a "rate-cutting war" on small individual trades like the one that yielded institutional clients huge discounts, proved unsuccessful. Once a few small houses hoping to add to their volume started cutting fees, other firms followed and by the end of the year the commissions charged individuals also started to fall, sometimes reaching as much as 40 percent below the previously fixed rate.

Negotiated rates combined with sagging stock prices and diminished share volume cut deeply into brokerage earnings and prompted much concern about the future profitability of investment firms. Evidence of that apprehension was not hard to find. Investors showed little interest in the stock of publicly owned securities firms, all of which were selling at steep discounts from their original offering prices earlier in the decade when it was widely held that public ownership was the solution to Wall Street's capital shortage. Donaldson, Lufkin & Jenrette, Inc., the first brokerage house to go public, saw the price of its stock, originally offered in the spring of 1970 at $15 a share, drop to 4%-its 1975 high-then down to 2 in October 1975. The stock of most other publicly owned houses, including some well-managed and profitable firms such as Merrill Lynch, Pierce, Fenner & Smith, Inc., also registered declines. Hardest hit were the small and medium-sized houses, particularly those heavily committed to research in a narrow range of stocks. Some of these houses were forced to close, quit the brokerage business, or merge with large full-service firms. The future seemed to rest with the financially strong, diversified houses. "They can offset the rate cutting with underwriting business, they can obtain the underwritings because they have distribution" said a brokerage house official, "and they can eat up the small firms with economics of scale."

Because Kidder, Peabody was just such a house, it survived the wrenching experience of the shift from fixed minimum commissions to negotiated rates without too much immediate hardship. Its gross revenue from commissions declined from 47.8 percent in 1974, the peak for the decade, to 46.6 percent in 1975. The decline, modest compared to some firms, stemmed chiefly from the loss of some small accounts that either left the market entirely or chose to do business with one of the small discount houses with which Kidder, Peabody did not try to compete. The firm, like most other major houses, did more for individual clients than only execute their buy or sell orders. It provided advice, research, and other assistance. Some broker-age customers, not wanting these services, found it cheaper to place small orders (up to 500 shares) with a discount house than with Kidder, Peabody. The firm, like the other top houses with which it competed, offered discounts only on orders above 500 shares.  Whether Kidder, Peabody or any other major house would continue to adhere to a "standard" rate remained to be seen, particularly since some commercial banks seemed prepared to cultivate the small investors' business by providing them with a discount securities service. In September 1976 New York City's Chemical Bank, the nation's sixth largest commercial bank, announced it was testing just such a plan for some of its checking account clients.

Negotiated rates were but one of the many profound changes that helped transform Wall Street in the late 1960s and early 1970s. There were other equally far reaching ones. Included among these were: the increasing institutionalization of stock ownership and trading; a substantial decrease in the number of individual shareholders (down 18.3 percent between 1970 and 1975); the emergence of a nationwide central trading market for stocks that weakened the New York Stock Exchange's previously undisputed primacy as the nation's chief trading market; the growing number and rising importance of foreign investment firms in America's security markets, making both the brokerage and underwriting business more international and competitive; and the mounting challenge posed to investment houses by other financial intermediaries, particularly the large commercial banks which competed with security firms in several important areas: the underwriting of state and local general obligation bonds, Eurobonds, and others, most notably private placements. These developments, coming at a time of an erratic stock market and a reform-minded SEC, forced investment houses to adapt their policies and practices to a new financial and investment environment.

Adjustment to these changes served to reconfirm the correctness of several of Kidder, Peabody's earliest and most fundamental policies. Strong distribution, diversification, and adequate capital, the three basic principles that had guided the partners' actions for two generations, made it possible for Kidder, Peabody to weather the most recent crises that beset the securities business. And since these policies appeared to be equally valid for the future, they continued to determine the firm's direction.

Kidder, Peabody strengthened its distribution still further in June 1974 when it acquired Clark, Dodge & Co., an old, respected house founded in 1845. Faced with rising costs and declining income, Clark, Dodge's officers sought to unite their twenty-two-branch firm with a full-service house. The merger gave Kidder, Peabody three additional offices in California (Palo Alto, Sacramento, and Carmel), two in Ohio (Cleveland and Toledo), and for the first time direct representation in the upper South, at Norfolk, Virginia. Most of Clark, Dodge's senior officers and employees joined Kidder, Peabody.
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