Tuesday April 17, 2012
A bit of History
Back in the Day, membership in the Wall Street community was a privilege extended to elites. It was rather like Yale's Skull and Bones Society. First one had to possess a membership, called a Seat, on the New York Stock Exchange. Then one had to amass enough capital to handle th the trades. Exclusivity was insured as access to trading data and information was expensive. After all, if one had an NYSE seat, one would hardly want to spoil the experience by letting the rest of the retail rabble in through the back door so to speak. Edison invented the original stock ticker but the NYSE kept access to its software, the reporting of trades, expensive and exclusive.
As recently as the 1960s, firms were still partnerships. See what I mean about exclusivity? One did not just buy stock in the thing, one got voted in as a Partner.
Ah those were the days. The Firms restricted membership and information, admission was by permission and it was expensive, What else could have been done to keep Fraternity Row in business? Ah yes, tell you what, let's fix the commissions, and set them high as well. As recently as 1973, commissions were fixed. None of this $7.95 Wal Mart stuff indeed. Back then doing your first 100, was a big deal. That meant you had recorded $100,000 in commission in one year. With the standard Merrill payout at 28%, you got $28,000. That's a fast food manager's salary today but good money back then. There was no dickering, and the NASD suggested a percentage limit on trading costs.
But, if the firm made a market in a security, or claimed to, it functioned not as an agent. Functioning as an agent meant that the actual commission was printed on the confirmation, no fun in that! If the firm could claim to 'make a market' which usually involved parking no more than a few hundred shares in the firm account, then the commission was not shown on the confirm. Now we're really having fun as a fraternity!
Offices were staid affairs often looking more like a British men's club than a retail trading center. All were downtown. The trend to suburban offices was just taking hold in the early 1970s. Downtown was harder to get to, but closer to the luncheon clubs atop the skyscrapers, we're exclusive don't you see. Houston, Texas even sports a street just for the purpose of conveying the Anointed from River Oaks to downtown, Allen Parkway it's called. Back then to get to the Lehman office atop Alen Center, one had to take not one but two elevators to get to the office on high. Just to re enforce the image, there were less than 100 Lehman brokers in America (Mr. Pigeon I can get you size!). And they sat in leather upholstered chairs crafted from seats in, yes, Citroen automobiles. Remember, exclusive.
Women on Wall Street were like women at Yale, there weren't any until 1969 or in Skul and Bones until 1992. It was pretty much a guy thing. Recall that women were only admitted to Rotary Clubs in the late 1970s, or was that the early 1980s?
The Big Firms sported legendary Wall Street names-Loeb Rhoades, E F Hutton, Smith Barney, Lehman, and so on. Ever heard of Reynolds or Spencer Trask or Bache or F I duPont (yes the Delaware duPonts, not all were in the chemical business). They are al gone now, taken over or merged into larger entities.
My manager in Houston, Texas with duPont Walston had been a 3% partner at Goodbody. By the time the Dow cratered to 577 in 1974, he was reduced to a desk and a phone at Rauscher Pierce.
But when a firm failed then, the SEC NASD et al would move customer accounts elsewhere, no one had ever lost money due to firm negligence.
The real horror show debuting in America toay is not Hunger Games but MF Global and now
Options Xpress. MF Global was check kiting and using customer money. Options was as Jesse points out, stock kiting.
The horror is that now one can lose money and not be compensated for firm negligence. Jon Corzine walks free today. As Jesse points out, breaking the rules is only for the To Big to Fail or campaign contributing hedge funds.
In 2008 firms evaporated once again, just as they did from 1972-74. Bear, Lehman, and if another hour had passed, Merrill before John Thain quickly inked a deal with Bank of America.
Bob Precther has a 400 target on his monthly newsletter. That was there a couple of decades back. In the big run up of the 1990s, he quietly removed it. Now its back. Don't laugh too hard. The DOW was 577 in 1974.
Such a number would probably require a bankruptcy of some Dow firms, come to thnk of it, didn't GM and EK both former Dow components go bankrupt? Chrysler too. But as I say the real horror would be counter party risk. One might be right on the direction of the markets, but would there be any one to pay off on your SPX put at the bottom?
Customers of MF Gobal are asking that question right now.
(I had originally planned to write more about the 1970s time period and how things have changed. If you find this narratie interesting, let me know).