The president of the Securities Industry Association yesterday warned that major brokerage houses are growing dangerously large at the expense of smaller houses and pose a serious threat to the continued free trade of stocks.

In a letter to the Securities and Exchange Commission, SIA president Edward O'Brien noted a "rising tempo of concentration in the securities industry."

"The ingredients are in place," O'Brien added, "for the largest firms to become active market makers in listed equities."

The term "market maker" refers to situations in which a brokerage house receives orders to sell and others to buy the same stock, and match the transactions for a better price than would be reached if the deal took place on the floor of a public exchange.

Federal securities laws currently require brokerage firms to disclose all orders on the floor. They can then match orders - or "go off the board," as it is called in the trade - if they can make a better deal.

The SEC recently completed hearings on a proposal to life the disclosure rule, in effect allowing competition among brokerage firms to substitute for free trading on the floor. The SIA opposes the change, in part on grounds that the securities industry will not support competionn.

O'Brien's remarks accompanied the release yesterday of an SIA study revealing that the 25 largest New York Stock Exchange firms have almost two-thirds of the capital of all NYSE firms, receive almost two-thirds of the revenues and collect more than half the commissions.

The 7-page study showed that since 1973, the major houses have significantly increased their shares of the Wall Street market, regardless of whether that market is measured by capital, revenues or commissions.

Through mid-1977, their market share increased from 51 to 64.5 per cent in capital, from 48 to 64 per cent in gross revenues, and from 41 to 56.4 per cent in commission revenues.

During the same period, the number of NYSE firms dealing with the public fell from 476 to 371. In fact, the report notes, the number of firms supplying brokerage services to the public has been dwindling since the late 1960s due to two severe stock price plunges and troublesome operational problems.

"Since (1975)," the report declared, "despite two relatively prosperous years, the number of NUSE firms has declined by another 45, as many institutional research and smaller firms habe merged because their survival, in one form or another, required diversification and additional capital."

The report said the near term outlook for Wall Street firms is not much brighter. "The continued decline in the number of firms appear all the more omonous," the SIA concluded, "Since estimated after-tax profits of NYSE members plummeted 63 per cent from the first half of 1976 to the first half of 1977."